Gogo Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the Gogo First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Mr. William Davis, Vice President of Investor Relations. Please go ahead, sir.

[William Davis:]

Thank you, RJ, and good morning everyone. Welcome to Gogo's first quarter 2021 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, President and CEO; Barry Rowan, Executive Vice President and CFO.

[Oakleigh Thorne:]

Thanks, Will, and thank you all for joining us this morning and for your interest in Gogo. The first quarter results we announced today and the completion of our refinancing last week, besides Gogo strong momentum as we execute on our pure-play business aviation connectivity strategy. Today, my remarks will focus on highlights of our first quarter results, business aviation's strong recovery from the depth of COVID, our progress against the strategic initiatives I discussed on our last call and the impact of the refinancing on our business on a go-forward basis. So, let me start with results. Gogo delivered a really strong first quarter, driven by the ongoing recovery of the business aviation market and the strength of our advanced platform. We generated total Q1 revenue of $73.9 million, up 4% compared to Q1 2020, driven by a 3% increase in service revenue, and a 10% increase in equipment revenue. The service revenue growth is primarily attributable to 3% increase in ATG aircraft online, hitting a new record high of 5,892 aircraft.

[Barry Rowan:]

Thanks, Oak, and good morning, everyone. In my remarks today, I'll start by walking through Gogo's first quarter financial performance in more detail. Then I'll provide an update on our balance sheet, following our comprehensive refinancing last week, which is a major milestone for Gogo, and sets us up for significant value creation going forward. And finally, I'll finish up with some additional context around the updated 2021 guidance and long term targets we announced this morning. As Oak mentioned, the accelerating recovery in the business aviation market and our unique ability to capture that value drove strong first quarter results. Total revenue of $73.9 million increased 4% compared to the first quarter of 2020, driven by increases in both service and equipment revenue. These results reflect the continued recovery in the business aviation industry, and strong sales of Gogo’s AVANCE platform. On a sequential basis, total revenue decreased 4.8% in the first quarter of this year. We had strong growth in service revenue sequentially. However, as expected, equipment revenue declined following the record AVANCE shipments in the fourth quarter of 2020, driven by pent up demand promotional activity and general seasonality for equipment. Let me break down the revenue progression between service and equipment. We achieved record service revenue of $59.4 million this quarter, an increase have nearly 3% compared to the prior year period, due primarily to a 3% increase in ATG aircraft online and recognition of $1.2 million in service revenue, under the network sharing agreement within Intelsat. As a reminder, we have a 10 year deal, under which, Intelsat has exclusive rights to our ATG network for Commercial Aviation, subject to paying us at least $178 million in revenue share over the term. We expect to generate increased revenue, under this Agreement overtime. On a sequential basis, service revenue grew more than 4%, due primarily to a 2% increase in ATG Aircraft online. Higher service revenue from the network sharing agreement with Intelsat. And an increase in average monthly connectivity service revenue per ATG Aircraft online, or ARPU from $3,069 to $3,085. Overall, we're expecting ATG ARPU to continue to rise throughout the year, and exceed 2020 results, for the full year 2021. In the first quarter, new customer activations, as a percentage of total activations increased to pre-COVID levels of 65%, which is a positive indicator for the projected growth trajectory of our service revenue. It's important to highlight, that since emerging from the depths of the pandemic, we have seen consistent sequential growth, in our subscription based service revenue. This trend is, key to our recurring revenue model, and will be an important long term value driver. Notably, we expect continued sequential service revenue growth throughout 2021. Now let me discuss equipment revenue. We generated equipment revenue of $14.5 million in the first quarter, a 10% increase compared to the first quarter of 2020, driven by increased shipments of our advanced products. As Oak outlines, driving penetration of the advanced platform into our installed base and with new customers is a centerpiece of our long-term strategy. It provides the foundation for our expectations of continuing growth, in our service revenue annuity stream. Looking forward, we expect the seasonality, we've experienced over the past several years to persist. With equipment revenue, back end loaded to the second half of the year, and strongest in Q4. There are several factors that drive Q4 sales. Promotional activity and trade show training are two contributors. And we also find that some companies wait until the end of the year, to get a sense of their financial position before making equipment investments. That trend is combined with our sizable backlog of purchase orders, new orders received in the first quarter, and other indicators give us confidence, that 2021 equipment revenue will grow at least 20%, over 2020. We raised our 2021 revenue guidance to reflect these positive trends. I'll do a deeper dive into our full guidance update, in a few minutes. But first, let's focus on profitability. As we outlined last quarter, we anticipate service margins to contract somewhat throughout 2021, mainly due to increased data centre and network operations costs. Some of these increased costs are transitional, as they relate to the separation and migration activities, following the sale of our Commercial Aviation business to Intelsat. As mentioned previously, our service margin will also be modestly affected by the financial statement geography change, with Intelsat's revenue share, being recorded as service revenue instead of cost of service. While we experienced some of that anticipated contraction in the first quarter, service margins remain strong at 76% and we expect this metric to remain in the mid-70% range over the longer term. Equipment margins rose significantly on a sequential basis, following the $2.6 million inventory reserve that was recorded in Q4 2020. We also saw an improved product mix with higher margin held five shipments in Q1.We don't expect this very high equipment margin to continue through 2021. However, we do expect equipment margins for the full year 2021 to be above the 2020 levels. In terms of operating expenses, we've been successful in beginning to adjust our cost structure to align with our smaller sized and more focused business. In the first quarter, we saw significant decreases in G&A spending due to lower outside services and personnel expenses. This drove a 26% year-over-year reduction in combined engineering design and development, sales and marketing, and G&A expenses, as these expenses totaled $20 million for this quarter. As we noted in our pre-announcement filing in mid-April, this does reflect a delay in certain budgeted operating expenses, totaling approximately $4 million that we expect to incur in future quarters. Looking at operating expenses for the full year 2021, we expect OpEx to grow from the low levels experience in the first quarter of this year, reflecting financing and other expense growth in G&A, increased 5G spend as that program continues to ramp and modestly increasing sales and marketing expenses. We continue to expect G&A expenses to be relatively flat for 2021 versus 2020, as we deliver on our obligations under the Intelsat transition services agreements. As we've said previously, we expect to reduce G&A excluding non-cash stock-based compensation by proximately $10 million by the end of 2022. 5G expenses were some of the delayed costs that will be pushed out the second quarter and later in the year. We spent just $1 million in total external 5G development and deployment costs in the first quarter, of which approximately $600,000 was in OpEx and the remainder in CapEx. We continue to expect to spend approximately $12 million in 5G OpEx for external development and deployment in 2021, as reflected in our adjusted EBITDA guidance. Although there could be some shifts between 5G CapEx and OpEx for the balance of the year. Our bottom-line performance for the first quarter was strong. Gogo delivered adjusted EBITDA of $33.9 million, a 25% increase over the prior year period and up 76% from Q4 2020. As reminder, Q4 2020 adjusted EBITDA was negatively impacted by $10 million for the full year accrual for 2020 cash bonus expense, as well as a $2.6 million inventory reserve as we previously described. Free cash flow for the quarter was $23.9 million, a 4% increase over the prior year period due to the increase in EBITDA, offset by lower net working capital. Free cash flow for the first quarter of 2021 increased by over $40 million from the fourth quarter of 2020, due to the interest payment in Q4. We expect free cash flow to be negative in the second quarter due to the higher interest payment prior to the April refinancing, but expect to generate positive free cash flow thereafter. We're pleased with our first quarter results, particularly as they reflect Gobo's ability to drive growth even through the lingering effects of COVID. Before I moved to a discussion of our guidance and long-term targets, I'll touch on our balance sheet position, which now reflects the comprehensive refinancing we completed last week. This represents a major milestone in our transformation to the new Gogo and creates a step change in our value creation potential. I'll summarize the mechanics of the transactions, and then elaborate on some of these benefits. As we previously announced, in March and April, Gogo entered privately negotiated exchange agreements with GTCR and other existing holders of our 2022 convertible notes. Through those exchange agreements, approximately $135 million of aggregate principal amount of the convertible notes were exchanged for approximately 24 million shares of Gogo common stock. In connection with a GTCR exchange agreement, Gogo welcome Mark Anderson, Managing Director of GTCR to our Board of Directors. GTCR has been a strong supporter of our strategy, and we truly look forward to continuing to work closely with Mark and the GTCR team as we execute our shared vision for driving shareholder value. As I've described, we completed our comprehensive refinancing transaction on April 30. We secured a seven-year $725 million Term Loan B bearing interest at LIBOR plus 3.75% with a LIBOR floor of 75 basis points. In addition, we put in place a five-year $100 million revolving credit facility. We use the proceeds of the Term Loan B and cash on hand to redeem in full the $975 million aggregate principal outstanding of our 2024 Senior Secured Notes and pay the redemption premium, accrued interest, and transaction fees and expenses. These transactions have transformed our financial profile, reducing our total debt by $385 million. And we will reduce our interest payments by nearly two-thirds, realizing approximately $70 million in annualized interest expense savings. These savings will also increase by an additional approximately $6 million, as the balance of the convertible notes mature in 2022, or are converted earlier. This comprehensive refinancing and simplified balance sheet, enhances Gogo’s free cash flow generation and catalyzes the powerful value creation cycle along three primary dimensions. First, as a result of the transaction, Gogo significantly reduced our annualized interest expenses, strengthening our free cash flow. Second, with enhanced free cash flow generation, we have more financial flexibility to invest in strategic projects with attractive returns. And thirdly, our fortified balance sheet makes us even more resilient against the potential increase in competition. And as a result, we are well positioned to further deliver our balance sheet to enhance shareholder value returns over time. Over the long-term, our strengthened free cash flow profile is augmented by low ongoing CapEx, significant tax assets of about $800 million in net operating loss carryforwards and our plan to settle the conversion of the remaining converts in common stock out or prior to their maturity. We currently have approximately $109.6 million common shares outstanding and approximately $103 million in aggregate principal amount of convertible notes outstanding. As of May 4, we had $100 million of cash on hand. With our undrawn revolver and no current plans for drawing it, we exit the refinancing with $200 million in total available liquidity. Our team has written to be very proud of what we've accomplished over the past year through completing the CA divestiture and then the month since through this additional transformational transaction. Today we are the new Gogo, well positioned to build on our enhanced financial profile and strong market position to drive long term shareholder value and deliver on a clear actionable investment thesis. Now let's turn to the updated guidance we announced this morning starting with 2021. Based on the strength of our first quarter performance, we are raising our 2021 revenue and adjusted EBITDA outlook. We now expect 2021 total revenue in the range of $310 million to $325 million increase from the previous range of $300 million to $320 million. We continue to expect service revenue to grow at least 15% over 2020. However, we now expect equipment revenue to grow at least 20% in 2021, compared to our previous expectation of equipment revenue being relatively flat year over year. Adjusted EBITDA is now expected in the range of $115 million to $125 million, excluding $4 million of non recurring separation and migration costs related to the sale of the CA division. This is increased from the previous range of $105 million to $120 million. We expect -- we continue to expect capital expenditures in the range of 25 to $30 million in 2021. With the majority tied to Gogo 5G. There may be some fluctuation between CapEx and OpEx each quarter as required by the accounting guidelines. We also provided 2021 free cash flow guidance, which reflects the impact of the refinancing. We expect free cash flow in the range of $10 million to $20 million, including cash interest payments of approximately $71 million. It's important to note that all guidance is for the full year 2021. Our expectation is that revenue and profitability will be weighted towards the second half of the year, particularly in the fourth quarter. Looking out over the longer term, Gogo has also provided a long term free cash flow target to reflect the impact of our comprehensive refinancing. We're targeting approximately $100 million in free cash flow for the full year 2023 following the deployment of the Gogo 5G network in 2022 and expect significant free cash flow growth thereafter with continuing improvement in our credit profile. Our other long term targets remain unchanged. We're targeting at least 10% compounded annual revenue growth from 2020 to 2025 and adjusted EBITDA margins of 35% to 40% throughout the planning period. As our outlook demonstrates, we are stepping into what we believe is a bright future for Gogo, drawing on our strong market position, the strength of our transformed balance sheet, our industry leading product and service platform and tailwinds in the attractive business aviation industry. Before we open up the call to questions, I'll just reiterate our thanks to the world-class Gogo team. Our progress and strong momentum are a testament to our team's dedication, ingenuity and unwavering focus on delivering for our customers and reaching our strategic goals. Thank you, team. Operator, we're now ready for our first question.

[Operator:]

Your first question comes from the line of Ric Prentiss from Raymond James. Your line is open.

[Ric Prentiss:]

Thanks. Good morning, everyone.

[Oakleigh Thorne:]

Good morning, Ric.

[Ric Prentiss:]

Morning, you guys have been busy.

[Oakleigh Thorne:]

We try.

[Ric Prentiss:]

We will start the conversation on competition, you mentioned a little bit about AVANCE conditions you in case you make a decision on LEO, but we get a lot of questions about competitive dynamics, obviously, there's other air to ground potential networks out there. There's LEO, ViaSat, talks a little bit about what they're doing business aviation, but talk a little bit about how you see the competitive dynamics and your ability to continue to grow share?

[Oakleigh Thorne:]

Yeah. Well, we look at growing units, not necessarily share anyhow. So we don't focus so much on share. But yeah, we look -- there are three general segments of competitors or complements depending on how you want to look at them. LEO's we actually view it as more of an opportunity than a threat. The three LEO networks that are in process right now, and probably more to come after that we obviously have Starlink, Telesat, OneWeb, and at least Telesat and OneWeb have telegraph pretty clearly that they're going to move in a B2B manner into our segment. And I think we view that is not going to get partner with either of them in order to add, LEO is a feature of our offering. And frankly, we think that's a pretty big threat to our geo competitors. So either Starlink chooses to go with a B2B model or not, I don't know. But this is a pretty small market, if you think about our whole industry is about $500 million industry on the service side. And they've got much bigger industries to attack and frankly, bigger markets to attack. And then when you think about the investment of having to go deal with nine OEMs build a dealer network of hundreds of dealers, deal with a highly fragmented market in terms of sales to the end users, fragmented market when it comes to the number of planes and models that you have to get at DCs for. I'm just not sure that Starlink is really going to view this as something they want to go after. I think the Starlink has aspirations in the in the larger Aero markets and commercial aviation and in mil Gov. And again, that -- those are aimed at larger aircraft. And to the extent that they could fit some of that on a large VA aircraft, they probably go after that market segment because we relatively easy for them. But that's not a significant threat to our core markets. I don't think -- and I don't think it's anything they're going to get to in a real hurry. So number one on LEO, we view that as an opportunity because our advanced platform gives us the ability to add a new bearer quite easily. The necessary condition for accessing LEO's is our electronically steerable antennas. And we're obviously looking at doing that and thinking through that and how you actually put that on a VA aircraft. And that's essentially all we would need to develop to be able to access a LEO network. And as I said, earlier both Telesat, and OneWeb look like they will enter this business relationship. So we hope, we will be able -- we've not approved this plan, we're not there yet, but we're working at it hard and now if we execute on it. We think it would give us an ability to certainly defend our core market and expand overseas, which is an area where we don't really have much business today.

[Barry Rowan:]

That's LEO. On the GEO front, the big weakness is latency. And I think over time, as LEO has come along with much lower latency. The weaknesses of the high latency solutions like GEO will become more apparent to end users. When we were in the commercial airline business, we did a lot of work with an airline in particular, understanding the impact of latency, and we were looking at future applications that people would be using in aircraft and setting parameters around customer satisfaction. And about half of the used cases we came up with could not be served with GEO satellite connectivity. So both our competitors and the satellite, the GEO competitors have long-term committed plans to launch more GEO satellites. And it's going to be very hard for them to pivot the LEO satellites anytime soon. So we actually view that as a weakness. Those guys, obviously, the GEOs are much more expensive to install than we are, which is a major inhibitor. And frankly, just given them relative uncertainty of our equipment compared to theirs. That will always be that they are far more expensive than we are. There service plans tend to be a lot more expensive. Viasat has been discounting to some extent and trying to come down to what they call ATG prices. However, when you look at their plans, there are a lot of limitations. That kind of, I would say, undercut but they're actually saying publicly. So they're stuck still on the large end of the market, the equipments are heavy and it's large. Viasat is a little smaller than Inmarsat. So, they've been able to come into the super midsize jets. But that's about it. And so -- and we compete very effectively with those guys in the high end, we actually have more jets in the large market and in the super midsize market than both Inmarsat and Viasat combined. Often and frankly, we are installed on the same aircraft they are in and customers use our server, North America use the satellite products in other regions. And then on SmartSky, they've got a lot of challenges. I think, they've been around for a long time, they were going to put us out of business any moment since 2014. And so far haven't gotten a network running. Now I'm not saying they won't get a network running and obviously, they're working hard at that. But there are a lot of revelations that came out of SmartSky in the last quarter that would cast out on their ability to launch a network anytime too soon. They haven't achieved least according to an article two weeks ago, they have not yet achieved the tower to tower handoff. And that's a pretty necessary condition for a cellular type system like ATG system. The issues are not only technological though, I mean, you've got to build a distribution network like we have. You've got to build up the sales organization and build relationships and nine OEMs, you've got to get a solid dealer network and then you've got send those dealers who invest in developing FTCs to install your equipment in hundreds of models of aircraft. And dealers aren't going to really go out there and invest in that unless they're pretty sure they're going to be able to sell those FTCs to other dealers, because there's going to be a lot of demand for the product. And I think that, a lot of 5G product coming out, dealers are going to look at that kind of skeptically and are going to say, gee, looks like Gogo’s probably going to have a better product, anyhow, so why would I invest in creating those FCC. Then you got to turn on light up a whole network. So you're going to have high operating costs and all the backhaul, they're going to have more tower density than we have. And that means they're expensive, their backhaul is going to be more expensive than ours. So you're going to have -- you're going to be burning a hole in your pocket, while you're trying to build revenue gradually over time. This is not a market that moves at lightning speed, right? That takes a long time to get aeroplanes into shops and so it takes a long time for OEMs to make your mindset, et cetera, et cetera. So – and just to get the tough haul and they've gotten some funding recently, but it's going to take a lot more funding for them to be able to come a real competitor and I believe. So, that's answer your question, Ric.

[Ric Prentiss:]

It does. Very thoughtful answer, Appreciate that. Obviously, you guys spend a lot of time looking at the competitive environment. Follow-up question is, you've mentioned strategic projects, strategic possibilities in the future then expand overseas, is that what we should think of is where some of the future might be for Gogo and don’t you face some of those same issues as far as how do you then develop a dealer network and sales and opportunities overseas? If I'm hearing you, right, that that might be an opportunity strategically?

[Oakleigh Thorne:]

Yes. Well, we actually already have sales and support overseas because of our old narrowband products. We sell radium, and we sell SwiftBroadband globally. So we have a network already, we would need to expand that somewhat. But that's an incremental investment we could make without too much cost. We also -- the way we would probably go at this, and let me back up for one second, we have not committed yet, our Board is not formally approved yet, us going after the ESA LEO project or some other options we see on the table. But the point we've been making, it's an advanced gives us the opportunity to go after those, the option I should say, of going after those opportunities if we want to. And that's really powerful. I think that as we look overseas, you're going to start, obviously, with large jets within the ESA LEO kind of apparatus. But once you're there, you can go after the medium sized jets, and light jets, because the ESA form factor should be smaller, and gives you the ability to go after those guys. We’re particularly good at engineering for small aircraft, that's one of our very core competencies. And so we think there's the opportunity with LEOs to go down market overseas in that market of 14,000 aircraft, which you really can't do with a GEO satellite solution. So that would be the TAC

[Ric Prentiss:]

Okay. Makes sense. I think brochure on I suppose really getting at is in other places that don't have connectivity.

[Oakleigh Thorne:]

Yes. It's the issue overseas is pretty simple. This is just not economic really in most regions to build an ATG network, because outside the US is a large geographical area obviously. And it's 20% to 30% of the world's flight, whereas the rest are in the US. So there's very low flight density. So the CapEx involved in creating ATG networks is pretty insurmountable. You do have an ATG network in Europe, of course, whether it's is some density, but all of Europe, in total, it's still only 6.5% of all the business aircraft in the world, so not a very big market. So, satellite is really going to have to be the solution to the rest of the world.

[Ric Prentiss:]

Great. Thanks guys. Stay well.

[Oakleigh Thorne:]

Thank you.

[Operator:]

Our next question comes from line of Phil Cusick from JPMorgan. Your line is open.

[Oakleigh Thorne:]

Hey, Phil.

[Phil Cusick:]

Hi, guys. Thank you. I heard the milestones in 5G, that's great. What hurdles remain in getting that up and running?

[Oakleigh Thorne:]

We need this current 5G chip production to stay on track. And assuming that happens, then all the technology risk is removed, and it's really a function of blocking and tackling. And we -- on integration testing and the like, basically everything else is in our control, let me put it that way. So we have a great program management organization at Gogo, enabling an excellent job on managing this risk. And reorganizing the project in order to still hit our deadlines, and we feel very good about that. So we're on track for 2022 as we said, and when it comes to blocking and tackling, we are really good at it. This would be our fourth ATG network, really, we built the first ATG network, then we built ATG four. And you have to remember that we were on the verge of launching our first significant upgrade of our ATG system. But unfortunately, we had a Chinese partner on back in 2018 when I joined the company and that was almost complete, and that wasn't working very well. So we did that. And now we've got this. So our team is really good at this, and they understand how to do it, and we're very confident in our ability to deliver.

[Phil Cusick:]

Okay. And you talked about 28% penetration, and we get into this a little bit with a record, but do you think that the L3 price points are enough to cover the gamut of planes out there? How high can penetration get from 28% given the price points you have today?

[Oakleigh Thorne:]

I think it's hard to imagine for me 10 years from now that there's a plane without connectivity, so that's how we look at it. There are markets, like general aviation, which is not accounted, not in that 28% share total addressable market. But there are markets like general aviation, and the general turboprop market. When you look at them, you say, okay, I understand that that is certain, turboprop that are not trotters, they aren't that profitable or whatever, they are not addressable today. But I think that ultimately, they are addressable. So we believe all planes will be connected in 10 years time, and yes, there may be lower price points to get you there. But L3 is pretty cheap. It's around $30,000 at an entry point, you can buy -- pay as you go plan, if you don't fly that much, you don't pay anything, you can buy at pretty low costs, what we call core plans, and then you can upgrade over time, you can upgrade the equipment fairly easily. The three stages of L3 is core, and then there's two more enhanced stages after that. So you can come in pretty cheap and grow, and we're getting a lot -- we're getting some success in the right end of the market, no question and in the turboprop market. So we think we're -- we've got some good openings there. And, yes, we'll keep learning and figuring out better ways to trade more of those markets. But so far, we're making some pretty good progress.

[Phil Cusick:]

Okay. And last one, any anything you can give us on the status of conversations with the remaining convert holders? Thanks.

[Oakleigh Thorne:]

That's really a Barry question, but I'll answer it because it's a really easy question financially. And I am -- without talking to them right now, there's not that much incentive for us at this point to convert them, will convert them at maturity. Or it is -- they can make a compelling economic case to us to convert them as well.

[Barry Rowan:]

I think that's right.

[Oakleigh Thorne:]

Thanks.

[Barry Rowan:]

The data piece, the reason we did it previously was we wanted to get them converted, because it really enhanced the financing. We did help the system getting an upgrade, for example. But now as Oak mentioned that incentive is no longer there in the same way that was before.

[Phil Cusick:]

Thanks, Barry.

[Operator:]

Your next question comes from the line Scott Searle from ROTH Capital. Your line is open.

[Oakleigh Thorne:]

Hi, Scott.

[Scott Searle:]

Thanks for taking my questions. Hi, Oak. Hi, Barry. Congratulations on all the work you've done in the past year. It's nice to see you guys becoming a real company. So Barry, just real quickly, I'm not sure I missed the number, but did you give a number for Intelsat contribution in the first quarter? And I just want to clarify on the component availability, it sounds like you guys have sufficient inventory to carry you through this year? Just want to confirm on that front. And then as it relates to 5G and the 5G upgrade, I'm wondering what the cost is Oak in terms of moving the AVANCE, existing AVANCE installed base and upgrading that to a 5G solution. And as you look at now, it sounds like there is an uptick in terms of new jet orders. I think you said 6% this year and next year, what do you think the attach rate for that is in terms of connectivity and particularly on the turboprop market, which has been an underpenetrated area? I mean, how deeply penetrated do you think that can be over the next three years to five years?

[Oakleigh Thorne:]

So that…

[Barry Rowan:]

Let me start take your first one on Intelsat, Scott, which is a stake problem. And so it was about $1.2 million for the first quarter. And as the minimum amounts start relatively modestly and then grow from there. And it did, as we talked about how some impact on the -- on the service margin. It makes a couple of points difference in service margin because of the geographic shift on the financial statements from being a contra cost of service to revenue. Oak, why don’t you take the other question?

[Oakleigh Thorne:]

Yes. The analyst projection is a well-known investment bank who's got somebody on this call and has a very good business aviation analyst. And they've raised projections of 6%. I've delivered this year and 6% next year. So that -- a lot of those units will be installed with IFC, it might not always be Gogo, some of those would be larger jets that that might only have a satellite solution in them. So I don't -- I can't give you an exact number on what we think we would get out of those 6% today, but we can get dive deeper into their numbers and give you some projections if you'd like. Turboprops -- a lot of the turboprops coming out today do come with IFC. That there's not a lot of new turboprop delivery. But most of them would have some IFC in them.

[Scott Searle:]

Got you.

[Oakleigh Thorne:]

What was the other….

[Scott Searle:]

I am sorry. Component – component availability, in terms of your comfort level?

[Oakleigh Thorne:]

Yes, we have pretty good line of sight through the next couple quarters being able to fulfill our demand. And, you know, we're still working on securing, making sure we have supply secured after that. But you know, the benefit of being – of our sourcing strategy and our common componentry is that a, we don't have to secure that many different SKUs, which is good, makes it a lot simpler and b, for each SKU, we order a lot more of them. So we have a more of a – more important to our suppliers. So that gives us a fair amount of leverage in terms of trying to get to the front of the list when it comes to getting supply. So our team is working extremely actively, and if they have, you know, very good tracking, and all this kind of stuff. So we don't take all of that inventory is that we build up our inventory – our working capital needs a lot, but we secure it any – we secure it and as far as, how far out we're good, we're good out a couple quarters and trying to finish that up to the end of the year. So we’re feeling pretty good about it.

[Scott Searle:]

Got it. And lastly if I could Oak, you answered a lot on the competitive landscape but SmartSky certainly made a lot of headlines talking about the – their IP and intellectual property position. I'm wondering if you could just quickly address are there any concerns that you have related to your ISP solution and its ability to operate in a 5G environment and or otherwise, that has any concern for you as it relates to the patent position? Thank you.

[Oakleigh Thorne:]

We're not, yeah, we're not concerned. I mean, we study every one of their patents in a lot of detail, make sure we understand them. And we don't believe that they have any valid patent that we could be founded infringing upon. Now, they do have patents that we don't think are valid, because they have ignored prior art. But that's a different, you know, that's a different issue. So, you know, we have more patents than they do, if you want to, you know, who's got the biggest patent list? We do. We have 349. They – we've been in this business a very, very long time. And we've been thinking about a lot of different ways to do ATG for a very, very long time. And, you know, there's nothing they're doing that we haven't already thought about, and I'll put it that way. And, you know, the thing that SmartSky did that was, you know, smart early on, and we did it also was figure out how to access unlicensed spectrum. And, you know, they had this sort of regulatory loophole, I'll call it that, that allows us to use regular, unlicensed spectrum and we can do the same thing. If you can't patent regulatory loopholes. That's about the most original thing they've done. So back to the patent site, they're not concerned, you know, they may find that the only way that they can, you know, convince investors that they have something that's monetizable is to sue us over intellectual property. I bet I think that would be a mistake on their part.

[Scott Searle:]

Great, thanks so much. Congrats on the quarter.

[Oakleigh Thorne:]

Thank you.

[Operator:]

Your next question comes from the line of Simon Flannery from Morgan Stanley. Your line is open.

[Simon Flannery:]

Great. Thank you very much. Thanks for all the guidance. On ARPU, you've talked about the number of planes growing 400 a year and the opportunity to get into some of the smaller planes that we're talking about. So how does that may influence your thinking on what happens to ARPA, you've got the data growth. You continuing – you've got some of these new unlimited plans, but what are all the puts and takes on that over time? And then thanks for the free cash flow guidance, how do you think about, what you will spend that 100 million plus on over the next few years, balancing between paying down more debt, strategic investments, M&A, return of capital? What are the priorities as you get into 2023 and beyond?

[Barry Rowan:]

Yeah. Simon. I'm happy to take those on ARPU you asked about the puts and takes. There are several drivers there. Couple of that will push that up overtime and one that may reduce it over-time. So first, people tend to move toward more unlimited plans. So we have seen that progression overtime. They want to have predictability in their bills. They want to have access to the pool of services. So that's one thing that going to lift. But the second one overtime is clearly 5G, because of the enhanced performance of 5G. We're very confident. We'll be able to price that at higher levels, reflecting that value. So that would lift up overtime as 5G network is deployed. On the downside, as we get into smaller aircraft, they tend to spend less, as you'd expect on a monthly basis. And -- but having said that, the price per megabyte is still attractive. And that's a very under penetrated market. So that presents a really attractive market for us. So it makes sense to continue to go after that market. But we do expect ARPU its raise overtime, particularly as you look at the deployment of 5G. On the uses of cash, $100 million of free cash flow, your first priority is to continue to deliver. So we've made a major step forward on that with the sale of CA. and then using that those proceeds to paydown debt, we still want to continue to deliver. And then, out overtime here, we'll have to evaluate that, when we get through the full deployment of 5G and for -- as we are generating cash, we'll see what those priorities are. But it puts us in a great position to be able to even frankly, think about those decisions at this point.

[Simon Flannery:]

And what is that amnestied target leverage do you think?

[Barry Rowan:]

Yeah, we haven't really set that. But, we will -- we look at that, as we continue to unfold the business. And as I said, get on the other side of the 5G deployment. But we'll take careful look at that, how to balance leverage against shareholder returns and come out with something probably more specific as that unfolds overtime. But right now, we haven't set up there's no decision to make at the moment.

[Simon Flannery:]

Great. Thank you.

[Oakleigh Thorne:]

Hi, Simon, I just don't see a need to lock ourselves into something when we don't know what conditions will be 18 months from now, let's wait and see. In terms of the investments, the opportunities that we sort of have on the drawing board are much lower investments than 5G. So I don't want people to think that we're looking at those kinds of heavy lifts again. And, our requirements for those that they give us significant competitive advantages, and they have a very high return on invested capital. So, if we're going to have a pretty high bar on investments.

[Simon Flannery:]

Thank you.

[Barry Rowan:]

And Simon, I would just add one piece of the art good question too is, as we talk about revenue growth annually, at least 10%. And that split between digital planes coming online, round numbers, about 8% of planes coming online, additional aircraft online and about 3%, ARPU growth overtime. So that's basically the mix. And, historically, those two things are obviously been the drivers of improved revenue overtime also.

[Simon Flannery:]

And does that fair again on the ARPU, or does that more as the 5G kicks in?

[Barry Rowan:]

Yeah, it does step up when 5G kicks in, because – that is a really a step function in the increase in ARPU. If you look at it on a compound basis, it's the 3% number.

[Oakleigh Thorne:]

And Simon just to make it really clear, yeah, we will have more customers with lower ARPU than the average and we're going to have more people above. But it's all going to drive growth for us and is very clear points out on a megabit per megabyte basis is going to be very profitable. So that's why the, you know, the overall ARPU number only goes up at 3%. But, you know, you've got growth at both ends of the curve so.

[Barry Rowan:]

Thanks, Simon.

[Simon Flannery:]

Thank you.

[Operator:]

Your next question comes from the line of Louie DiPalma from William Blair. Your line is open.

[Louie DiPalma:]

Great. Barry, Oakleigh, can you hear me?

[Barry Rowan:]

Yes.

[Oakleigh Thorne:]

Hey, Louie, how are you?

[Louie DiPalma:]

Great. I just want one quick one since already 837. But in terms of your future plane growth, how much of your growth is expected to come from retrofits versus lineset? And related to this over the past year, do you have an estimate for how many of your ATG system shipments were to the OEM channel versus the aftermarket? Either channel. Thanks.

[Oakleigh Thorne:]

Generally, speaking, it's about 60% aftermarket 40% OEM. Barry, you have it for the most recent quarter and year – so after market recently.

[Barry Rowan:]

Yeah. So if you look at it, historically, and kind of go forward basis, really, the OEMs as a percentage of ATG, equipment revenue in the fourth quarter it was – I would say, skewed more of the 20%, 25% range for OEM. In the first quarter, it was about 40%, OEM. And you guys, we'd look at it on a go forward basis the OEM percentage we expect to be in that kind of 30% to 40% range.

[Louie DiPalma:]

Awesome. Sounds good. That's it for me. Thanks.

[Operator:]

There are no further questions over the phone line at this time. Presenters, you may continue.

[Oakleigh Thorne:]

Well, okay, this will conclude our call for today. Thank you everyone for your participation bye-bye.

[Barry Rowan:]

Thanks.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.