Gogo Inc. Q3 FY2024 earnings call

Demand Trends: Overall business aviation flight demand was strong, up 2% quarter-over-year and 30% from pre-COVID Q3 2019. Data usage per hour on connectivity was up 17% year-over-year and 106% from pre-COVID. Big surge in demand at high end of market. ### Gogo Galileo: HDX passed FAA DO-160 testing, on track for parts manufacturing authority in December and commercial shipping by year-end. Saw unprecedented demand with over 1,000 customers signing up for HDX webcast, large crowds at demos. Signed 27 STC agreements for HDX. ### 5G ATG Network: 5G chip in fabrication, expected to ship late in Q2 2025. Shipped 342 5G provision kits with MB13 5G antennas, 153 installed and flying using 4G network. Has line fit commitments with 5 OEMs. ### Satcom Direct Acquisition: Expected to accelerate global expansion, drive AVANCE penetration, and enter new segments like heavy jet Intercontinental and MilGov mobility. Brings financial benefits, more than doubles business size, expected to be immediately accretive to earnings and deliver $25 - $30 million in annual recurring synergies over 2 years. ### FCC Secured Networks Program: Received $11.1 million in FCC grant funding in Q3, program to date total $30.3 million. Submitted and granted first 6-month extension, planning next extension.

Gogo's total revenue for the third quarter was $100.5 million, up 3% year-over-year. Service revenue was $81.9 million, up 3% year-over-year. ATG aircraft online was 7,016, a 2% decrease year-over-year. Total AVANCE aircraft online grew to 4,379, an increase of 16% year-over-year, comprising 62% of the total fleet. Equipment revenue was $18.7 million. ATG ARPU grew to a record $3,497, a 4% year-over-year increase.

2024 Guidance: Adjusted EBITDA expected in range of $120 - $130 million. Free cash flow expected in range of $55 - $65 million. Target 2024 revenue in range of $400 - $410 million. ### Post-Satcom Direct Acquisition: Pro forma combined company anticipated to generate 2024 revenue of approximately $890 million. Long-term annual revenue growth expected in 10% range with adjusted EBITDA margins in mid-20% range.

Product Life Cycle: Current products late in life cycle, may pressure ATG aircraft online ahead of new product launches. ### FCC Funding: Partial funding of FCC program may lead to spending exceeding reimbursement funds in late 2025, negatively impacting 2025 and 2026 free cash flow. ### Market Competition: Confronting competitors in GEO offerings, may impact pricing and margin levers in long term.

Q: While you have withdrawn the longer-term kind of guidance, Jesse, you just kind of touched on, just maybe a housekeeping question. I mean, is there any reason to think that -- so maybe said differently, so if the transaction will be accretive kind of day 1, your previous guidance on a stand-alone basis was, call it, $150 million of free cash flow for next year. I mean, is there anything -- any reason or any maybe timing-related items that might shift that pro forma free cash flow number one way or another? Just trying to unpack as to maybe why that might not necessarily still be a good target as we think about next year. And then another question, I think the -- just taking a step back, just thinking about Gogo's strategic fit in Avionics longer term, particularly in the light of the SATCOM Direct acquisition. I mean, help us think through maybe again the rationale there. I mean, the Satcom Direct deal, particularly as you think about the competitive positioning from GEO offerings. And with that, specifically, Gogo is moving into new segments, LEO-based but it seems -- but you're also kind of now confronting competitors that you maybe not necessarily had to deal with in the past, some of the more established GEO guys. I mean does that impact how you're thinking about the pricing and margin levers of the business on a longer-term basis?

A: Oakleigh Thorne: So well, Jesse answer the first part of your question and I'll take the second. Jessica Betjemann: Okay. So a couple of things, Sebastiano, that is going to be changing for 2025 free cash flow from the Q2, the targeting $150 million next year. So for Gogo stand-alone -- well and actually for the combination, a few things are going on. So one, through this acquisition or due to this acquisition, we are taking on more debt. So that will be increasing the interest expense impacting our free cash flow. So that's due to the combination. But with regards to Gogo stand-alone, a few things are going on. So we will have more equipment revenue next year. And with the demand of HDX that we're seeing, that's probably going to increase even more and that's going to have just -- equipment revenue in general is going to have lower margin. We also are going to be very competitive in terms of our equipment pricing and have introduced some incentive programs as well that's going to be impacting the free cash flow next year. And then as we go through and some of the timing shifts with regards to FCC, that also impacts next year. And then as mentioned, some of the benefit we're seeing this year with OpEx and CapEx pushing out for our programs into 2025, that also will have a negative impact into 2025 next year. But as the companies come together, obviously, we will have to work through integrated business plan and work through what our impacts are expected with regards to 2025. Oakleigh Thorne: Thanks, Jess. I guess, Sebastiano, in answering your question, Ironically, I would say this deal for us is all about LEO, not GEO. And you'd say, well, yes but they're a GEO company. But you have to look at is their distribution channel and the verticals they serve and how that plays into LEO connectivity. So first of all, the 1,300 customers they have today and their ability to provide the right kind of service to the large jet, 7,000 intercontinental kind of jets that are very lucrative customers, we think gives us ability to actually upgrade those 1,300 by adding LEO. We think many will keep GEO because at the kind of expense they have and their demand for connectivity, they want to add both capacity that LEO and GEO together can provide as well as to have the redundancy that GEO can provide. But for us, it's all about adding that LEO sale on top of those 1,300 and expanding that within that segment which Satcom knows how to serve really very well. Second, in the MilGov market, where they're really growing quickly right now. We think that our LEO product, again, is a great add-on to the GEO. And in the military, there's really going to be -- they're really going to desire to have both because of the whole PACE concept which is that you need to have primary alternative contingency and emergency connectivity. So again, we -- as we look at this and build our business case, it wasn't really around keeping the 1,300 as GEO customers. It was about moving those to LEO. And if we didn't keep any on GEO, the business case closed but we think we'll actually have the opportunity to keep a lot of them on there. Beyond that, GEO connectivity is improving rapidly. And over the next year or 2, GEO speeds will achieve 100 megabits per second. You'll still have the latency issues but that's going to be a pretty good backup system and a really nice way to augment LEO connectivity. So we do think that a lot of people will elect to keep it. So, I don't know if that answers your question in terms of the competition but it's how we looked at the deal. And again, I'd say it's primarily about driving growth of our LEO products and keeping the GEO is a nice to have. It's sort of an incremental benefit.

Q: I want to follow up on some of Sebastian's questions. First, time frame to closing. You're saying year-end. Obviously, it's a fast one, it's a private company. But walk us through long poles in the tent to get it done. Is this a year-end closing? Is it earlier than that? Just kind of thinking when should we think of this deal getting closed?

A: Oakleigh Thorne: Yes. We're hoping for having it closed at the beginning of December. It could -- obviously, anything, it could drag longer. A couple of different tracks. Obviously, there's the commercial consent track. All the required significant commercial consents have been obtained. In terms of filings, we don't have a lot in this deal. Obviously, we've got DOJ. We filed -- we just refiled a few days ago. So there's a new 30-day ticker that started I don't know, last week sometime. If we get through in another 30 days, we should be able to close at beginning of December. CMA in U.K., they've asked a few questions. But so far, that looks like it's moving along reasonably well and that would actually -- on the current time line would be cleared before the DOJ would. We've got a foreign direct investment filing in Canada. So far, we haven't heard from Canada. That expires mid-November if we don't hear from them. And then we've got a filing in Saudi Arabia which we think probably also done by the end of November at this stage. So those are the regulatory hurdles. Financing is done. That's complete. So we are -- we've committed financing, so that's closed. And then we're working very hard on integration so that we can hit the ground running day 1. We've got 11 integration teams working on different functional areas of the company. And we think it's a lot of work to be done but we're going to be ready to go when we close.

Q: Just quickly, on the AOL number, I thought you had some comments. It doesn't sound like AOL was down as much as expected and you're starting to see some reactivations as customers have gone into suspensions. I'm wondering if you could comment on that. Are we through kind of the worst of it, I'll call it, the organic suspension cycle? And also on the Galileo front, you had some comments about your expectations doubling in 2025. Look, with Satcom Direct, with the dealer channel that you've been building with the STCs now, I think, addressing 18,000 aircraft. Could you calibrate us in terms of what that doubling is kind of your expectations in '25? And what kind of constitutes success for HGX and FDX in '25 and '26?

A: Jessica Betjemann: Sure. Let me take the first one, Scott. So on the AOL, yes, it became -- the decline was better than what we anticipated. We did have higher new activations for the quarter than we had expected which was good. Obviously, not back to the levels that we had last year but still better than last quarter. And then the classic deactivations came in lower than we expected as well. So it was a good quarter for us. The reactivations have been fairly steady. We haven't seen too much change in that. That's been fairly steady all year long. For next quarter, I mean, in terms of just our own forecasting, we're more conservative. We kind of look at the last 6 months average. So we're expecting that it won't be necessarily as good. It's hard for us to predict. Obviously, we would hope that it continues on the same path as Q3 and that would be a good upside for us. Oakleigh Thorne: Yes. But current projections would have half good quarter, half bad quarter in... Jessica Betjemann: It's coming down more in terms of our current projections only from how we do that modeling. Oakleigh Thorne: Yes. So -- and then on the Galileo piece, yes, I think we shared at some point that we expected about 200 shipments in 2025. And I think we're looking at probably more than -- well, we're doubling that in terms of our projection right now for '25. Remember, that's shipments, not units online. What happens is we'll start shipping to dealers right at the end of December, the STC dealers, they'll develop STCs. They will start taking more orders as they're developing their STCs for the models they're developing STCs for and that will ramp over the year. But the demand is unbelievable. I think the market is so happy to have all the talk with Starlink for quite a while in the LEO world and all of a sudden, there's a home team player, Gogo with a LEO product that's real and it's coming out and they've been able to taste it and experience it and the response has just been overwhelming. So we're very, very positive about where that's going to go. And frankly, we see some vectors that could drive that 400 up. So more to come.