Gogo Inc. (GOGO) Earnings Call Transcript & Summary

Welcome to Gogo's Annual Meeting of Stockholders. I will now turn the call over to Oakleigh Thorne. Mr. Thorne, please go ahead.

Thank you. Mary? Hello, ladies and gentlemen, will the meeting please come to order. The polls are now open. If you previously voted by proxy, you do not need to vote today, unless you wish to change your vote. If you have not voted or like to change your vote, you can do so by clicking on the voting button on the lower right-hand side of the web portal. I want to welcome all of you to the Annual Meeting of Stockholders of Gogo, Inc. I am Oakleigh Thorne, Chairman of the Board of Directors, President and CEO. As you are aware, due to public health and safety concerns related to COVID-19, we are conducting a virtual Annual Meeting of Stockholders. And those of us from Gogo are attending this meeting virtually from different locations. There will be a management presentation at the conclusion of the meeting, after which I will be available for questions. Also present, virtually, at the meeting today are the other members of Gogo's Board of Directors. Mark Anderson, Robert Crandall, Hugh Jones, Michele Coleman Mayes, Robert Mundheim, Christopher Payne, Charles Townsend and Harris Williams as well as members of the company's management, including Barry Rowan, Executive Vice President and CFO; and Marguerite Elias, Executive Vice President, General Counsel and Corporate Secretary. Ms. Elias will act as Secretary of the meeting. Todd Schaffer, a representative of Broadridge Financial Solutions has been appointed to act as inspector of elections. Natalie Martini and Dan Nimoff representatives from our independent accounting firm, Deloitte & Touche, are also virtually present at the meeting. During the question-and-answer period at the end of the meeting, Ms. Martini will be available to answer appropriate questions. The agenda for the meeting and the rules of conduct for the meeting are accessible on the web portal for the meeting. To conduct an orderly meeting, we ask that you abide by these rules. Please note that failure to observe these rules may result in the termination of comments by stockholders for the reasons set forth in the rules of conduct. As stated in the rules of conduct, questions can be submitted in the field provided in the web portal for this meeting. During the business portion of the meeting, we ask that you restrict your remarks to the item of the agenda that is before us. Please save any general questions until after the management presentation. Thank you for your cooperation with these rules. The Secretary has delivered an affidavit of mailing, establishing that notice of this meeting was duly given. A copy of the notice of meeting and the affidavit of mailing will be incorporated into the minutes of the meeting. All stockholders of record at the close of business on April 5, 2021, are entitled to vote at the Annual Meeting. A list of the stockholders of record entitled to vote at this annual meeting will be available on the web portal for the meeting for the duration of this meeting. Our first order of business at this meeting is to determine whether the shares represented at the meeting, either in-person or by proxy, are sufficient to constitute a quorum for the purpose of transacting business. Ms. Elias, do you have a report?

Yes, Mr. Chairman. The stockholders list shows that holders of 92,083,425 shares of common stock of the company are entitled to vote at this meeting. There are 77,472,927 shares of the common stock that are represented in-person or by proxy or approximately 84% of all shares entitled to vote at this meeting.

Thank you. Because holders of a majority of the shares entitled to vote at this meeting are present in-person or by proxy, I declare this meeting to be duly convened for purposes of transacting such business as may properly come before it. The next order of business is a description of the matters to be voted on at today's meeting. The first proposal before the stockholders of the company is the election of 3 directors to serve until the annual meeting of stockholders in 2024 and until their successors are duly elected and qualified. The Board of Directors of the company recommends the election of the following persons as directors of the company. Michele Coleman Mayes, Robert H. Mundheim and Harris N. Williams. Does anyone have any questions regarding the election of the 3 directors?

No, Mr. Chairman.

The Second Proposal before the stockholders of the company is the approval of the compensation of the company's named executive officers. This proposal is a nonbinding stockholder advisory vote. That the Board and compensation committee will take into account the results of the vote when determining future executive compensation arrangements. The company's executive compensation is discussed in the proxy statement that was made available to you earlier. The Board of Directors of the company recommends that the compensation of our named executive officers be approved. Are there any questions regarding the executive compensation arrangements?

No, Mr. Chairman.

The Third Proposal before the stockholders of the company is the approval of the frequency of stockholder advisory votes regarding executive compensation. This proposal is a nonbinding stockholder advisory vote, that the Board will take into account the results of the vote when determining the frequency of future stockholder advisory votes regarding executive compensation. The Board of Directors of the company recommends that a frequency of every year be approved. Are there any questions regarding the frequency of stockholder advisory votes regarding executive compensation?

No, Mr. Chairman.

The Fourth Proposal before the stockholders of the committee is the approval of our Section 382 Rights Plan. The Board of Directors recommends the approval of the Section 382 Rights Plan. Are there any questions regarding the proposal to approve the Section 382 Rights Plan?

No, Mr. Chairman.

The Fifth Proposal before the stockholders of the company is the ratification of appointment of independent registered public accounting firm for the fiscal year ending December 31, 2021. The Board of Directors of the company recommends the ratification of the appointment of Deloitte & Touche LLP. Are there any questions regarding the appointment of Deloitte and Touche?

No, Mr. Chairman.

Thank you. I hereby declare the polls closed. The Inspector of elections will tabulate the final results. Will the Secretary please report the preliminary results of the voting?

Based on the preliminary results received from the inspector of elections, the stockholders have voted, one, to duly elect Michele Coleman Mayes, Robert H. Mundheim and Harris N. Williams to the Board of Directors. Two, to approve on an advisory basis, the compensation of the company's named executive officers. Three, to approve on an advisory basis every year as the frequency of future advisory votes approving executive compensation. Four, to approve the Section 382 Rights Plan. And five, to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for fiscal 2021. The final voting results will be reported in a Form 8-K that will be filed with the Securities and Exchange Commission no later than June 3.

Thank you for attending today's meeting. The meeting is now adjourned. I will do a management presentation in a moment, after which we will have a brief question-and-answer period. Ms. Elias?

Thank you, Mr. Chairman. Before we get started, I would like to take this opportunity to remind our investors that during the course of this presentation, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in this presentation. These risk factors are described in the version of this presentation that you will see and are more fully detailed under the caption Risk Factors in our annual report on Form 10-K and other documents we have filed with the SEC. Any forward-looking statements that we make today are based on assumptions as of this date, and we undertake no obligation to update these statements as a result of new information or future events. During this presentation, we'll present both GAAP and non-GAAP financial measures. You can find a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to those comparable GAAP measures in our most recent earnings release, which is available on our website and our quarterly report on Form 10-Q, which was filed with the Securities and Exchange Commission.

Thank you very much, Ms. Elias. Before I start the presentation, I'd like to make just a couple of comments. First, I'd like to thank Ron LeMay, who retired as Chairman earlier this year. He very ably ran these meetings for 7 years and was a valuable colleague as our Chairman of the Board. Second, I'd like to welcome GTCR. We Thornes used to be the largest shareholder at these meetings and now GTCR is the largest shareholder. I'd like to make a couple of points, which is they've been of tremendous value already. They added a lot of value in our recent refinancing. And frankly, they benefited all shareholders by their wise counsel through that process. I'd also note that Mark Anderson, who's joining our Board is experienced in the Business Aviation industry, and will add a lot of value on our Board. So welcome the GTCR. And finally, I want to just thank our Board, especially for all the effort they've put in over the last year. I'm going to talk in a moment about a lot of the accomplishments that we had over the year since our last meeting. But I just want to make the point that our Board was there for us throughout that process. We actually had 19 meetings, last year alone. So I want to thank the Board for their hard work and wise counsel through everything you're about to hear about. So thanks. Okay. Let's dig into the presentation then. Caroline, let's to the next slide. Thanks. So I want to start with where we left off at last year's meeting. And this was the last slide in last year's presentation. And in it, we talked about the attractiveness of the Business Aviation division, and then we talked about commercial aviation. And then we ended with the following points. And if you don't mind, click up there, Caroline. And that was that the best thing for our Commercial Aviation business was a vertical or horizontal integration with some other company, and we basically hope to do that to realize the value we thought was inherent in that for our shareholders. So if you didn't know what we were saying then, basically, that was code for we're trying to sell this business. So I think we -- hopefully, we telegraphed that well enough. Caroline, let's go to the next slide. So let's pick up there and talk about what we've accomplished since we last met. One thing to remember is that we had started the process of selling the CA division before COVID actually hit. And then COVID hit and we had to take a little hiatus. We had a -- it was a very difficult situation for us because in the commercial airline business, passenger accounts were down 95%, and it's very hard to sell internet on airplanes when there are no passengers on them. That led to about a 75% decline in our Commercial Aviation revenue in the second quarter of last year. And I'm really proud of the Gogo team in terms of how we responded to that. We had to ensure the stability of our company and our -- make sure that we would have the cash flow to survive COVID. We executed what we called our 16 cost -- 16-lever cost reduction plan that involved everything from dramatic reductions in supply chain, renegotiating contracts with hundreds of vendors, Satcom vendors involved a lot of sacrifice on the part of our employees, everybody from the Board on down, took a pay cut last year. We had furloughs. We ultimately sadly had to have layoffs. But it was a well done plan and we managed to survive COVID. So thanks to everybody for chipping in and getting that done. Back to selling Commercial Aviation. We completed that sale December 1, to Intelsat for $400 million. I think a lot of people were surprised by the valuation we got, but I think it validates the point I made in last year's board meeting, which is the business had built a lot of value. It simply needed to be part of a larger enterprise. And specifically, I thought a satellite company because you can get such improvements in capacity utilization when you actually own the beams that you're using as opposed to renting those beams. Next, we -- the third big step in our turnaround process was our recent refinancing. And as part of that, we equitized $134 million of convertible notes, leaving about $103 million to still be equitized. We did that really to improve our credit rating which was accomplished, both S&P and Moody's. And that gave us access to the Term Loan B market. We placed $975 million of first lien notes with $725 million of Term Loan B. All of this reduced our annualized cash interest expense by roughly $70 million. And when the rest of the converts are equitized, it will be another $7 million in interest savings. And finally, we focused on the jam in the business, which is really our Business Aviation division. We spent a lot of time starting once we signed the Intelsat deal last year on a very careful strategic planning around this business, it has -- is a very attractive industry structure and that it has a highly fragmented customer base, no dominant suppliers, et cetera. We have a very strong market share, 5,700, 5,800 jets on our ATG network. You add up all of our competitors together, there are still less than 1,500 aircraft in total. We have a leading product in the market. We have -- we sell at a very attractive price relative to competitors. We have a very strong recurring revenue model, 95% and of our service revenue was on a recurring basis, and we have very strong cash flow. So we're very happy with the BA business. And if we flip to the next slide, we'll talk a little bit about our plans for that business. First of all, in strategic planning, we like to leverage our competitive advantages against our competition. And in our case, we really think there are 3 primary competitive advantages. First is our proprietary ATG network. We own license spectrum. We have 260 towers. I don't think the FCC is going to be creating any new ATG license spectrum. So that's a very unique asset because the air to ground network is relatively close to the aircraft compared to satellite networks, at least, the geo satellite networks that are out there today, we can have very small equipment on the aircraft. It's easy to install, very cost-effective, and that's given us the ability to build the strong market share that I was just talking about. Our equipment is very unique to fitting on the small fuselage of business aircraft. The other advantage of an ATG network is low latency, which provides higher quality. And all of this has driven us to have a leading customer account in every segment of the Business Aviation market, from turboprops, light jets, medium-sized jets and even in the large jets where we have competition from geosynchronous satellite competitors, we actually have more units than our competitors combined. Second major asset or competitive advantage is our advanced platform. This is really a software-centric platform like Apple iOS, it runs across all of our hardware, whether it's the low-end, cost-efficient L3, AVANCE L3 product or the high end AVANCE L5 product or our future 5G product. Some of the stuff it does today that's cool is it supports over-the-air upgrades of software it runs self diagnostics and reports them to our support desk. And actually creates its own trouble tickets today so that even before our customers know they have a problem, we can be solving their problem. What's really cool, and we'll talk in a little more detail in a moment, is that it's really extensible. So we can easily add new products, and I'll give you an example in a moment. New services, new bearers that has add new networks and actually aggregate them with our existing ATG network to create even more bandwidth in the aircraft. And that includes the ESA-enabled LEO satellites. You'll be hearing a lot of talk about Starlink and other low earth orbit satellite systems, we think those are very promising. And in our case, we could -- with the addition of an ESA antenna on top of the aircraft be able to aggregate that connectivity with our existing ATG network or actually sell it on its own, but at a fairly low-cost to the customer because the advance software or hardware, rather, inside the aircraft could simply be upgraded with software to power that connection. The third major competitive advantage is our distribution channels. We have deep relationships at -- and we are line-fit at all 9 of the Business Aviation OEMs. We have a really strong 120 dealer network, and that's actually a global network because we do support narrowband products overseas. We have been making those dealers and OEMs money for 27 years. And we have very deep relationships there. Okay. So what have we done to leverage these? Let's flip to the next slide. We developed a 3-pronged strategy for leveraging our competitive advantage. #1 is investing in our AT&T network to meet customers on, what I call their, on ground connectivity expectations. Those are -- their expectations developed in their home and in their office in terms of how they use the internet today. And as we all know, apps are getting more complex. The video meeting apps that we all use today are a lot more complicated than what we used a couple of years ago. So bandwidth and performance expectations are going to continue to grow on the part of our customers, and it's very important that we meet those expectations. To do that, we're investing now in our build-out of Gogo 5G. And we've talked about that's a pretty substantial investment over the next 2 years. But about every 10 years or so, a company like ours needs to go through a major network upgrade. And this is the first of those we've had for roughly 10 years. We also have, as part of our planning, developed a roadmap for future enhancements to the ATG network, much more modest investments than 5G. But that we think will continue to give us a steadily improving performance on that network. The second prong of our strategy is to leverage our advanced software platform. And I'm going to give some examples here. It gives us the ability to add product very easily. GGV is our Gogo Vision entertainment product. It's actually embedded in the in the AVANCE software. It can be updated as a product online just over-the-air as part of the AVANCE platform that sits on the plane. So we can turn this on, for instance, remotely and offer a customer, a promotion to try the product for a month or a couple of months and decide if they want to go to revenue and buy the product or not, and many of them have. And with the flip of a switch, we can turn them on and go revenue. So that kind of flexibility and the ability to add products on top of our IFC products is a strong driver of growth in the future and gives us a lot of opportunities. Second is we can add services. So we dropped our connectivity floor from 10,000 feet, which is what it used to be. That is you couldn't get online until you got to 10,000 feet. We dropped that down to 3,000 feet earlier this year. None of that was accomplished with hardware. It was all done by software. It was a software upgrade in AVANCE and then in our ground network. It's been a great success. It's given us access -- much more improved access to the small jet market and the turboprop market and where we're starting to see a lot of traction. So the last point about AVANCE is it gives us the ability to add networks. And I talked about LEO, the LEO satellite networks, a moment ago, and in our case, with the addition of an ESA antenna and the software upgrade, we'd be able to take one of our customers and move them under a LEO network when they become available. So there are a lot of network opportunities and where we see the return on investment and strategic advantage of pursuing one of those, we will do so. And then finally, we talk about leveraging our AVANCE hardware platform. And typically, we talk about AVANCE being software centric, but it also has a hardware component to it, just like Apple does. Across all of our hardware, we run the same components, whether it's L3, L5, 5G. So that sort of common componentry, if you will, enables us to have a bigger presence in the supply chain, buy more quantity, thereby lowering our cost. And then on inbound logistics, it gives us -- it simplifies the quality control function and gives us the ability to improve quality. Today, in a supply chain constrained world, it's also been a great advantage in making sure that we have supply to meet demand. This year, we're seeing extraordinary demand for equipment in the Business Aviation market. We just raised our equipment revenue guidance of $15 million. But because of our strong supply chain, we've been able to secure supply to meet that challenge through the end of this year. So supply chain is very important, and we view this as a competitive advantage, especially because we can keep costs down and compete very effectively on price. So our current plan, we believe, drives sustainable long-term value growth. We've recently given guidance. We're trying to create a company that grows very reliably over the long term. We guided to 10% plus revenue CAGR over the 5-year planning horizon, a 35% to 40% adjusted EBITDA margin throughout the planning horizon. And to sort of guide people to where we think free cash flow will be in the post-5G world. We noted that we believe we'll have $100 million in free cash flow in 2023, and we expect that to grow from there. And one of the features of that is that we have significant net operating losses, which will shelter that cash flow from income tax for a very long time. And finally, just talking about strategic overlays. And I talked about LEOs and other growth opportunities a few moments ago. AVANCE does offer us those opportunities. We think that we can add product, expand our total addressable market with modest investments in things like the LEO, opportunity I discussed a moment ago. However, I want to be clear that we'll only pursue those, what we call overlays, if they create strategic advantage and drive a significant return on investment, which is my way of saying that we won't do anything stupid With that, Marguerite, I'd like to turn it over to Q&A.

Thank you, Mr. Thorne. We do not have anything in the queue. So there are no questions

Okay. I will now -- I guess, I've already opened the meeting for general questions. There being none, Marguerite, do you want to turn it back over to Mary.

Yes. I think that we are done.

And this concludes Gogo's Annual Meeting of Stockholders. Thank you for joining. You may now disconnect.