GOGO - NASDAQ

Good day, and welcome to the First Quarter 2023, Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce, Vice President of Investor Relations, Will Davis.

Thank you, Andrew, and good morning, everyone. Welcome to Gogo's first quarter 2023 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; and Jessi Betjemann, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on the conference call. Those risk factors are described in our earnings release filed this morning and are more fully detailed under risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is May 3, 2023. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events. During the call, we will present both GAAP and non-GAAP financial measures. We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings release. This call is being broadcast on the Internet and available on the Investor Relations website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Thanks, Will, and good morning, everyone. Thanks for joining us today. I'll focus my remarks on three main areas. First, I'll provide a state of the business aviation industry as seen from Gogo. Second, I'll provide key highlights of Gogo's first quarter results; and third, I'll give an update on the key strategic initiatives we're working on to drive accelerated growth in 2024 and beyond. Jessi will then walk through our quarterly performance and 2023 outlook before we open up the call to your questions. So let me start with the state of the industry. The business aviation industry continues to serve demand at much higher levels than the pre-pandemic period, driving excellent new installation numbers for Gogo, which we expect will translate into high-margin current service revenue, the primary driver of Gogo's long-term value creation model. The dealers and OEMs are still navigating some supply chain and labor laws. The avionics industry is in the midst of a return to normal operations, though at higher levels, as I noted a moment ago, and with some bumps still on the road. For Gogo, that means dealers are returning to normal order patterns due to the extended lead times induced by COVID and fear that supply may not be available at all, many dealers ordered more equipment than they had immediate need for over the past two years, culminating with our record setting Q4 2022 shipments. Fortunately, for Gogo, our great production ops team was able to meet that demand. However, as lead times have come down, dealers can use current inventory for new orders and don't immediately need to backfill for those installs, which is why despite having our second best new install quarter ever, we do not have as much equipment revenue to show for those installs as we normally would. We've seen this movie before. After a very strong Q4 in 2020, we suffered a 30% decline in equipment revenue in Q1 2021, only to finish 2021 with very strong equipment revenue growth for the year. We also saw this in 2019, 2020. Regardless, we're confident that our record 2022 shipments will translate into strong activations in 2023. According to our dealers and OEMs, 75% of Gogo inventory in the channel now has either a named customer or an aircraft serial number associated with it. As for the rest of the inventory, we expect demand to take care of that. However, we're also launching some dealer incentives to help that process along and we're working with some of our smaller dealers to shorten install times so that they can sell Gogo as a standalone outside of a large maintenance event. We've had some great success thus far and have brought standalone upgrade install times down to five to seven dealers -- with five to seven days with some dealers and are on track to get advanced upgrade times down to three days on some models with another deal. In general, the larger dealers are extremely busy. The elevated flight activity that started with COVID is accelerating the pace at which planes need to get in for required inspections and maintenance events. Many charter and fractional sleeps literally have planes parked on the tarmac grounded until they can get into the shop for maintenance. Meanwhile, dealers continue to suffer labor shortages and some parts shortages. For Gogo, this has translated into more opportunities for dealers to install a equip but that's been tempered by dealers sometimes not having enough workers to install our equipment if the work is to occur during a fixed maintenance window. Similar, post-COVID return to normalcy trends temporarily impacted our AOL count in the first quarter. The first is the higher level of maintenance events, most owners turn off their Gogo service while they're in the shop or grounded on the tarmac waiting to get into the shop. The second is the increase in secondhand aircraft inventory. But still well below the historical average of 5.6% of the US fleet, there's been a big jump in used aircraft for sale this year from around 2.5% to 3.6% of the fleet which impacts our AOL because customers typically turn off their Wi-Fi when they park the aircraft for sale. However, those sales are also an opportunity as the new owners usually reactivate our service and often upgrade before the plane comes back into service. Taking a step back, Gogo's installed base is evidence of both our strong market position today as well as the immense opportunity we see ahead. Of the 15,000 business jets in the North America -- in the North American market, almost 50% of them have a Gogo IFC system installed today, of which almost half are installed with AVANCE. AVANCE is a perfect stepping stone for high-performance-oriented customers with easy upgrade path to either 5G or GBB as they both utilize the same advanced infrastructure on the airplane, making it easier and cheaper to stay with Gogo and an upgrade and to move to competitors' products. For this reason, that continuing to expand AVANCE penetration is a cornerstone of our strategy. Meanwhile, based on our research, the rest of our customers that's non- AVANCE are generally satisfied with their current Gogo plastic product, which will continue to benefit from improvements to our ATG network. Our loyal installed base provides a solid financial foundation for our business for years to come and the other 50% of the business jet segment and the highly unpenetrated 10,000 aircraft turboprop market represents an opportunity for future growth. So let's move to our Q1 performance. The message is that despite some bumpiness as the industry returns to treat coved patterns, we had our second best new install quarter ever and our best first quarter's new install -- sorry, first quarter installs ever. We delivered first quarter revenue of $98.6 million, up 6% over prior year, driven by record service revenue, our primary value driver. The impacts on our equipment revenue were most significant in January and February, but in March, shipments were back on track. April was much better than January and February, but still a little off track. So we feel we're on the right trajectory, but still a wood to chop to get back on flat. Our operating metrics for the quarter were strong, with twice as many customers upgrading service is downgrading and continuing strong aircraft retention rates of greater than 90%. On the bottom line, Gogo delivered first quarter adjusted EBITDA of $39.7 million, down 7% year-over-year, reflecting softer equipment revenue, as we just discussed, and increased spending on our strategic initiatives, which Jessi will discuss in a moment. As for guidance, the factors I discussed in my business aviation state of the union persists. However, we believe we are poised for strong performance in the second half especially given the pent-up demand we see for Gogo 5G, and we still expect to finish the year in line with the full year 2023 revenue, adjusted EBITDA and free cash flow guidance we reiterated this morning. Now let's turn to the drivers of business aviation demand. The underlying secular trends driving demand for business aviation connectivity remains strong and continue to support our growth runway. First, passengers who flew commercial, but could afford private aviation, tried flying private during coke and have generally not gone back to commercial. Many have now ordered their own jet or a fractional interest in the jet. Second, the demographic of passengers is going through a shift to a younger generation that expects high-quality Internet connectivity wherever it goes. And last almost all passengers went through a technology transformation during COVID. As we all lived in isolation and had to master heavy data consumption apps like

Thanks, Oak, and good morning, everyone. Gogo continues to generate strong financial performance even as we've undertaken significant strategic investments like Gogo 5G and our Global Broadband Product or GBP. This is a true testament to the strength of our underlying business model and financial position. In my remarks today, I'll start by walking to Gogo's first quarter financial performance in more detail. Then I'll provide an update on our balance sheet and capital allocation strategy, including the paydown of debt we executed today, and I'll finish off with some additional comments on our 2023 and long-term outlook. Total revenue of $98.6 million in the first quarter grew 6% year-over-year. Our top-line was driven by record service revenue of $78.5 million, up 11% year-over-year and 1% sequentially. Our ATG aircraft online reached a record 7,046 units as of the end of the first quarter, representing 8% growth versus the prior year and 2% growth sequentially. AVANCE units online grew to 3,447 units, up 28% year-over-year and now comprised 49% of our total fleet. We expect our advanced aircraft online growth rate to accelerate in the coming months as dealers resolved staffing challenges that are contributing to slower installation rates and more of the equipment we shipped at the end of last year is brought online. We continue to expect the primary service revenue growth driver to be from additional aircraft online as we execute in a global market that is only 22% penetrated with in-flight connectivity and we launched two new products, 5G and GBP. Total ATG ARPU grew 2% year-over-year to $3,389 driven by recurring revenue and higher priced service plans. The launch of Gogo 5G in Q4 this year, followed by our GBP product in the second half of 2024 are catalysts to further expand our ARPU growth opportunity over time. Moving to equipment. Gogo delivered $20.1 million in equipment revenue in the first quarter a 9% decrease year-over-year and 35% decrease sequentially from the seasonally high and record fourth quarter. We shipped 223 AVANCE units this quarter down 9% year-over-year and down 43% sequentially, reflecting standard seasonality for our business that was particularly pronounced due to record shipments in the second half of last year as well as the normalization towards pre-pandemic order dynamics that Oak had discussed. We remain confident that the strong secular underlying drivers of IFC demand and our strong position in an under penetrated BA market will continue to propel our equipment sales in the future. We ended the quarter with a strong backlog and about half of our expected 2023 equipment revenue budget already secured. Overall, we're expecting our 2023 top-line performance to skew towards the second half of the year with stronger activations and shipments in the third and fourth quarter. Now turning to profitability. Gogo delivered strong service margins of 79% in the first quarter, consistent with the prior year period and slightly above our budget, driven by lower network costs. We continue to expect long-term service margins in the 75-plus percent range and to be the primary lever for free cash flow generation and long-term value creation. Equipment margins were 10% in the first quarter, 26 percentage points lower than the prior year period and 22 percentage points lower sequentially. The decrease in our equipment margin was primarily due to additional costs related to the FCC reimbursement program and increased production costs driven by our expected 5G launch in the fourth quarter. As Oak described, we have determined to participate in the FCC reimbursement program and by doing this, we incurred $1.3 million in inventory write-off costs. In addition, we incurred $1 million in cost this quarter, replacing a large number of BDO air cards in advanced equipped aircraft with dual modem air cards. These FCC-related costs drove down equipment margins by 12 percentage points. We expect equipment margins to go back to planned levels in the 25% to 30% range in the quarters ahead. Now moving on to operating expenses. First quarter combined engineering, design and development, sales and marketing and general and administrative expenses increased 15% year-over-year to $29 million, and on a sequential basis, operating expenses were flat. The year-over-year increase reflects development expenses for GBB as well as higher personnel costs. As we previously stated, we expect that 2023 and 2024 will continue to be investment years as we complete our 5G program and ramp up spending for GBB. We continue to anticipate that these investments will support sustained strong topline growth and once completed, will be a key driver to significant free cash flow growth in 2025 and beyond. In terms of global 5G spending, we continue to stay on track and on budget for Gogo's 5G's commercial launch in the fourth quarter of 2023. While our timeline has shifted, we have remained on track with the cost expectations we set back in 2019 and that Gogo 5G in external development and deployment costs would be approximately $100 million. In the first quarter, our $2.6 million of 5G spending was comprised of $2.2 million in CapEx and $0.4 million in OpEx. Now, on to our GBB initiative. In the first quarter, Gogo incurred $1.5 million in operating expenses related to GBB. We continue to expect external development costs for GBB to be less than $50 million over three years with approximately $14 million in 2023 and the remaining spending to occur in 2024. As we previously stated, we anticipate that approximately 95% of GBB external development costs will be in OpEx. This spending profile is reflected in our 2023 adjusted EBITDA and free cash flow guidance. Moving on to our bottom-line, Gogo's first quarter adjusted EBITDA decreased 7% year-over-year to $39.7 million primarily due to lower equipment revenues and increased operating expenses, including GBB. Gogo delivered net income of $20.4 million in the first quarter, down 8% year-over-year, translating to $0.16 in basic earnings per share and $0.15 in diluted earnings per share. As a reminder, our financial statements reflect non-cash income tax expenses as we continue to generate positive pre-tax income. Based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period, but we may pay a modest amount by the end of our planning horizon. We continue to expect additional reversals of portions of our valuation allowance against deferred tax assets within the 2023 fiscal year. In the first quarter, we generated $20 million in free cash flow, up $11.2 million compared to Q1 2022 due to a decrease in net working capital from lower accounts receivable, and lower 5G CapEx. Free cash flow was down $5 million sequentially, primarily driven by employee-based bonus payments made in the first quarter. Now I'll turn to a discussion on our balance sheet. We ended the quarter with $712.3 million in outstanding principal on our term loan and $188 million in cash and short-term investments with our $100 million revolver remaining undrawn. At the end of the quarter, Gogo had a net leverage of 3.1x, in line with our target range of 2.5x to 3.5x. As we announced on May 1, Gogo made a strategic decision to pay down an aggregate principal amount of $100 million on our outstanding term loan debt facility. As mentioned in previous calls, while we have a hedge agreement in place and before the paydown were more than 90% hedged, the first step down to $525 million will occur in July. The paydown will materially reduce our interest expense minimizing our exposure to the current volatile financial environment and ultimately strengthen our financial and strategic viability. As a result of the paydown Google will reduce its term loan B outstanding principal to $612.3 million. Gross leverage at the end of Q1 was 4.2x, and it will be reduced to 3.6x after the feed-out. On an annualized basis, we expect to reduce cash interest by approximately $8.5 million based on current silver rates. And in 2023, interest cost will be reduced by approximately $4.5 million based on the April forward silver rates and [Technical Difficulty] interest income. As a result of executing a more conservative financial policy with a lower leverage target and pay down our debt, this week, Moody's upgraded our credit rating to B1 with a stable outlook. The fee down of our debt is in line with our balanced capital allocation strategy. As a reminder, our priorities are: first, to maintain adequate liquidity, second, investing in strategic opportunities to drive competitive positioning and financial value, including 5G and GBP; third, maintaining an appropriate level of leverage for the economic environment with a target net leverage ratio of 2.5x to 3.5x, and finally, returning capital to shareholders as appropriate in the future. Now I'll turn to our outlook. For those reiterating our fiscal 2023 financial guidance and long-term targets. We continue to target 2023 revenue in the range of $440 million to $455 million. While we've had a slower start to 2023 due to the dynamics I discussed earlier, we continue to believe 2023 will be a strong year for aircraft online growth as the record units we shipped in 2020 are activated driving recurring high-margin service revenue and equipment additional equipment sales follow, particularly in the second half of the year. We expect 2023 adjusted EBITDA in the range of $150 million to $160 million, reflecting operating expenses of approximately $30 million for strategic and operational initiatives including $9 million in expected 5G spending, which reflects the shift of $6 million from 2022 to 2023 related to the chip delay, approximately $14 million of GBP development spend and approximately $7 million in additional operational initiatives focused on penetrating the 78% of the global business aviation in-flight connectivity market that remains untapped and maintaining our long-term competitive. We expect 2023 free cash flow of $80 million to $90 million, which includes capital expenditures of approximately $30 million to $40 million, of which $20 million of tried to Gogo 5G even with our investments in exciting new products, we expect year-over-year free cash flow growth in 2023 of nearly 50% at the midpoint of the guidance. Importantly, our 2023 guidance does not reflect the impact of Gogo’s participation in the FCC's secure and trusted communications network investment program. As previously mentioned, Gogo’s plans to proceed with the SEC program by submitting an initial reimbursement request before the July deadline. Since the program is currently partially funded, we have some optionality in what we request reimbursement for that could impact where money received will be recorded between the income statement and balance sheet. We will be solidifying our plans over the next couple of months, but in the interim, I want to provide some directional context on how the reimbursement program could impact our 2023 outlook. At a high level, we expect free cash flow to be impacted by increased use of working capital as we build airborne inventory into our equipment. The government reimbursement so partially lag those purchases, and then we see a cash flow benefit in subsequent years as the program unfolds. We will update our guidance on our Q2 call to reflect the program once our plans are finalized and provide more complete information on the financial impact of the SEC reimbursement program. Our long-term targets also remain unchanged, reflecting our expectations for the launch of Gogo 5G in late 2023 and the launch of our GBV product in the second half of 2024. We reiterate that we expect revenue growth at a compound annual growth rate of approximately 17% from 2022 through 2027 with global broadband materially contributing to revenue in 2025. We also expect annual adjusted EBITDA margin to be in the mid-40% range by 2027 and which includes continued investments in engineering, design and development to fund innovation and market competitiveness in the out years. And finally, we continue to expect free cash flow of more than $200 million in 2025 and growing in 2026 and beyond. We believe that our value proposition is underpinned by the strong growth in free cash flow as we complete our 5G GBV investments and execute in an underpenetrated global market. Gogo's business continues to perform extremely well. Our outlook underscores the immense value creation potential for our customers and shareholders that we expect to unlock as we execute our strategy and invest in the strategic initiatives that will extend and enhance our long-term growth. Before we open the call up for questions, I would like to thank the entire Gogo team for their continuous hard work, dedication to our business and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks. We are now ready to take up this question.

Thank you. [Operator Instructions] Your first question comes from the line of Ric Prentiss with Raymond James.

Thanks good morning, guys.

Hi, Ric

Hi, good morning. A couple of questions, if I could. First, Oak, you started with, obviously, the state of business. You mentioned 15,000 business jets out there, you guys have about 50% of that 50% or bounced help people understand why do you think that market is so underpenetrated. You talked a little bit about the technology changes and demographic shifts, but help people understand how you think that curve plays out of what drives people to say, "Yes, I want in-fligh connectivity on that pool of business jets. And then on the 10,000 turbojets sticking with the US, what is it there? Does it require price? Is it antenna? What is it that gets turbojets to come on board? And then the third part of the question is obviously the global side of it. What do you think spurs people to come to say, "Yes, I'm ready to pay for in-flight connectivity?

Right. So we'll start with Jet. 50% given that -- that this has been lying fit for, I don't know, roughly 10 years or so, I would say, isn't that bad when you think about it. A lot of the jets are trying the older than significantly older than the amount of time that this has been -- our service has been line-fit available at the OEMs. So all that has to come through the aftermarket. And frankly, I think that service levels have to do with it. And I think that the incredible increase in the capacity, we'll be delivering with 5G and GBB, et cetera, will be a real incentive for people to install service. Second, you have to do it. Generally, it takes a long time to install. Our systems are faster than installed than others, but still probably haven't been fast enough. So we really focused on reducing install times so that you not only have to wait for -- you don't have to wait for a big maintenance event. You might even just go in and do a standalone upgrade or install rather. I'd say the lower end of the business jet market, there's some price sensitivity, but that's where we've got L3 positioned and lower price plans that go with that. So I think that's why we've been pretty successful in driving penetration of the light jet market over the last couple of years. So it's a combination of all those things, it's generational. I mean a lot of business jets five, 10 years ago owned by people my age and many of those people didn't want to have connectivity on the jet or feel a need for it. That's really shifted as today. I think we did a whole of our user base last year and 67% of them are now Gen X, Y and

Great. That's very helpful and will help people to frame it. And I think Jessi mentioned that GBB could be material in 2025, is that kind of the hope, and is that GBB opens up and unlocks that 14,000 global opportunity that haven't had the availability before and that's why -- and what those material, kind of, can you give us a hand on what material might mean in 2025?

I am not in charge of the definition of material, so I'll let Jessi deal with that. But we're looking to commercially launch the GBB antenna and network in the fourth quarter of 2024. So you can imagine installs starting to hit at the end of 2024, going into 2025. So that's, I think, why we say material, and we'll start getting service revenue really in 2025 on it. Yes. Okay, so.

It's still going to be heavily weighted beyond the equipment side, but you'll start getting some service revenue.

Great. Last one for me. And, of course, I know I love service revenue guidance rather than just total revenue again, because I do think the overall value of the company is going to be more driven by service and the one-time equipment revenue. But the final one, $100 million debt pay down, that sounds nice way to get debt reduced as the hedge comes down for step down. How much cash do you think you need on hand to run the business particularly as you look at maybe the working capital pressure with the FCC program, and then remind us of what the other step downs on the hedges are as far as timing?

Yes. So I mean, the cash that we would like to have on hand. As a reminder, we have the $100 million revolver available to us. So we always have that, but somewhere between $50 million to $75 million, we'd like to be a little bit more conservative and making sure that we have that cash on hand. And especially, as you noted, with some inventory requirements with FCC initially until we get the reimbursement back from the government. So there could be a small lag in that initially. And with regards to the hedge pay down, we've got the 125 pay down that happened in July of this year. And then the next pay down is in December of 2024. So it goes from $525 million down to $350 million, and then it will step down to $250 million in terms of what's hedged, it will step down to $250 million December of 2025, and then December 2026 down to $200 million.

Great. That helps a lot. All right. Thanks everybody. Stay well.

Thanks, Ric.

Thank you. Your next question comes from the line of Phil Cusick with JPMorgan.

Okay. Thanks. Just a couple of follow-ups on Rick's questions. Maybe talk about the long-hauls to launch the GBP network. Any update on OneWeb's progress there? And what else has to happen for you to get that up and launched in 2024? What are the big pieces? And you talked about what the alternatives are today, but what are the alternatives that look like they're coming down the line? Who else is working on products for global private aircraft? Thanks.

Yes, sure. So the long -- There's two long-hauls. One is the OneWeb network. They've launched now all the satellites they need to complete their global network. They do have, I think, another two launches, but those are all spare satellites. So what they need to provide our services actually in the space. They need to position those satellites now in their orbital claims and get them up and operational. I think that -- they will -- and there's some software changes they make for Aero. So that will all get done, I think, by the middle of next year, and I think that will be a slightly shorter poll than the other one, which is our building of our terminal, our aircraft terminal, which we're doing with Hughes. That program is in great shape. I have to say, working with Hughes is real pleasure. Their operational maturity and program maturity is outstanding. And so we've been able to actually move that project in. It was going to be a early 2025 delivery and now we're into the fourth quarter move to the left. And I think we see, frankly, some opportunity perhaps to even move in a little more. So that's going extremely well. I'm not going to give away any secrets, but we're going to have some fun news about that at EBACE in Geneva at the end of May, the big Global Business Aviation Convention. So those are related two poles, and I think both are in very good shape at the moment. And in terms of alternatives right now, I think, Starlink would be the main one. They have a large antenna today, 39 inches long, 31 inches wide, which is quite large for Business Aviation. That's installed on some Embraer 145s flying from JSX Airlines and on some G650s, which I believe are all pretty much owned by some Scandinavia Air [ph] or another. They've been seemingly having difficulty getting STCs for that. And they're sort of making halting progress trying to get into the market. From personally, I think that, we have great respect for Starlink in the people at SpaceX, they're literally a group of rocket scientists. But we think that we'll be very competitive with them in our [Indiscernible] market. With our combination of ATG and LEO, frankly, we think we're going to have the best product in the market. When it comes to return link, will be much better than they are and other factors I won’t bore you with in terms of the key stuff, but we think we as a very competitive product. We'll have much better service in a market that is very complex and very service sensitive and very demanding of service. So that's good. And I think that on pricing will be very competitive. So we think we can compete effectively with them. And then I guess the third part I'd make is coming into this market makes no sense for them. They're a great company. They do some things extremely well, obviously, on the satellite side. But when it comes to markets, they're generally do it two ways. One, they have a very standardized offering, you're going after very large markets like direct-to-home, and it's relatively simple on the service side and the mass marketing just is enough to sell that product. And so that works well for them, and they do it at real scale, and they get cost way, way down. But they have to manufacture millions of terminals and the like to actually have the costs come down to where they need it. The other thing they do really well is really large customized programs like the Department of Defense and the like, and they're deals are worth millions and it's worth them committing huge teams of geniuses to build those programs and deliver them. But what doesn't really make sense is adding -- getting into markets that require -- that are very small and require lots of customization and cost. And I'm not sure they're really good at that. When it comes to antenna, they're going to try and take a consumer-grade antenna and beef it up for aero, that doesn't really work in aero, okay? It's got to be a ruggedized aero standard manufactured piece of equipment, which is a lot different than what you could put on a home, right? It's the same with routers. The same with every single component of what they have. So that level of customization for a very small number of units doesn't make sense. The level of service that you have to have for a very small number of units doesn't really make sense either. So I think -- and if they come in and they dramatically cut pricing, they're going to take us $300 million or $400 million service market today and make it a $150 million service revenue market. That doesn't really make sense because that's a rounding error in their numbers. So that's our take on them. And then I think Satcom Direct has a deal with OneWeb, as well as we do. We don't see a lot of progress from them on that front. They seem to be pushing some of their other products more heavily. But I mean, I think we always have to take them seriously. They're a good competitor. So I think that's kind of the competitive landscape.

That’s helpful. Thanks, Oak.

Thank you. Your next question comes from the line of Landon Park with Morgan Stanley.

Good morning, everyone. Thanks for taking the questions. I was wondering if we could try on the OEM side. I'm wondering if -- maybe you could comment on what kind of take rates you guys have been seeing out of that channel and maybe how that's trended over the last couple of years. And any early indications you've had from them regarding GBB, just what the outlook looks like there? And then separately, I was just wondering if you could talk about what the EBITDA cadence might look on through the year, given that the 1Q level was already at sort of the high end of your guidance, it seems to include some one-time expenses. So how should we think about the puts and takes through the rest of the year there?

Sure. So I think the OEM part and leave Jessi, with the hard numbers part on EBITDA. Our take rates are very widely by OEM, I would say. We have very high take rates at the Textron’s and OEMs and Embraer's today, less so at Gulfstream coming out of line fit, for instance, but we often get put in, in the aftermarket there, same at Bombardier. So it's a little hard to say exactly what the take rate is because often we're installed sort of just after it comes off the line in a service center or something like that. However, I think that, the way to think about it, about 65% of OEM delivery stay in the United States, something like that. And so we're kind of limited to that side of the opportunity, if you will. And we would be on almost all Textron planes delivered to that market, very high-percentage of Embraers, and then less so, like I just said on the Gulfstream and Bombardier and Dassault. However, we have very high penetration of the Bombardier, Gulfstreams and Dassault. But again, that generally comes in, in the aftermarket. I would say our take rates have been growing which is good. And then, I would say that on GBB, the receptivity is just outstanding. And I've never seen the OEMs as excited as I see them now across that product.

And in terms of the EBITDA for the rest of the year, so definitely, the revenue is going to be higher on the second half of the year than the first half, as we passed-through, but we will have some increase in expenses. So in Q1 the GBB, expenses was only $1.5 million and 5G expenses was only $0.4 million. So, both for 5G and GBB, those expenses are going to be picking up as well as the other operational initiative expenses. So that will have some impact on the EBITDA going forward while the revenue is growing.

Understood. That's very helpful. And then just a follow-up on the OEM side, maybe just including the aftermarket installs would come shortly after delivery? What of those 700 with the 65% in the U.S., is it nearing 90-plus percent, in terms of what you guys can get off of that? And -- just maybe more broadly, are you seeing anything on the macro side? Have you picked up any customer sensitivity or anything along those lines?

Look, we haven't shared the attachment rates at the OEMs. We can contemplate sharing those in the future.

Okay.

So I'm not going to give you exact numbers. But like I said, if you First of all, but today, we are limited to those that are being delivered in the U.S. I'm going to give you a little wrinkle, which is sometimes those that are ordered overseas do install our equipment, but they don't activate it and they install it in order to have a get better pricing in the aftermarket and when they go to sell that aircraft. So they think they have our product and then they sell there. So there's a little bit of a wrinkle there. But I think that if you look at Textron deliveries in the U.S., we're probably close to 90%, something like that. If you look at Gulfstream, it's going to be at the other end, it's going to be sort of 20%. So then…

Okay.

Yes. And because sometimes in the aftermarket at least if it's a relatively new Gulfstream it's going to be at a Gulfstream aftermarket facility generally. We don't look at that, I would say, as a line-fit OEM install. So we don't really count it that way. So that is complete we were sharing that in the future Landon, but I think I'll give you the color.

That's very helpful. And is there anything on the macro that you want to add?

No. And when you say macro, you mean, macro economy?

Yes, the macro economy…

It impacts people’s feeling. Well, it's on people's minds. We did a little hole of our Dealer Advisory Council in roadshow to visit dealers and so in all, I would say, let's call that 12 to 15 dealers. And only one mentioned the economy being the issue. There are a lot of other things that got mentioned that might ultimately be economic, but we're more, I would say, micro in reality. So -- there's been no real impact on orders at the OEMs, right, Will. I mean they continue to be strong. And from the dealer perspective, they are busier than they can really handle right now, catching up on maintenance from over time. I mean, they're literally planes parked on ConneX that can't fly because they're no longer in compliance on their maintenance logs they're trying to get that work done, so those planes can start flying again. So everybody is very, very busy. So I don't think the macro economy has really hurt the market.

Great. Thanks so much for taking the questions.

Thanks, Landon.

Thank you. Your next question comes from the line of Lance Vitanza with TD Cowen.

Thanks guys for taking the question. Maybe just to stay with the theme of the dealers and the shipments and activations and the turbulence there, I think the concern is that it does raise the specter of perhaps the macro pressures are kind of bleeding into the business jet demand. But just to be clear, it sounds like really what happened is that the dealer has requested a lot of shipments historically because the lead times have become concerning and now that's reversing. And it doesn't sound like the underlying kind of final demand has changed much. Is that fair? And I think you said, if anything, it's stronger than pre-COVID and presumably, it's also stronger than where it was before the supply chain sort of got challenging. Is that fair?

Yes. I think that's all fair. We had a huge Q3 and Q4 shipments, record breaking. Some of that, I think, was driven by the still COVID ordering patterns. I think also our equipment prices go up every January 1. So I think people are loading up ahead of time on equipment before the price increases kicked in. So -- and I think that they bought enough inventory to last them well into this year. And they don't need to backfill but they're taking off the shelf to install. They've got -- already got plenty of inventory on the shelf. So I think that's the real impact right now. The important thing to us is getting the plant to gear on the plane and activate it and producing service because as Rick pointed out earlier, that's the [indiscernible]. So we're happy with that and a little inside baseball. We had a really good activation quarter, it doesn't show so much in AOL because when people go into maintenance or they put the aircraft up for sale, they often almost always spend the service for a couple of months or however it once it's long it takes to sell the debt. So there's a little dampening there because those sales activities have picked up in the last year and the maintenance activities are picking up. So but that's all temporary, right? Most of those -- the ones that go for sale almost all come back online, often was an upgrade, which we like. And the ones that go into the shop, they turn it back on as they come out of the shop. So -- and obviously, if the grounding way to get their shop, they're really not going to -- they're really going to turn it off. They can’t get to the shop once they start paying make a bit they're not using. So those tend to dampen AOL, but we had good demand on the install side and activation side. And so we feel pretty good about that. The issue we found a couple of times is this plane is meant to come in for two months. It's going to get all the following things done and they want to sell them an IFC system. However, if I do, because of my labor issues, I got to add two weeks to the two months and the customer won't accept that extension to the maintenance window. So those are the types of things that do dampen things a little bit. But like I said, it was our second best activation month ever -- quarter ever and certainly our best first quarter activation.

Great. Thanks. Appreciate it.

Thank you. And our next question comes from the line of Louie DiPalma with William Blair.

Hey, Louie.

Oak, Jessi and Will good morning, and Jessi congrats on your first call as CFO.

Thank you.

Oak, you provided several metrics for the 5G pre-provisioning. What are the next technical milestones to look for with the 5G launch, and is there a risk that the launch could slip to early next year?

Well, we're on track right now in terms of getting the chip fabrication completed at Samsung and getting that chip to GTT, Airspan and us on schedule. That looks so all be on schedule. We've done almost all the testing we need to do on this system already, but we have not tested as anything that just relates to the 5G chip. So clearly, that testing has to take place, which will happen generally late second quarter, early third quarter. We'll be flying it in the third quarter. There's always the -- that’s one possibility that something goes crazy at Samsung again or whatever. But with the amount of attention, Samsung, Airspan, GTT, and we have all paid to this chip at this point. It would be shocking if there was a problem with it. So we're quite confident, we'll be delivering in Q4. And now it appears to be completely on schedule.

Okay. Excellent. And Oak you also discussed, how the 5G service is expected to be five times to 10 times faster than your current AVANCE ATG product. And as it relates to small and midsized aircraft that only fly in the US, I know you were just talking about Textron aircraft. But do you think that those aircraft, the small midsized aircraft would be good candidates for the global broadband product? Or do you think that for small and midsized aircraft that only fly within the US that most likely they will stick with your ATG products as that appears to be fast enough for most of their needs as it relates to streaming or video gaming and phone calls and whatnot?

Yes, that's 100% right. And I think also, it will be priced to appeal to that market. So, I think that ATG, if the mission is generally US is a very good answer and 5G is a very good answer. So that's where we're positioning that product. The GBB product, we're really positioning for obviously the international claims that fly outside the US most of the time. For heavy jet in the US that fly outside the US, often enough to want to have a system that can handle that overseas. And in that market today, we've already got like the heavy jet market, where over 50% of the US heavies have our system -- our ATG system on this today, probably about half of the heavy -- the super mids have our system and a lot of those are advanced already. So for them to add GBB is going to be a pretty heavy -- pretty easy lift and it can replace their current geosatellite products. Often, they have us and the GEO product. So, a lot of that market looks at this, I'd really love to have one throat to strangle, one provider and one price for the bundled package that I can pay one bill. And I think that the LEO will provide better service than GEO. So that market -- that's the other market where GBB is really a…

Great. And one last one for Jessi. Will there be a material step-up in recurring cost of service expenses with the launch of 5G this year and the global broadband networks next year, will there be like significantly higher like backhaul costs and power expenses and other data center software fees that we should be thinking about? I know Oak and Jessi, you previously outlined expectations for significant margin expansion. And I'm just wondering, what types of additional costs we should be thinking about?

So 5G backhaul, it's in our guidance and it's in our long-term forecast that we've been providing. So there will be some increase in the 5G backhaul. And as mentioned, with GBB, we're paying by the drink on that with one left. So that will be flowing through cost of those as well. But we still expect the margins to be in the 75-plus percent range in the long term. So -- that's included all in our plans.

Great. Thanks, Jessi. Thanks, Oakleigh.

Thank you

I would now like to turn the call back over to Vice President of Investor Relations, Will Davis for any closing remarks.