Gogo Inc. (GOGO) Earnings Call Transcript & Summary

Okay. Great. Well, welcome to Morgan Stanley's Annual TMT Conference. My name is Justin Lang. I'm a Space Tech Analyst at Morgan Stanley, part of the A&D research franchise here. Delighted to kick off our firesides for this conference with Gogo and especially thrilled to have CEO, Chris Moore; and CFO, Zach Cotner, up here with us. So welcome both.

Thank you.

Thank you.

Before we begin, I do have to read some disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/research disclosures. You're going to hear a lot of that for the next few days. But look, we have a lot of ground to cover, exciting time in your business. You just reported earnings on Friday. This will not be an extended call back, I promise. But I think the discussion is very timely. So I want to just start though high level with you, because again a lot of change in the business, transformational merger a little over a year ago with Satcom Direct and Gogo. So, maybe just step back with me for a second, Chris and talk about sort of the original thesis, but more importantly, how you grade things a little over a year in here as you brought these two companies together?

Yes. I think as acquisitions go, it was a really good strategic move by Gogo to buy Satcom, I think, on a number of levels, mostly for international coverage. Gogo was predominantly a U.S.-centric business and with the Air to Ground network, and they were rolling out the LEO service, but they haven't got any international locations, staff, revenue. So this has really just accelerated that. And then the other big thing with the acquisition as well is Satcom Direct also had a good strong business in the military government sector as well. So really, when you look at combined portfolio from a technical perspective, there wasn't a lot of overlap. Satcom Direct was predominantly a satellite communications provider. Gogo is predominantly an Air to Ground provider with the Air to Ground technology. And we're getting into Satcoms, but it was still early stage. So actually, from a synergy point of view, Zach and I were able very quickly -- we did the deal on December 3. And by the end of Q1, we've already done quite a large portion of the synergies, which is -- was mostly headcount, but like a year on from that, we're done with all the synergies. There's some kind of things that we can still kind of refine from a financial perspective, but the businesses came together quite quickly. And when you look at a lot of other M&A around the space from the operator level, that's a lot more difficult. If you look at the recent acquisitions of ViaSat, Inmarsat, that's still going through a lot of those synergies. SES with Intelsat, still a lot of synergies, because on the technical side, even though you might be in the satellite industry, the technology is still very proprietary, whereas from a Gogo perspective, with the acquisition of Satcom, our technology is very multi-network, which is on a satellite side, which is really beneficial so that you can actually move a lot quicker. You're not married to one technology. Really, our technology is like a foundational platform and that can go across multiple networks. So that enabled us to do a lot of synergy savings quickly. And I think the business now is on a good trajectory to really -- now we've got the synergies done is really now transforming the customer base, which is a little bit more difficult from legacy-based technology to the new technologies of 5G on Air to Ground. And when I say 5G, it's really broadband, true broadband, so you can stream, do Microsoft Teams in the back of the cabin and then going into LEO broadband, which, again, stream, you can do kind of broadband capable things. And then if you look at GEO, it's more like an underlying architecture from a -- these are all orbits, right, LEO, GEO. So that technology lends itself to being more global than LEO at this point in time. So for a lot of our customers, they want two services for redundancy. So that's really now what we're focused on is kind of -- we've got a lot of legacy customer base that we need to migrate into the new technology.

Got it. That makes a lot of sense. And I want to spend a little time on Galileo and your LEO-based solution. So maybe talk about -- a little more about what the offering is and then give us the flavor on HDX and FDX.

Yes. So what Galileo is it's a LEO service. And at this point, we're partnered with Eutelsat OneWeb based out of Europe, and we're utilizing their constellation. The one thing we've done on GEO, which is an important point to make is we've always been agnostic. So we have Ku/Ka-band versions. Usually within satellite, there's two flavors the operators usually pick it's either Ku or Ka. Our GEO services are agnostic across Ku or Ka. At some point, I see that being the same for LEO potentially. But at this point in time, our LEO services predominantly Ku, comes in two form factors, HDX and FDX. HDX is really 60x 6 to 10 meg service. What does that mean? Really, the uplink is 6 to 10 and -- when you look at that, what does that enable you to do in a plane? If you look at small jets that at this point, don't have the ability to put GEO services on, GEO services going on the tail or you put Air to Ground services on the belly of the airplane. The LEO service actually goes on to the fuselage. It looks like two laptops kind of size. It goes on to the fuselage, you fix it on to the fuselage and now you've got the same broadband capability that you would have in your home or in the office. So you can run your VPN services, be completely tied into the office. And that's kind of -- the entry point is HDX. So you can get on really small planes like think of it like 6-person passenger planes like Phenom 300 by Embraer. -- or a PC -24 by Pilatus, so very small planes. It could also be supplemented or stand-alone with the 5G service, which I can cover in a bit, but that's really HDX. Then going into FDX, that's really designed for mid- to large cabin airplanes. So that's really going from either kind of a Dassault Falcon 2000 right through to a Gulfstream G800 or a Global Xpress 8000. So there's a lot of technical terms, unfortunately, in our business. So these are just airplane types or you could go into an Airbus or a Boeing business aircraft. So really, we've got from our new technology, when you think of 5G, which is more focused on the smaller aircraft as a primary communications method and a backup for the mid- to large jets, we've got something for every single one of our customers. So we've got something that goes on to a very small aircraft, right through to very large aircraft. The other exciting thing with HDX going into the government market, we can also put that product onto a drone. So that will -- that form factor can actually go on to a UAV. And with that government market, that opens that up. And then the other thing with HDX, where nothing else can do in the market, we can actually put the HDX terminal into the tail of the airplane and our competition can't do that. And that lowers the cost of installation. So the one thing we can do is get the cost of installation of this equipment cheaper than anybody else, which is really kind of important to open up the market opportunity.

That's great. You mentioned on Friday that the target for this year is 700 aircraft online equipped with Galileo -- and I think as of the end of 4Q, you're about 75 aircraft. So nice ramp there. So talk to me a little bit about the confidence you have in that number -- is that a conservative estimate? Do you see upside there? What are you seeing on sort of equipment side, STCs that derisk the 700.

I think it's an aggressive number, but we feel confident in putting out something aggressive at this point in time, when you look at our pipeline, our sales pipeline, we have over 1,000 aircraft in there. the qualified pipeline, which is effectively -- when we say qualified, most of it is qualified, but we go 50% and above. So really, that means you're very close to closing that customer from a sales perspective, there's a number of metrics in there. We have over 400. This is what I said on the call last week anyway. So we feel very confident with the 700 number, although it's aggressive. If you think of it in terms of like our competitor who is very fast moving for the industry, that means in the same time period, we've put on like double what they have. So I think that kind of shows the strength of robustness to the business. So that -- which is great. I think it's a very realistic number to focus on. And I think the fact that we've now got contracts with all the OEMs who make the aircraft outside of a few. We're very confident within the next 12 months, you will not be able to order a business jet without selecting us as an option. It's a bit like when you're ordering a really fancy car. You kind of might put options.

I don't know anything about that. [indiscernible] on the ground.

Precisely. But if you want to upgrade the vehicle, you might want to put someone like an option on there. The jets and specifying jets is a very similar process. You end up putting this on as an option. When you're choosing the carpet, the interior, the veneer, you choose the Internet. So you will not be able to order a business jet without us selecting us as an option. That's a big deal. And then we have a very extensive MRO market globally that can fit this on in what they call the aftermarket, which is really important. And we can do that. So again, that strengthens our confidence in the number. And then they're actually actively selling, not only our sales team is actually selling our product. Those MROs and OEMs are actually actively selling our product, because they want to sell either an upgrade option because that's good for them or the MROs are trying to get maintenance work in. And at that point, they will fit it on to the jet. So we feel confident about that. And then our government business, they've got a good target on them for LEO services this year as well. And we believe that market will be slower to ramp just because of the sales cycles. Typical sales cycle from activation from shipment in our business is three to six months because you've got to put it on a plane. So that means the equipment leaving our docks and going to an MRO and OEM, we expect it to be activated on the network within that period of time. And then government can be a little bit longer, 6 to 12. So if you kind of think of it that way, I think the numbers this year are good, robust. What's been kind of hidden, that's really explosive growth for LEO from our perspective, but that's being probably dampened a little bit with the positive shift that we're now making with our customer base from going from more legacy connectivity services to those services. So if you look at our total numbers, it's kind of being a little bit masked at this point in time on because we're in this technical transformation of the business.

Right. I want to get there. And I want to hit 5G as well as alluding to it. So another product just -- it was a long time coming. Finally, you turned the network live early this year, must feel good. Also, the target is 400 aircraft online with 5G by the end of the year, maybe just a handful as of today, also a very steep ramp. Talk to us a little bit about where that slots in and sort of the overall Gogo portfolio.

Yes. I think that's the bit just to reiterate, I think now we've got -- if you think of the business, so if you're purchasing something from us, you've got the entry point, which is 5G. And that entry point really serves small jets, could be interesting as well from a governmental perspective, but that we need to prove that case out. But if you're specifying kind of specking a small jet like a Finom 300, PC-24, a citation aircraft, you'll be able to get a line fit from Textron this year. It's -- and Embraer as well. That's a really great entry point to a true broadband service. And our more legacy services on Air to Ground have been fantastic. But I would put it this way on transformational technology. This is like everybody in this room and it is all going back to a BlackBerry or a Nokia and then giving you an iPhone. It's completely transformative technology. And the usability of the system is completely different. So we have a test aircraft. We've both flown on it, and you can have simultaneous Teams meetings. You can have somebody on Teams, somebody on Netflix, somebody on the corporate network. This is really transformation for kind of those Air to Ground customers. And it's a great entry point. It also adds a level of -- we keep talking about multi-network, multi-orbit. That also for more higher-end customers gives them a level of resilience within the U.S. because the Air to Ground network is just a U.S. network. It gives them a level of resilience that we have a lot of customers who will not fly unless they have Internet connectivity. So we believe that service is really there. It's really nice now that we've got a true service that all of our Air to Ground customers can now migrate to if they want to, that is a very low-cost option for them to upgrade. And we just lowered the pricing of the equipment so that we know we can get an installation of that around $150,000 total on an airplane, which is very different to putting LEO services on an airplane, which is really entry point to that is like $300,000. So it's half the price of putting this equipment on board. And if you're just flying domestically in the U.S., it's a great service. So we're pretty excited about it.

That's great. So you'll have between Galileo and 5G, about 1,000 net new aircraft ads the end of the year. Just maybe unpack a little bit about the transition underneath that's masking it a little bit. It sounds like legacy will ebb to sort of wash up the number this year.

Yes. I just kind of -- we're migrating a number of services. So we're end of lifing one of our networks and has a new network. Actually, it's FCC funded, kind of what we call our LTE network. We have a lot of boxes and a lot of networks. So it kind of gets a little confusing. But if you think of Air to Ground, like we have an entry point into broadband, and we can take our legacy customers into that entry point in broadband and grow them into 5G. That's the easiest way of looking at it. That deactivation of those customers is really where we're seeing some of those customers fall off the network, and we're anticipating some won't come back. What's the reason for that? Is it that migrating to alternative technology? They could be? Or is it also the age of the airframe. So if you look at like business jets, everybody tends to focus on the high end, the $70 million airplanes, they look nice and they're good to talk about. But the reality is the bulk of the U.S. fleet is also more older airframes -- and that could range anything from $1.5 million jet right through to what I just said, $80 million jet. And within that, we've got -- we've been very successful in the past. We built a really good moat around the business with the classic Air to Ground business, if we call it that. So really, it's migrating those customers across. And some of those customers will fall off because they will not make an investment on the aircraft. That being said, we have a migratory service called C1, which we have a lot of boxes, a lot of names. But what does that do? It really picks that customer up at no cost to them, the FCC funds it and migrates them to be able to take advantage of the entry point into broadband. And that's been very successful to us. It was a bit of a slow ramp. But now where we stand on those numbers, we feel very confident that we can take a good proportion of those customers. There will naturally be some fall off -- but we've then got a good base to grow into 5G. So that's kind of -- I don't know whether you want to expand on that.

Yes. No, I think the only other point is probably mentioning GEO in with this whole piece is like the GEO is what Satcom kind of brought to the table, and it's held up incredibly well. And this is all in the larger aircraft, right, because it goes in the tail and it's a higher ARPA. And I think like we've been thinking it was going to drop more for the past two years, but it's held up because it is very expensive to upgrade, right? And for a lot of people, the GEO works great, especially the FLEX network, which is the Ku. And so we do expect that to come down again this year, and we're working with a lot of the GEO operators to work on backup solutions to make sure they keep -- we keep the real estate on. So again, back to your point about the numbers are a little confusing because we have all these strong shipments and ramp, but you have a large bulk of legacy products across the board that just will naturally decline at some rate. And I think kind of to the point of -- on the ATG side, I think the 5G was so late. That was -- that's part of the problem is if we had got that launched three years ago, I think we would have a better moat to build off of. But we feel confident we can do it, but it is -- you have a lot of moving pieces with legacy networks that are just -- it's the nature of it. Chris and I at Satcom, Satcom was 25 years old, and it had been through three or four of these. And the key is you have to start it well in advance, right? And I think some of these just took a little longer to get going, and we're doing them all at the same time. So...

Got it. Makes sense. Now Chris, one area that you've been pretty bullish about the past few quarters I've heard you talk about it is the fleet opportunity. You had the VistaJet win, which is a big win, maybe didn't get recognition in the market that probably deserved. And then you had this NetJets announcement late last year that the stock reacted pretty sharply to. So maybe just talk about -- I mean, I thought you gave good color on Friday's call, but we can flesh it out a little bit. How you're thinking about contextualizing the NetJets announcement? And any shift to the sort of fleet strategy or is it steady as she goes?

No, I think the fleet strategy is -- ultimately, I think the big thing for people to get their head around, we have a competitor. And I think for the classic Gogo business, like I said, a really good moat around the business and really didn't have serious competition. And now I think it's real for people who have been invested in the stock for a long time, now it's -- you're looking at every win or loss, and you're going to have win and losses on both sides. So I think that's quite an important point for -- conceptually, you're in a competitive market. That doesn't mean that every time your competitor wins something and you haven't won it, either one of you is going to go out of business. I think that would -- like there are many competitive markets in the world. Most people -- I think competition is a really healthy thing. You should have competition. It makes you better. So that's an important point to make. Regarding NetJets specifically, we have a fantastic relationship with NetJets. Interestingly, when we announced the NetJets win in our press release, we never actually said we won the whole fleet. We were very specific about what we've won. And what we said in that press release still stands today. So we've won a portion of the fleet, and we're rolling out on NetJets Europe, and we will also be rolling out on specific airframes of NetJets North America. What was probably disappointing from our perspective, but not a shock is we are still rolling out the technology. So the antenna, which is called the FDX, we just got that through the FAA regulations late in the summer last year, we're just rolling out STCs. That usually a 6- to 12-month program. And the reality is NetJets couldn't wait any longer and they needed to upgrade some of those aircraft, which is specific to that type of antenna, and they chose to go on those airframes at this point in time with our competition. However, NetJets also, my belief, are some of the best negotiators I've ever come across, and they're amazing. They have an amazing procurement team. So we'll see how that goes. I think they've always been a mixed fleet operator when it comes to connectivity, because they really do a good job of leveraging their purchasing power. So this wasn't a big shock from my perspective. The other thing is just if you focus on the upside with NetJets, we also do cockpit communications. So we do the Datalink VHF, which is a really important part of our business. So like safety services through that. We don't have that with NetJets today. That's with another competitor. The GEO business, we don't have with NetJets today. So none of that is impacting how people view us, but that just gives you a good broader perspective that NetJets has somebody else look after their GEO business. They've got 2 LEO providers and somebody else looks after the cockpit. So from my perspective, I think there's a lot of potential upside with our fleet strategy is, can we convince NetJets that we have good enough services in some other areas. They've also been a great Air to Ground customer for us for a long time. So does that mean in our numbers, we've been very conservative. We've removed those out of our model. But those pieces of equipment haven't been removed off the fleet. So is that a thing that from a redundancy perspective, is that important to NetJet. So it's those things that we're still working through with the client. And then pivoting back to VistaJet. If you look at VistaJet, that's a huge win for us. They've just put a potential $5 billion order in with Bombardier. They've announced they're rolling this out across a large proportion of their fleet. They've been a very good customer as those NetJets, by the way. But they're really a proponent to our strategy, and they're really vocal about why they went with us and why they didn't go with our competition. The other thing with the competition, we actually beat them out of that bid. They had 2 choices. It's all the competitor, and they chose us for a number of reasons. So -- and then if you look at Luxaviation, who we've announced multiple hundreds of aircraft. Avcon Jet over 100 aircraft. If you actually look at our fleet strategy, we still believe we've got over 1,000 aircraft with fleet customers that are with us today. Wheels up are rolling out our services and actually did an announcement that it's quite revolutionary the Internet on board, and they're actually going to speed up their rollout. Again, no impact on our stock with this, which is kind of frustrating from one and Zach's point of view, but we kind of try not to look at the stock and just focus on running the company at this point. But I think we really -- we're in that kind of prove it out piece, like Zach said, our numbers at this point, we've got so many moving pieces, but we feel very good about our technology road map that if we execute we can transform these customers into new services. And at the same time, we have a very fierce competitor, but we're winning business against the competitor. So I think that's a really important point to make. But we're still focused on these fleet operators. And I think we're clearly getting votes of confidence from significant players in the market.

Got it. That makes sense.

The only other point I would add is I think it might have been lost to is when we started reporting the LEO units online, Galileo, a large portion of those for NetJets or NetJets, and they're in Europe. So I think that's also the thing -- the announcement people assumed that it's the halo effect, right? Like if they're not happy, then who else is not going to be happy, but they are a large customer and they are rolling it out and it's a piece of the business that you saw at your end.

We're going to end up having hundreds of aircraft on with NetJets. I mean there are still a major significant customer from our point of view, very supportive. And we feel good with the rollout to Zach point. They're still going as planned with NetJets.

Great. No, that's great, and that's encouraging. I want to come back to the military government opportunity set because that seems super exciting. When I think about the TAM, you got manned aircraft, drones. I think we got a report over the weekend, U.S. one-way drones in Iran were linked with satellite-based connectivity. So drones, EV tool sort of a nascent business, but potentially promising. So just talk to us about how you frame the opportunity set for MilGov.

Yes. I think, again, we're a business in many parts of the -- where we're -- because we've been around for over 20-plus years, like Zach said, that business, we are currently pivoting it away from some narrowband services with sat phones, which has significant business around and really focusing on aviation broadband. So if we look at our aviation broadband for our government business, it grew 38% last year. And we said that on the call last week. That's a significant growth trajectory. And our international market was -- I can't remember the percentage, it was...

Like almost double that. It was a small book of business, right? So.

90% -- 90-plus percent the international business. Sorry, that number just went out in my head, but very, very significant growth. So if you look at that, focus that on aviation. The LEO product is really interesting for them because Eutelsat OneWeb doesn't have as bigger name as the competition, but it is a European network. So we're seeing a lot of interest from NATO. Our HDX product that we talked about before is very small can get into UAV. The other thing is the cost of installation, because we really do know aviation very well. We brought the cost of install down, so it makes it more cost effective, because everybody thinks just when you're dealing with a government customer, they just have an open checkbook that is not the case. So we've really brought the cost of ownership down. And we think that's a really interesting space for us. And also, we have within the Satcom Direct acquisition, a global footprint, and we've been selling to heads of state government for a while. So we have really good key relationships. And a lot of them will not buy from our competition just purely out of a sovereign-based communications need, security needs. And we've built up this underlying architecture in our business as well on the ground that serves NATO, U.S. DoD and other countries really, really well. So we're really super excited about it. I think, obviously, going to the other point, eVTOL, we're talking to eVTOL players. That model is still not proven out yet. Let's see when these guys start flying. I think there's a lot of airspace challenges, but I'm sure somebody is going to get there 100%. I think from our perspective, short term, the next two to three years, the government UAV business and government opportunity with the underserved airframes. If you look at U.S. government had a 25 by 25, so 25 meg on 25% of his Air Force aircraft and it failed that. And a lot of these guys are nowhere near, it's a very underpenetrated market. So I think the underpenetrated market, just the DoD. NATO is even worse because they haven't been funding as much as the -- I mean, nobody funds as much as the DoD anyway. So if you just look at a C-130, there's over 1,000 of them operational in the world today, it's quite clear that 25% of them do not have broadband connectivity. If you just outside of the UAV, so we just focus on that. We have a C-130 certified product on GEO, and we can also get LEO into that kind of mix as well. And we can really pivot those opportunities over to Gogo. We think that's pretty exciting.

I think two other points that are really critical that we've harped on a lot, but two phrases. One is called vendor lock, the other one is called pace planning. So pace planning refers to the military's view that on all these missions, you need to have -- it's an acronym, primary alternative contingency and emergency. So backup after backup after backup. And I think that's what's critical, because we are one of the only people that can do that, whether it's GEO, LEO, ATG, we can provide the pace planning. And that's also what we've tried to kind of push into the business aviation market is making sure you always have backup and connectivity. And then the vendor lock is kind of another critical concept because they have gotten stuck with vendors before where they can get gouged, right? They put all these antennas on, then they have no agnostic or flexible capabilities. And that's one thing that we've really tried to push is, again, we're the vendor, we're the face. We're the storefront, so to speak, but we will use all these other guys in the background to get you the best deal. And I think -- and it's -- like you said, it's tough because there was no Milgov business or Gogo before, but -- and it operates very differently, but we're still incredibly bullish. It just these cycles take a long time. And I think like you saw, our Q4 numbers were up pretty substantially in the MilGov business. And I know folks were trying to -- when is that going to hit, when is it going to hit, and we're starting to see traction.

We've got under a minute here, but I want to stick with you actually. just to close. We talked a little about the moving pieces in 2026. You've talked in the past about the balance sheet, potentially trying to refi or lower the cost of debt. Talk to us about what we should expect in '26, if anything?

Yes. So we've been actively talking to our bankers and the Board pretty regularly about this for the last probably six months. And from my perspective, the single biggest best use of -- for capital allocation is deleveraging. And we're exploring different ways we've already been analyzing whether it's a regular debt buyback or a Dutch auction. But it's kind of been the views of the Board and a lot of our banking partners that, look, we do need to do that. We do have to address the balance sheet. But it kind of maybe we should wait and see how much traction we get in the first quarter or two kind of help with the debt pricing. But I think we've said it over and over, we have more cash than we need, but making sure we deploy it at the right time and making sure we give what we need because the debt does mature in April of 2028. So it's just being thoughtful about deleveraging versus also making sure we get the maturity extension of we need and all that. So that's my biggest focus this year is kind of pushing that forward.

Good. Okay. We're out of time. Thank you, both. Great

Appreciate it.

Great. Thank you.