GOGO - NASDAQ

Good day, and thank you for standing by. Welcome to the Q2 2025 Gogo Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker today, Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Gogo's Second Quarter 2025 Earnings Conference Call. Joining me today to talk about our results are Chris Moore, CEO; and

Thanks, Will, and good morning, everyone. We believe our Q2 performance reflects the fundamental strengths and capabilities of our business to revolutionize in-flight connectivity by leveraging our strong market position as the only independent global multi-orbit, multiband connectivity company in aviation. With LEO, GEO and ATG Broadband, we are strongly positioned to support durable demand trends. In Q2, the business continued to show growth as demand for our GEO solutions remained strong across the global business aviation and military government mobility markets as we see increased advanced shipments and continued rollout of Gogo Galileo's STCs.

Thanks, Chris, and good morning, everyone. Like last quarter, I'm pleased to report the second quarter results were ahead of expectations for revenue, adjusted EBITDA and free cash flow. Our integration is progressing well. Cost controls are taking root and the demand for our new products continues to ramp. As our product investments roll off, we continue to expect solid free cash flow growth in '26 combined with further deleveraging. Strong first half results led to improvements across the board in our '25 financial guidance, which I'll discuss later in my remarks. Our 2025 guidance continues to reflect limited new product revenue given most HDX shipments are STC focused and our 5G network is anticipated to launch in Q4. 2025 remains an investment year, priming the pump for new product service revenue in 2026 and beyond. I'll now provide an overview of Gogo's second quarter financial performance, then I will turn to our capital allocation priorities and our positive outlook regarding the potential refinancing over the coming quarters. And finally, I'll conclude with additional context on our raised 2025 financial guidance. On a combined pro forma basis, Gogo's total revenue in the second quarter was $226 million, up 1% year-over-year and down about 2% sequentially. On a stand-alone basis, Satcom Direct's Q2 revenue grew approximately 1% from the prior year. Total service revenue of $194 million increased 137% over the prior year and declined 2% compared to the prior quarter. At the end of Q2, total ATG aircraft online were 6,730 or a decline of approximately 4% versus the prior year period and down 2.5% sequentially. Despite the pressure on total ATG AOL, AVANCE AOL grew nearly 14% from the prior year period and now comprises more than 71% of the total ATG fleet, up from 60% in Q2 2024. In the last 2 years, our total AVANCE AOL has grown nearly by nearly 1,200. Our 2025 guidance continues to assume AVANCE AOL growth, but that total overall ATG AOL will be lower at year-end '25 versus year-end '24. We believe that the rollout of 5G and LTE will help improve the trajectory of our ATG subscriber trends. Total ATG ARPU of $3,445 was relatively flat versus both the prior year and the prior quarter. Total broadband GEO AOL, excluding networks that are end of life, reached 1,321, up 15% from the prior year and 3% sequentially. This strength underscores our strong line-fit positions with OEMs. In addition, most GEO broadband aircraft are under fixed-term contracts, which helps to create revenue stability and our GEO ARPU is holding up better than expected. Now I'll turn to equipment revenue. Total equipment revenue in the second quarter was $32.1 million, up 59% year-over-year and 1% sequentially. Total AVANCE equipment shipments of 276 increased 19% versus the prior year period and 15% sequentially. This was our highest AVANCE equipment shipment quarter in the last 2 years, and we believe this strength bodes well for the future conversion of Classic customers to AVANCE ahead of our LTE network cutover. Regarding our profitability, Gogo delivered combined service margins inclusive of SATCOM Direct of 52.9%, up slightly sequentially. Stand-alone Gogo service margin was approximately 77% and in line with our previously stated targets. Service gross profit accounted for 96% of our total gross profit in Q2, and we focus on driving this recurring high-margin service revenue. Equipment margins were nearly 14% in the second quarter. As a reminder, we expect Galileo equipment pricing to be close to cost. Now turning to our operating expenses. Total Q2 operating expenses, excluding depreciation and amortization, were $55.9 million, down roughly $2 million sequentially. I will now provide additional commentary on our major strategic initiatives, 5G, Galileo and the FCC reimbursement program. In the second quarter, $1.5 million of 5G spending was all tied to CapEx. We expect total 5G spend to decline significantly in 2026 as we roll out 5G in Q4. Turning to Galileo. We recorded $1.3 million in OpEx in the second quarter. We continue to expect total external development costs for both the HDX and FDX solutions to be less than $50 million, of which $31 million was incurred from 2022 through the first half of 2025 and approximately $9 million is expected for the rest of the year. We anticipate approximately 80% of Galileo's external development costs will be in OpEx. And finally, our FCC reimbursement program. Following the passage of the National Defense Authorization Act last year, we continue to anticipate increased reimbursement of about $50 million for our FCC program. This funding will support the upgrade of our ATG network to LTE and provide incentives to upgrade our Classic fleet to AVANCE. In the second quarter, we received $5.9 million in FCC grant funding, bringing our program to date total to $53.4 million. As of June 30, 2025, we recorded a $9.8 million receivable from the FCC and incurred $5.4 million in reimbursable spend during the quarter. The receivable is included in prepaid expenses and other current assets on our balance sheet with corresponding reductions to property, equipment, inventory and contract assets with a pickup in the income statement. Moving to our bottom line. Gogo generated $61.7 million in adjusted EBITDA in the second quarter. Our adjusted EBITDA margin was 27.3% as compared to our initial long-term view in the mid-20s when the Satcom acquisition was announced last year. Gogo reported second quarter net income of $12.8 million and $0.09 of diluted EPS. I will now provide some color on our synergy progress. I'm pleased to announce that within 2 years, we now expect to achieve run rate synergies in the $30 million to $35 million range, up from our prior view of $25 million to $30 million. While we achieved the vast majority of headcount reductions, we expect further cost improvements from non-headcount areas like real estate and back-office software solutions. We achieved $18 million of run rate synergies at the close of the acquisition, another $9 million during the first quarter and a further $2 million in the second quarter. We continue to believe the cost to achieve these synergies will be within our previously expected range of $15 million to $20 million. Moving to free cash flow. Gogo generated $34 million of free cash flow in the quarter, above expectations and totaling $64 million in the first half. While we expect free cash flow in the second half of '25 to be lower than the first half, we believe our recent cash flow trends portend well for our longer-term outlook once investments roll off, new product service revenue begins and we continue to delever. Now I'll turn to a discussion of our balance sheet. Gogo ended the quarter with $102.1 million in cash and short-term investments and $850 million in outstanding principal on our 2 term loans with our $122 million revolver remaining undrawn. Our cash balance as of last Monday was $116 million. For Q2, this equates to a net leverage ratio of 3.2x, and we expect this ratio to remain relatively flat through year-end with a slight downward bias. Our cash interest paid for the second quarter, net of hedge cash flow was $16 million. As previously discussed, our hedge agreement stepped down at the end of July to $250 million with the strike rate increasing from 125 basis points to 225 basis points, resulting in approximately 30% of the loans being hedged. As a reminder, the cash interest paid for 2024 net of hedge cash flow was $33 million, and we continue to expect that to be approximately $70 million this year. Given our improved financial performance and relative strength of the credit markets, we and our banking partners believe there is sufficient market appetite to pursue a comprehensive refinancing over the coming quarters. We believe this will be a positive outcome for Gogo and its stakeholders. Our capital allocation priorities remain consistent with prior quarters and focused on executing across the following 4 priorities in order. First, maintaining adequate liquidity. Second, continuing to invest in our strategic opportunities, primarily through Galileo and 5G. Third, maintaining an appropriate level of leverage for the economic environment with a target net leverage ratio of 2.5 to 3.5x. 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 of 2023. Until we complete our refinancing, we expect to continue to prioritize deleveraging over equity buybacks. Bottom line, we believe our expected free cash flow growth over the next few years will provide ample excess cash to pay down debt, reduce our interest expense and ultimately return capital to shareholders. In our earnings release this morning, we increased key elements of our 2025 financial guidance. For the year, we expect total revenue at the high end of the previously guided range of $870 million to $910 million, which reflects our HDX launch in Q1 and 5G generating modest equipment revenue in Q4. Adjusted EBITDA at the high end of our previously guided range of $200 million to $220 million, reflecting operating expense of approximately $20 million for strategic investments, including 5G and Galileo versus our prior expectations of $25 million. Given our guidance, we expect the second half EBITDA will decline slightly versus the first half, largely due to timing of planned investments. Free cash flow at the high end of our previously guided range of $60 million to $90 million, and we expect 2025 to be the trough of our free cash flow as we have approximately $60 million slated for strategic investments, net of any FCC reimbursement versus prior expectations of $70 million. Our net CapEx is still expected to be $40 million after $50 million of CapEx reimbursement from the FCC reimbursement program. After 2 full quarters following the close of the SD deal, we are seeing the clear benefits of the combination, including global expansion, product expertise, synergies and the addition of a MilGov business. We have more work to do, but believe we are well positioned to delever the balance sheet, drive free cash flow and create long-term shareholder value. Before we open up 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 now concludes our prepared remarks, and we're ready to take questions.

Our first question comes from Scott Searle from ROTH Capital Partners.

Just maybe to jump in on the ATG front, down 170 this quarter. I know there are a lot of moving parts in terms of 5G transitions, reimbursement programs that are ongoing and there have been longer maintenance events. I'm wondering, can you take us through a time line of when you expect to see a return to growth in ATG and what the ultimate opportunity and penetration opportunity is for ATG when you look at aircraft within North America. I think there's a lot of different issues out there in terms of how much is ATG versus the Galileo potential. I'd love to kind of understand of stabilization time lines, which seem like it should be coinciding now with 5G commercialization, but how that growth should ramp up into '26 and beyond with 5G and with C1.

Okay. There's a lot there. So let me -- I'll start with kind of market opportunity and where we kind of see that, and I'll let

Yes. I mean I think the -- like we've said in the guidance, it's -- we still assume that the net ATG numbers are going to be down this year, but we're hopeful that next year with the C1 and the 5G launch, like you said, that will start to pick back up. The other thing that's interesting is when we look at deactivation reasoning, it's -- the highest drivers are consistent with what we've seen in other quarters, which are like to Chris' point, sold aircraft or management changes, right? So I think we also mentioned on the last call, we're kind of ramping up our inside sales team to really focus on these customers. It's early days, like we said, because it just kind of started in Q2, but they had a little bit of progress, but we got to get more focused on it.

Great. Very helpful. And just to clarify, Chris, on that front, it's -- these are not competitive losses to Starlink. This is suspensions, and this is the normal transition that we see in the ATG business now ahead of 2 major product cycles.

Yes. We're not seeing a mass level of loss to competition, no. It's -- like

Got you. And lastly, if I could, and then I'll get back in the queue. On the GEO front, you guys, I think, continue to outperform the early expectations, both in terms of aircraft and I think pricing. I'm wondering if you could just give us some longer-term thoughts in that market because I think at the time of the acquisition, there was some concern around the ARPAs related to the GEO market opportunity. It doesn't really seem like that's materializing at least not as fast. So I'm wondering if you could just give some updated thoughts on that opportunity and how you see GEO progressing over the next couple of years.

I'll cover the business side, but do you want to cover the ARPA piece?

Yes. I think as we said before, we anticipated even last year before the deal that we were going to see more ARPA contraction. But I think the nice thing that's happened is like we said, a lot of times, this stuff is very expensive to swap out, right? And if it's good enough for a lot of folks, they're not going to spend $500,000, $600,000 if it's satisfying their needs. I think our view is longer term, it's going to have to come down slightly. It's just the rate at which it does is it's kind of anybody's guess. But like I said, we're working on our long-term model, and it will assume modest degradation over the next few years.

Yes. I'll just add to -- I think customers have been waiting for Galileo. So I think that's a good testament to customers believing in Gogo, which is great. We've just got to get, obviously, the products out to them, which we're now executing on, which is fantastic. The other piece would be GEO business. We also launched our own products within that within the last few years, which actually really enhanced the performance of those networks with the Plane Simple range. And then I think also just like what I said in the script, it's just kind of like earlier on, it's a testament to having line-fit positions, which we're very lucky to have really, and we've worked hard to get. And you can see that kind of working through the OEMs as well as the MROs. But those products are predominantly really strong OEM products. So I think with that mix, like

I'll get back in the queue. Really exciting to see what's going on with 5G and the traction that you're seeing with Galileo.

[Operator Instructions] I am showing no further questions at this time. I will now turn it over to Will Davis for close. One moment.

I think somebody just came in.

We have Scott Searle from ROTH Capital Partners.

I apologize. If no one else is going to hop on, I'll pepper you with a few more. Chris, it sounds like there's some interesting opportunities percolating with 5G private network opportunities. I think you referenced some military applications potentially in North America. I'm wondering if there's any additional color on that front. And also, I'm not sure if there were some 5G metrics that you provided in terms of the number of 5G-ready aircraft at this point in time as we start to get to that 4G launch time period.

Yes. I mean, I'll cover the government piece, and then I'll let

I think it's a little over 300, pre-provisioned.

Yes, they're all pre-provisioned. So the network is there. I mean it's all rolled out. The towers are done, as I said before. It's just kind of getting these 5G cards in those boxes and converting those customers really quick. And those customers have been fantastic, really patient. So we're really motivated on getting those guys over really, really quickly.

Our next question comes from Justin Lane from Morgan Stanley.

A few quick ones for me. Maybe can you just provide a little more color on the CapEx guidance change? I understand the net number doesn't change, but just maybe the underlying drivers of the difference in the guide.

Yes, it's all related to the reimbursement for the Rip and Replace Program. Basically, we've accelerated some stuff that would have hit next year. It's really to make sure in advance of the cutover date that we're totally buttoned up. So it's just pulling in from next year. And then like I said, it's all reimbursed. So basically, everything else is pretty similar.

Okay. Great. And then maybe just on the HDX shipments in the quarter, it looks like they might have stepped down sequentially. Is there anything to call out? I mean, was that a dynamic that was sort of anticipated or anything to call out there?

Yes, that was anticipated. At the moment, we're rolling out those STCs. And really, I mean, at the moment, this is all just preparation work for 2026. So the -- from an FTC point of view, we've pretty much on the HDX got them all shipped out to our MRO partners. So we've got great traction there. We do have customers now starting to deploy, which is great. But that aviation cycles, unfortunately, I mean, it's good and it's a bad thing. It's a difficult market to get into from a competitor point of view, which kind of gives us good moats around the business. But equally, you've got to get the products ready. You've got to go through the FAA. You've got all of those aspects. So as we've said previously on calls, 2025 for us is really a build year on making sure that we've got those STCs. So this is all kind of anticipated. We don't see any slowdown in ramp on the profit.

Okay. Great. And maybe just last one on the MilGov business. Chris, I think you mentioned in your prepared remarks some delays in awards. Just curious if you could elaborate there. I mean, is that trend holding steady? Or does that look like it might reverse? And then just because we got the President's budget and the one Big Beautiful Bill Act, just from a MilGov perspective, is there anything above or below expectations in either of those?

Yes. Just kind of -- things are moving a little bit slower than expected. So -- and then there's just the nature of the government business really. Awards come, you try and influence as much as you can. The budget cycles, they operate a little bit differently as well. So we're hoping kind of we start seeing a little bit more movement in Q4 where you typically -- from a trend point of view, we've seen that. So fiscal year... Fiscal year starts. I think it's October, I would say. So I think, hopefully, we start seeing things through. But I would say there's definitely an acknowledgment with the administration on the need for the technology refresh. We've had a lot of interest on demonstrations, technology, the CIPR awards, the research grant awards are really strong. We're looking at it kind of next year rolling out our software within the Air Force, which is a really kind of good point for us. I mean they've been a great partner with us as well, the U.S. Air Force on developing that software platform with them. So I think things will start picking up, but it's a really difficult thing to predict. So -- and then the one piece of it, what we've seen, right, it's small business, but it's exceptional growth this year has actually been the international market. And I think that kind of step- up of NATO, people looking at their budgets. We're starting to see a lot of interest being generated from overseas clients, and that team has been growing quite a lot. And the way they contract is quite different to the DoD as well, and the fiscal cycle is a little bit different. So we're very optimistic. Team is working really hard, doing a really good job. So yes, we'll kind of wait and see. But the technology is there, which is the exciting piece. It's not like we're now waiting for the technology to come. I think with the expansive product portfolio and delivering on the product portfolio, I think we've now got something really interesting for the military.

Our last question comes from Louie DiPalma from William Blair.

Do you remain confident in, I think, approximately the $65 million in cost for 2025 coming out in 2026 as it relates to the different synergies and milestone payments for 5G, HDX and FDX, and how should we think of like the costs in 2025 versus 2026?

Yes. I think we still feel like the vast majority of that will go away. Like you said, we get the full year of synergies. And then obviously, we're kind of working on our R&D road map. I don't know that we're ready to release what projects are we working on. So some of that will get backfilled, but the vast majority will be pulled out.

Great. And one final one. From a high level, as you and customers have done more testing of HDX and FDX, just in general, how does it compare with Starlink in the market. Even though there are many less OneWeb satellites than Starlink, it appears that the OneWeb constellation is far less utilized. So how has the performance and testing been for the different solutions? And also, I missed the first part of the call, but what is the timing for flight test of 5G?

Yes, I'll handle the 5G thing first, Louie. So yes, we've got the customers ready to go, really got FTCs and things flying. So from a network point of view, I think rollout in Q4 is planned and migrating those customers over. There's no hold up there. So the 5G thing is pretty straightforward. Now we've got the chip. On the performance on Galileo, we're seeing great performance metrics. I think the nice thing is we're not seeing people do futile speed tests in the cabin because they can do what they want to do in that low latency snappy product feel is that they've got. We've got aircraft now flying around, capturing a lot of data. We're seeing very consistent service, happy customers. I think the fact that we've truly designed an aviation-grade product. And more importantly, we've got the support because things do happen from networks point of view that we make that seamless for customers. We can get an engineer. We advertise under 24 hours on an aircraft anywhere in the world. The reality is we don't really go beyond 12 hours and having that human touch if we need it. But the team has been great. Customers have been fantastic. Some big anchor clients who we've announced before in the past. And they're moving ahead and very, very happy with the service. So we're very enthusiastic. And we're seeing great performance on the FDX as well. And we're just wrapping up the FTCs on that. So yes, it's -- I think it's -- I think this is a bit where everybody kind of looks at satellite networks and speed tests, whereas having consistent performance in flights and you can fly anywhere in the world with our services, whether you're using dual-purpose service or you're not. So you're using multi-networks or a single network. I mean our aim is to have consistent service anywhere a client flies anywhere in the world. And I think we can safely say that we can do that.

The question-and-answer session is now closed. I will now turn it over to Will Davis for closing remarks.

Thank you all for your participation in our second quarter earnings call. You may disconnect.