GOGO - NASDAQ

Good day, and thank you for standing by. Welcome to the Q1 2025 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, William Davis, Head of Investor Relations. Please go ahead.

Thank you, Gigi, and good morning, everyone. Welcome to Gogo's first quarter of 2025 earnings conference call. Joining me today to talk about our results are Chris Moore, CEO, and

It is now my great pleasure to turn the call over to Chris.

Thanks, Will, and good morning, everyone. Thank you for joining us today. As we continue to merge Gogo and Satcom Direct, I would like to say how proud we are of the progress our global team is making. The merger is already indicating that it was a positive strategic move for our employees, our customers, and investors. We have built strategic and commercial momentum in the last quarter, resulting in significant milestones achieved with PMA approval for our HDX and FDX Galileo antenna, execution of new OEM agreements for our Gogo Galileo service, the confirmation of the fabrication of our 5G chip, and growth in the number of aircraft online optimizing RGO satellite services. The PMA approvals are particularly significant as they will enable us to begin shipping products and developing STC to both terminals. We have already made great progress with our Galileo HDX antenna as we continue securing new SDCs, OEM wins, and generating revenue with activated customers. The SDX PMA approval came just this week, almost two months ahead of schedule, and we expect FDX to follow a similar successful rollout with 10 STCs already queued. I am looking forward to talking you through a strong Q1 performance, which will cover our quarterly operating results, provide updates on our GEO NATG product lines, and highlight our success in realizing acquisition-related cost synergies. We will review the demand potential in our markets and outline our strategic approach to capitalize on these opportunities to enhance shareholder value. Following this, I will share progress on key strategic initiatives and conclude with a brief assessment of the potential impact of tariffs on our business. Finally, I will turn it over to

Thanks, Chris, and good morning, everyone. I am pleased to report first quarter results were ahead of expectations on both the top and bottom lines. In addition, five months after the close of the Satcom Direct transaction, we see improved product execution, strong financial discipline, and integration progressing well. We are still in the early days of the integration, but we believe these positive developments are setting the table for future free cash flow growth and material deleveraging as we look to 2026 and beyond. Even in this period of global macro uncertainty, we are reiterating our 2025 financial guidance, including the impact of current and proposed tariffs. Our 2025 guidance reflects small amounts of Galileo HGX equipment revenue in Q2, an FDX launch in the late summer, and assumes minimal 5G revenue beginning in Q4. We expect the Galileo HDX service revenue to ramp in the first quarter of 2026. I will now provide an overview of Gogo's first quarter financial performance, then I will turn to our balance sheet and capital allocation priorities. Finally, I will conclude with additional context on our 2025 guidance. For the first quarter, Gogo's total revenue was $230.3 million, up 121% year over year and 67% sequentially. On a stand-alone basis, Satcom Direct's Q1 revenue grew 10% from the prior year. Total service revenue of $198.6 million was up 43% over the prior year and 67% compared to the prior quarter. At the end of Q1, we had 6,902 total ATG aircraft online, which was a decline of approximately 3% compared to Q1 2024 and 2% compared to Q4 2024. We achieved record advanced upgrades in the first quarter, and converting our classic customer to advanced continues to remain a top priority. Advanced AOL reached 4,716, up 15% from the prior year and now comprises 68% of the total AT fleet, up from 58% in the prior year quarter. Our 2025 guidance assumes continued advanced growth, but the overall ATG AOL will be lower at year-end 2025 versus 2024. Total ATG ARPU of $3,451 dipped slightly sequentially and was flat from the prior year. We initiated a price increase in February of 2024. Total broadband GEO AOL, excluding networks that are end of life, reached 1,280, up 79 aircraft and 16% year over year and up 31 units sequentially. The majority of GEO broadband aircraft are under fixed-term contracts, helping to create revenue stability. In addition, our GEO ARPU is holding up better than expected. Now turning to equipment revenue. Total equipment revenue in the first quarter was $31.7 million, up 40% year over year and 67% sequentially. The number of advanced equipment units shipped increased 19% sequentially to 241. Regarding our profitability, Gogo delivered service margins of approximately 53% inclusive of Satcom Direct. Stand-alone Gogo service margin was about 77%, in line with our previously stated targets. 98% of our gross profit in the first quarter was tied to service revenue. We run the business to drive this recurring high-margin service revenue. Equipment margins were 7% in the first quarter, and as a reminder, we expect Galileo equipment pricing to be close to cost. Now turning to operating expenses. In the first quarter, total operating expenses excluding depreciation and amortization were $57.6 million and more than 5% below our budget, which helped drive better than expected adjusted EBITDA. I will now provide some additional commentary on our major strategic initiatives around 5G, Galileo, and the FCC reimbursement program. In the first quarter, $3.5 million of 5G spending was comprised of $1.3 million in OpEx and $2.2 million in CapEx. We expect 5G spend to decline significantly in 2026 as we roll out 5G in Q4. Turning to Galileo. We recorded $1.2 million OpEx and $1.5 million CapEx in the first quarter. We continue to expect total external development costs for both the HDX and FDX solutions to be less than $50 million, of which $27 million was incurred from 2022 to 2024 and approximately $13 million is expected in 2025. We anticipate approximately 80% of Galileo's external development cost will be in OpEx. And finally, our FCC reimbursement program. Following the passage of the National Defense Authorization Act late in 2024, we continue to anticipate increased reimbursement of about $50 million for our FCC program to support the upgrade of our ATG network to LTE and provide incentives to upgrade our classic fleet to advance. This will reduce our total cash outlays under the program to $10 million and should be a primary driver of our 2026 free cash flow improvement. In the first quarter, we received $5.9 million in FTC grant funding, bringing our program to date total to $47.1 million. As of March 31, we recorded a $10.7 million receivable from the FCC and incurred $6.9 million in reimbursable spend. This receivable is included in prepaid expenses and other current assets on our balance sheet, with corresponding reductions to property and equipment, inventory, and contract assets, a pickup in the income statement. Moving to our bottom line, Gogo generated $62.1 million in adjusted EBITDA in the first quarter, which includes approximately $1.2 million of operating expenses related to Galileo and $1.3 million of costs related to 5G. Our adjusted EBITDA margin was 27% as compared to our long-term view in the mid-twenties when the Satcom acquisition was announced in September. In addition, Gogo reported first quarter net income of $12 million, equating to $0.09 of diluted EPS. I will now provide some color on our synergy progress. We have made good headway driving synergies, and we believe that we have more to go. We achieved $18 million of run-rate synergies at the close of the and added another $9 million during the first quarter call. All in line with what we said on the fourth quarter call. Within two years, we continue to expect run-rate synergies in the $25 million to $30 million range. As we said on the Q4 call, we still believe the cost to achieve these synergies will be at the low end of our previously expected range of $15 million to $20 million, and we anticipate funding these costs with proceeds from the sale of the SD Headquarter Building in Melbourne, Florida. Moving to free cash flow. First quarter free cash flow was solid at $30 million, and we view the current and proposed tariff situation as manageable. We expect to have plenty of cushion to absorb any minor tariff impacts on our 2025 free cash flow guidance. We continue to expect that 2025 will be our trough year of free cash flow as new products ramp, and the corresponding product investments roll off. We believe that sustained free cash flow growth minus expected future earn-out payments is key to driving shareholder value and will help support the return of cash to shareholders over time. Now I will turn to the discussion of our balance sheet. Gogo ended the first quarter with $70.3 million in cash, short-term investments, and $850 million in outstanding principal on our term two term loans, with our $122 million revolver remaining undrawn. This equates to a net leverage of 3.4 times at the end of the first quarter, and we expect this ratio to remain relatively flat as we move through the year. Our leverage trends are better than when the Satcom deal was announced, largely due to higher adjusted EBITDA and strong free cash flow. Our cash interest paid for the quarter, net of hedge cash flow, was $17.8 million. As we mentioned in prior quarters, we have a hedge agreement in place, and at the July, the hedge steps down to $250 million with the strike rate increasing from 25 bps to 225 bps, resulting in 29% of the loans being hedged. As a reminder, the cash interest paid for 2024 net of hedge cash flow was $33 million. We expect that to be approximately $70 million this year. Our capital allocation priority remains consistent with prior quarters and focused on executing across the following four priorities in order. First, maintaining adequate liquidity. Second, continuing to invest in our strategic opportunities, primarily through Galileo and 5G. Third, maintain an appropriate level of leverage for the economic environment, with the target net leverage ratio of 2.5 to 3.5 times, and finally, returning capital to shareholders. As a reminder, Gogo has $12.1 million remaining on its $50 million repurchase authorization that our board approved in September 2023. At 3.4 times, we are just a tick under the high end of the targeted leverage range, and we continue to monitor the market to determine a reasonable strategy to refinance our term loan B. We believe our expected free cash flow growth over the next few years will find ample excess cash to pay down debt, reduce our interest expense, and ultimately return capital to shareholders. In our earnings release this morning, the company reiterated our 2025 financial guidance, adding that it includes the current and proposed impact of global tariffs. For 2025, we expect total revenue in the range of $870 million to $910 million, reflecting the HDX launch in Q1 and 5G generating modest revenue in Q4. Adjusted EBITDA in the range of $200 million to $220 million, reflecting operating expenses of approximately $25 million for strategic and operational initiatives, including 5G and Galileo. Free cash flow in the range of $60 million to $90 million, and we expect 2025 to be the trough of our free cash flow. We have approximately $70 million slated for strategic investments net of the FCC reimbursement. And finally, we expect capital expenditures of approximately $60 million, containing $45 million for strategic initiatives, including 5G, Galileo, and LTE network build. The CapEx guidance excludes $20 million reimbursement from the FCC. I remind you that preliminary targets for the combined company assume 10% long-term revenue growth in adjusted EBITDA margins in the mid-20s. We anticipate providing updated targets once our long-term plan is finalized. In summary, Gogo's first quarter performance highlights our focus on new product execution and financial discipline. The positive impacts of the acquisition are visible in our results, and we believe that a fully integrated Gogo Satcom Direct global business will have the scale, market positioning, and the broad product portfolio needed to delever the balance sheet, drive free cash flow, and create long-term shareholder value. Before we open the floor for questions, I want to express my gratitude to the entire Gogo team for their hard work, commitment to our business, and dedication to providing exceptional service to our customers. Operator, this concludes our prepared remarks, and we are now ready to take questions.

One one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Ric Prentiss from Raymond James and Associates.

Hey. Hey, Ric. Thanks, everyone. This is Brent Pinter on for Ric. Appreciate the color on the modest tariff impact and its absorbing the guidance. Can you size that for us in terms of the dollar amount that's now baked into your guidance on tariffs?

Yeah. It's about around $5 million. It's kind of half EBITDA, half working capital. You know, a lot of it's from our purchases of inventory. So and like we said, most of our revenue is service-based, so that's exempt.

Okay. Got it. And then just on the broader economy, can you update us on the proportions of your customer base that are corporate versus charter, high net worth, etcetera? As a combined company now that we have Satcom, in what portion of your customer base would you view as economically sensitive, you know, given some of the macro fears out there, and if you're seeing anything, any impact so far?

Yeah. We're not really seeing any impact at all. I mean, the good thing with the business is we're really diverse internationally. And, you know, we're not really seeing any kind of impacts at this point in time. The other bit would be government business, you know, we look at any potential impacts, usually, there are we've seen that in the past with trends in the past that business aviation, like, when we looked at COVID in 2020, if it goes down slightly, then the government business goes up. So we're feeling pretty confident at the moment. The OEM deliveries look good. As we mentioned in the call, with the geo activations, they're still up. And the demand on the pipeline for Galileo is exceptionally strong.

Okay. And then last one for me. On the 10% growth at SATCOM, since we don't have all the historicals there, could you break down roughly the growth rate that you saw in 1Q between geo broadband, versus narrowband, versus milgov? And since Gogo investors are newer to that business, how should we think about kind of a long-term sustainable growth rate and what's baked into that 10% combined guidance that you gave in terms of Satcom growth?

Yeah. There's a lot to unpack. I'll try to distill it as best I can. I would say the vast majority of the growth was related to geo broadband. And with the like, you can see that, like we said, with the geo units online. So and then, you know, within that, there's a pretty sizable piece in Milgov that was also a geo broadband. And we're not you know, the 10% was the previously guided long-term growth rate, so we're not prepared to discuss the long-term rate on this call. But, I mean, if you if you want to think about the trends, it's really the geo broadband units online.

Okay. Thank you, everyone.

Yep. Thank you. Thanks, Brent.

Thank you. One moment for our next question. Our next question comes from the line of Sebastiano Petti from JPMorgan.

Hi, thank you for taking the question. I guess just relatedly to that, if you could perhaps,

Yeah. So you know, we noodle this a lot to try to try to make sure we're being kind of thoughtful about the trends of the business. And I think one of the big factors that we monitor very closely that are really kind of outside of our control is the continued path of ATG units online. Right? Because, you know, Q1 was a little rough on that side. And then as well as the geo units online as well as the corresponding ARPU, and, you know, we don't release ARPU for the GEO business, but it's holding up much, much better. But we do anticipate kind of continued pressure on that piece going forward. So you know, if that holds up better than we kind of think, there could be upside and closer to the high end. But, again, it's early days. Right? You know, we're only a quarter in, so we just want to make sure we're thoughtful about those trends as the new combined business and how the LEO story unfolds?

Okay. That's very helpful. Thank you for that. And then just as you touched on,

Yeah. When we when a customer suspends, we actually have really good market intelligence data on why customers are suspending or leaving the network. So, yeah, when we look at that information, actually, it's pretty well educated, so it's not kind of, you know, guesswork there. So, you know, on the air-to-ground side, we're still very confident. We can see also with customers still pre-provisioning for 5G, which I think is a good indicator as well in the market that people still want the service. And then unlike the GA business, which is more kind of contract labor, twelve months plus, the air-to-ground business is actually there's a lot of kind of customers within more flexible based contracts. So it's really kind of hard to put some trends around that, but when we're looking at the reasons why people are suspending, we haven't got really major concerns at this point.

Got it. And then lastly, on the geo broadband, I mean, obviously,

Yeah. So, I mean, obviously, there's growth there in geo, which is really encouraging. I think that just demonstrates the power of line fit as well with the OEMs and the customers are obviously still taking the service. You kind of hit, you know, a good point. I think that we see it in two things with Galileo. One is customers may upgrade and replace geo. That's a definite potential. But as I mentioned on the last call, we also see kind of the mid to large jet market taking it as a supplement. So having both LEO and GEO. And then going into the government sector, that's actually a requirement. With the PACE planning, the primary alternate contingent and emergency. So we do see kind of, you know, modest growth and it's kind of difficult to predict. But that's kind of really why we see the market. But, you know, GEO is holding up exceptionally well. I also think that also is a demonstration to kind of, like, with competitive products. There may be a potential there. There's a little bit of cooling off, and also, the geo products have also got a lot more competitive with speeds. But, obviously, with the LEO, it's slightly, you know, a big different offering from a latency point of view. So with our mid to large jet customers, we see that more kind of like as a supplement, and then hopefully that's positive for the business. Thanks again, everyone.

Thank you. One moment for our next question. Our next question comes from the line of Scott Searle from Roth Capital.

Hey, good morning. Thanks for taking my questions. Congratulations on a great first quarter out of the gate. Chris, maybe to start, I want to confirm on the 5G chip front, you used the word fabrication a couple of times in your opening remarks. I want to confirm that you guys have actually gotten some tests back on it. And this chip is to go outside of some basic firmware upgrades and testing and otherwise. Was wondering if you could also take us through the milestones to getting that launch up and running. It sounds like you're tracking towards the fourth quarter of this year. And finally, on the 5G front, help me reconcile ALL ATG down exiting 2025, given the impact that we're expected to see from 5G at some point late this year and certainly 2026? And then I had a follow-up.

I will try and cover that. I think, you know, with the fabrication, it's just at this point, we've been at this stage before. So we've been, you know, pretty cautious at this point. I mean, obviously, when you bring up the chip, they have to layer it and actually come up with the fabrication of the product. That will then go from our supplier, go into packaging, and then ultimately, then we have to bring up as well. So we've got these stages that will unfold over the next several months. And, you know, that's why we've got hopefully, the network being launched in the fourth quarter. Everything's looking good so far. We have been to this stage before, so we're very optimistic, but you know, we don't want to really say much more than that at this point. Regarding the actual business, I think I covered it in the last comment, but, you know, it's you know, we see that kind of suspensions, people coming back online, Q1 is usually a big heavy maintenance window for a lot of customers. So, you know, the story unfolds across the year. We still think there's strong upgrades for customers going into, you know, more advanced air-to-ground products. Obviously, opportunity for those customers with Galileo as well.

Great. Thank you. Very helpful. And if I could on the Galileo front, it sounds like that with the PMA approvals, you're really progressing well on both the HDX and the FDX front. I'm wondering just from a competitive landscape standpoint, if your expectations for the size of the market and share are increasing given the success and early success that you're having, with FDX and HDX, and if you know, kind of the flipping Twitter comments from Elon Musk were actually driving some competition and opportunities and share your direction. Thanks.

Yeah. I think the big thing is, you know, we're really encouraged. We've got over 300 customers in the pipeline already for HDX, which I think speaks massive volume. So we're really excited about that. Also, the FTC, we're seeing no slower. And, you know, that's why the MROs are so important to us. And, yeah, competition's healthy. I think it's a really, really good thing. I think customers have been waiting with, you know, having a competitor in the market. And then also, the FDX PMA, we're ahead of schedule. Our engineering team's done an amazing job. We had a lot of lessons learned from HDX. We were able to accelerate the product into market, which is fantastic news. And those STCs are now starting to become a real thing as we can ship products. So we're really excited. And from a competition point of view, I think it's really important as well is, you know, competition's good, but we're really focused on providing that enterprise product globally. And then to the earlier point, you know, whether it's LEO and GEO together or LEO on its own, we actually see a really good kind of positive opportunity for the product overseas. We look at the mix in our pipeline just for HDX at the moment. It's about a sixty-four-forty split between North America and the international markets. And I think that's a real strength of Gogo moving forward with the Satcom Direct acquisition. We've now got access to a complete global sales team, which and also, we can provide support anywhere in the world. We can get on a plane in typically under twenty-four hours if there's any problems with systems. And then also we've made massive investments in regulatory compliance as well. So we're really excited. We're getting really great reactions from customers, and I think that split as well is really interesting on kind of, like, that pipeline split with 40% coming from overseas. I think is really encouraging.

Thanks so much.

Thank you. One moment for our next question. Our next question comes from the line of Justin Lang from Morgan Stanley.

Yes. Hi, Chris,

Yeah. I would say pretty much what you just covered. I mean, it's really encouraging at the moment. The overseas markets, which, you know, arguments have been kind of a little bit sleepy before in the past, very dependent on the DOD. And, really, you know, we're seeing a lot more demand coming from more sovereign-based networks, also the ability to have a little bit more control on their future. So we see a great opportunity within the European environment. Also, Southeast Asia and some other territories as well. Great news is we've got specialized staff in those areas. And then the DOD is really, you know, as mentioned in the call, really looking at that tech refresh and, you know, that narrowband technology that they've been very dependent on for a long time and the difficulty of really moving into new services and installations of those services. So we've really kind of we feel with the HDX and the FDX we've really kind of created a very easy-to-install platform taking a commercial proposition into the government, to drive out costs for them as well. So, you know, we really don't want that kind of thousand-dollar hammer moment for the government. What we really want to do is drive in the scale of commercial solutions. So, you know, we're really we're very, very kind of encouraged about that business unit. We feel very optimistic about it. Yeah. So all of the things you mentioned, we're starting to really see those. And, also, the support for our partner, UTelsat OneWeb, is really increasing, and you can see that with a lot of press and kind of the traction they're getting as well. So we're very excited about the whole opportunity.

Great. Appreciate it. Good to hear. I'll stick to one. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Louie DiPalma from William Blair.

Chris,

Morning.

Good morning.

When taking into account the one-time program cost and further expected synergies, how much of the 2025 costs, you know, should go away for 2026?

Yeah. So the estimate that we're saying is anywhere from $60 to $70 million. Like you said, you're really seeing all of this stuff hit. You know, obviously, there will be some, you know, investment as we roll out kind of our five-year R&D roadmap, but I think it's going to be a lot tighter, and that's sort of what we said is $60 to $70 million of kind of cost that should be pulled out.

Great. And what's the breakdown? How much of that should be OpEx versus CapEx?

Looking right here. I don't have that in front of me, but when we chat later, I'll be able to pull it up for you.

Okay. Great. And another question, Chris, from a high level, can you discuss the performance for HDX for the initial adopters? I know that you said that it's performing according to spec. But can you remind us what those specs are and how the performance of HDX and FDX should compare to the Starlink performance?

Yeah. I think I'll take that in a couple of things. So we've got customers flying around in Europe and the US right now. Actually, paying customers in Europe, largely operate the services working flawlessly, and, you know, they're able to do everything they want to do from Teams meetings, streaming movies on the bulkhead. And then the nice thing with our solution is, you know, obviously, completely integrated into the cabin management system. Regarding kind of comparisons to competitive products, I'll just fold Leo Speed. And, ultimately, HDX is designed to go up to 60 megabits per second. We're seeing the product perform within that parameter. The uplink speed's solid. And, really, when you look at the passenger counts on those jets, it's, you know, more than enough capacity flexibility. I think everybody's gone kind of speed mad. Everybody talks about speed, but nobody talks about the consistency of the cape and the capacity capability within flight. So, you know, really, what we're focused on is that and also having service level agreements that we can back that up with. But everything we've seen with customers is extremely encouraging. We're really excited. We've also got some customers down in South America, and, you know, that's the other nice thing we're seeing about the service is just consistent wherever these customers are flying, and it's completely global. And we've got the same expectations from FDX as well. And we're pretty excited about it, Lou.

Great. That's it for me. Thanks, everyone.

Yeah. Thank you.

Thank you. At this time, I would now like to turn the conference back over to William Davis for closing remarks.

Thank you, everyone, for joining our first quarter conference call this morning. This concludes our call. You may now disconnect. Thank you. This concludes today's conference call.