Earnings Call Transcript - GOGO Q1 2023

Operator, Operator

Good day, and welcome to the First Quarter 2023, Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. It is now my pleasure to introduce, Vice President of Investor Relations, Will Davis.

Will Davis, Vice President of Investor Relations

Thank you, Andrew, and good morning, everyone. Welcome to Gogo's first quarter 2023 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; and Jessi Betjemann, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future 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 on the conference call. Those risk factors are described in our earnings release filed this morning and are more fully detailed under risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is May 3, 2023. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events. During the call, we will present both GAAP and non-GAAP financial measures. We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings release. This call is being broadcast on the Internet and is available on the Investor Relations website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Oakleigh Thorne, Chairman and CEO

Thanks, Will, and good morning, everyone. Thanks for joining us today. I'll focus my remarks on three main areas. First, I'll provide a state of the business aviation industry as seen from Gogo. Second, I'll provide key highlights of Gogo's first quarter results; and third, I'll give an update on the key strategic initiatives we're working on to drive accelerated growth in 2024 and beyond. Jessi will then walk through our quarterly performance and 2023 outlook before we open up the call to your questions. So let me start with the state of the industry. The business aviation industry continues to serve demand at much higher levels than the pre-pandemic period, driving excellent new installation numbers for Gogo, which we expect will translate into high-margin current service revenue, the primary driver of Gogo's long-term value creation model. The dealers and OEMs are still navigating some supply chain and labor laws. The avionics industry is in the midst of a return to normal operations, though at higher levels, as I noted a moment ago, and with some bumps still on the road. For Gogo, that means dealers are returning to normal order patterns due to the extended lead times induced by COVID and concerns that supply may not be available at all; many dealers ordered more equipment than they had immediate need for over the past two years, culminating with our record setting Q4 2022 shipments. Fortunately, for Gogo, our great production operations team was able to meet that demand. However, as lead times have come down, dealers can use current inventory for new orders and don't immediately need to backfill for those installs, which is why despite having our second best new install quarter ever, we do not have as much equipment revenue to show for those installs as we normally would. We've seen this before. After a very strong Q4 in 2020, we suffered a 30% decline in equipment revenue in Q1 2021, only to finish 2021 with very strong equipment revenue growth for the year. We also experienced this in 2019 and 2020. Regardless, we're confident that our record 2022 shipments will translate into strong activations in 2023. According to our dealers and OEMs, 75% of Gogo inventory in the channel now has either a named customer or an aircraft serial number associated with it. As for the rest of the inventory, we expect demand to take care of that. However, we're also launching some dealer incentives to help that process along, and we're working with some of our smaller dealers to shorten install times so that they can sell Gogo as a standalone outside of a large maintenance event. We've had some great success thus far and have brought standalone upgrade install times down to five to seven days with some dealers and are on track to get advanced upgrade times down to three days on some models with another dealer. In general, the larger dealers are extremely busy. The elevated flight activity that started with COVID is accelerating the pace at which planes need to get in for required inspections and maintenance events. Many charter and fractional fleets literally have planes parked on the tarmac grounded until they can get into the shop for maintenance. Meanwhile, dealers continue to suffer from labor shortages and some parts shortages. For Gogo, this has translated into more opportunities for dealers to install equipment, but that's been tempered by dealers sometimes not having enough workers to install our equipment if the work is to occur during a fixed maintenance window. Similar post-COVID return to normalcy trends temporarily impacted our AOL count in the first quarter. The first is the higher level of maintenance events, as most owners turn off their Gogo service while they're in the shop or grounded on the tarmac waiting to get into the shop. The second is the increase in secondhand aircraft inventory. Although still well below the historical average of 5.6% of the US fleet, there's been a notable jump in used aircraft for sale this year from around 2.5% to 3.6% of the fleet, which impacts our AOL because customers typically turn off their Wi-Fi when they park the aircraft for sale. However, those sales are also an opportunity, as new owners usually reactivate our service and often upgrade before the plane comes back into service. Taking a step back, Gogo's installed base is evidence of both our strong market position today as well as the immense opportunity we see ahead. Of the 15,000 business jets in the North American market, almost 50% have a Gogo IFC system installed today, with nearly half installed with AVANCE. AVANCE is a perfect stepping stone for high-performance-oriented customers with an easy upgrade path to either 5G or GBB, as they both utilize the same advanced infrastructure on the airplane, making it easier and cheaper to stay with Gogo for an upgrade rather than moving to competitors' products. For this reason, continuing to expand AVANCE penetration is a cornerstone of our strategy. Meanwhile, based on our research, the rest of our customers that are non-AVANCE are generally satisfied with their current Gogo product, which will continue to benefit from improvements to our ATG network. Our loyal installed base provides a solid financial foundation for our business for years to come, and the other 50% of the business jet segment, along with the highly unpenetrated 10,000 aircraft turboprop market, represents an opportunity for future growth. So let's move to our Q1 performance. The message is that despite some bumpiness as the industry returns to pre-COVID patterns, we had our second best new install quarter ever and our best first quarter installs ever. We delivered first quarter revenue of $98.6 million, up 6% over the prior year, driven by record service revenue, our primary value driver. The impacts on our equipment revenue were most significant in January and February, but in March, shipments were back on track. April was much better than January and February but still a little off track. So we feel we're on the right trajectory, but still have work to do to get back on flat. Our operating metrics for the quarter were strong, with twice as many customers upgrading service as downgrading and continuing strong aircraft retention rates of over 90%. On the bottom line, Gogo delivered first quarter adjusted EBITDA of $39.7 million, down 7% year-over-year, reflecting softer equipment revenue, as we just discussed, and increased spending on our strategic initiatives, which Jessi will discuss in a moment. As for guidance, the factors I discussed in my business aviation state of the union persist. However, we believe we are poised for strong performance in the second half, especially given the pent-up demand we see for Gogo 5G, and we still expect to finish the year in line with the full year 2023 revenue, adjusted EBITDA and free cash flow guidance we reiterated this morning. Now let's turn to the drivers of business aviation demand. The underlying secular trends driving demand for business aviation connectivity remain strong and continue to support our growth runway. First, passengers who flew commercial but could afford private aviation tried flying private during COVID and have generally not gone back to commercial. Many have now ordered their own jet or a fractional interest in the jet. Second, the demographics of passengers are shifting to a younger generation that expects high-quality Internet connectivity wherever they go. Finally, almost all passengers experienced a technology transformation during COVID. As we all lived in isolation and had to master heavy data consumption apps like Zoom or Teams for work and Instagram or Snapchat for our social lives. These trends drove a 137% increase in data usage across our networks between pre-COVID Q1 2019 and Q1 2023, as well as a 79% increase in usage per hour over the same period. Though flight counts are not a revenue driver for our business, industry observers use that as a proxy for demand. Our Gogo fleet flights in Q1 were about even with the prior year, but up approximately 30% compared to Q1 2019, which represents significant growth in the overall market. Additionally, Wall Street analysts project that OEM jet deliveries will hit 700 this year, up from 565 three years ago, and with currently committed purchases, will grow to almost 800 in 2025. Our OEM relationships are very important to us. AVANCE is either standard or an option on all 29 models of aircraft currently in production. This is a huge advantage for us as we launch 5G and GBB. They are merely extensions of systems that are already certified and installable on all makes of aircraft. Now let me turn to an update on our strategic initiatives and how we intend to accelerate growth with our three-pronged strategy. First, we want to expand our service addressable market by broadening the advanced platform product offering and adding networks to meet the needs of each segment of the business aviation market globally. Second, we want to drive customer loyalty by continually improving our networks and leveraging the advanced platform to provide easy upgrade paths as new technologies emerge. Lastly, we will offer the best product and best service to each segment of the market at the lowest total cost of ownership. We're making great strides in our strategic initiatives to achieve those goals, including our 5G network, our GBB LEO offering, our FCC replacement program, and the numerous operating initiatives I discussed on the last call. So let me start with our Gogo 5G system. We remain on budget and on track for a commercial launch in the fourth quarter of this year. Once live, our 5G network is expected to deliver speeds roughly five to ten times faster than Gogo's current ATG networks, with peak speeds up to 25 to 30 times faster, enabling multiple streaming sessions and video conference applications to be opened simultaneously on the same aircraft, all at a lower cost than competing satellite solutions. In the meantime, customers who want Gogo 5G service can install the AVANCE L5 system today with full 5G provisions and operate on Gogo's 4G network until the 5G X3 box is available. Once the X3 is ready, it can be installed quickly, allowing 5G service to begin immediately, saving downtime and expense. We're extremely pleased by the market's excitement for Gogo 5G, as evidenced by our pre-provisioning momentum. We delivered 52 pre-provision chipsets to customers in Q1, with 116 end customers that have signed up for pre-provisioning promotions, and 98 dealer purchase orders in-house. We also have order commitments from four OEMs and are in discussions with several others. We have STCs in process for 20 aircraft models representing roughly half of the business jets in North America. Now, turning to our LEO-based global broadband initiative, which adds an electronically steerable antenna to the advanced platform and incorporates OneWeb's low Earth orbit satellite constellation into our network offerings. LEOs are particularly well-suited to business aviation because their low altitude enables an equivalent link budget with less power than GEO satellites, thereby enabling global coverage with smaller antennas that fit better on most business aviation aircraft. Our goals for the global broadband offering are to: first, expand our total addressable market to include the 14,000 business aircraft registered outside of North America, most of which have no access to broadband connectivity today; second, add a satellite feature for the hundreds of U.S. super mid and heavy jets that fly global missions but have Gogo's advanced ATG installed for use over North America today; and third, drive enhanced stickiness in our core North American medium-sized and smaller aircraft segment by offering an EV path to add a LEO product if they desire more capacity. We expect GBB will enable streaming directly from your favorite video services, multiple simultaneous video conferencing sessions, VPN access, and all the other connectivity-enabled solutions you use today, the same service levels you expect in your office or living room. We continue to make great progress alongside our partners. OneWeb has completed the launch of its 588 satellite global constellation in April and is on track to deploy the network and make it aero-ready in 2024 as expected. We completed the preliminary design review in February with Hughes, our partner on the antenna side, and are currently on track to deliver GBB commercially two months ahead of schedule in the second half of 2024. Our GBB product has received a very enthusiastic response from our OEMs, dealer partners, and fleet managers, and we hope to have some exciting news on that front in the not-so-distant future. Now let me talk about a couple of competitive advantages of GBB. First, our small form factor antenna is designed to work on all size aircraft, while our only current LEO competitor is attempting to deliver a very large antenna that will work best in the already competitive heavy jet segment of the market. Second, Gogo offers much better customer service in a very small but complex and service-sensitive market. And third, Gogo will be the only in-flight connectivity provider that can deliver a combination of LEO and leading ATG services, enabled by our unique advanced multi-bearer capability. Together, the combination of Gogo 5G and GBB will deliver a truly unparalleled experience for passengers using heavy data applications like Zoom or gaming, offering a unique performance advantage over competitors by virtue of our proprietary ATG spectrum and technology. Importantly, we're well positioned to leverage our existing international footprint to support GBB customers outside the U.S., with over 20 dealers already in place and approximately 900 narrowband customers in 90 countries today. Before turning it over to Jessi, I'd like to provide an update on our SEC reimbursement program. Last summer, Gogo was awarded a $334 million grant under the Federal Communications Commission's Secure and Trusted Communications Networks program. It would reimburse the company for expenses associated with accelerating the removal of Chinese telecom technology from the 3G and 4G network. Because there were more qualified grants than originally planned, all grants were cut back to 39% of the original award, which in Gogo's case is $132 million. Legislation with bipartisan support has just been introduced that would fully fund the grants awarded by the FCC, and we are hopeful that it will be approved. Because the functionality of replacement ground-based equipment will be better than the equipment installed on our 3G and 4G networks today, Gogo will receive some significant benefits from this network refresh, including a 40% improvement in connectivity performance for AVANCE L3 customers and almost doubling the number of aircraft that the network can simultaneously handle. Jessi will provide some directional guidance on the expected financial impact of this program, which is not yet reflected in our guidance and which we will address on our Q2 earnings call. Jessi will also provide more detail on our recent $100 million debt pay down and our Moody's upgrade. I will just state that we are committed to using our capital wisely. While returning capital to shareholders remains a priority, given the current interest rate environment and the fact that our interest rate hedge will come down by $125 million in July, we thought it was most prudent to reduce our leverage at this time. Overall, we're excited about the future and believe Gogo has the right strategy in place to continue to capitalize on the significant opportunities in our market and deliver long-term value creation. We're confident that our fundamental business model provides a strong foundation to support the strategic and operational initiatives we have underway and that our investment strategy continues to support our release of free cash flow in 2025 and beyond. Now I'll turn it to Jessi for the numbers.

Jessi Betjemann, Executive Vice President and CFO

Thanks, Oak, and good morning, everyone. Gogo continues to generate strong financial performance even as we've undertaken significant strategic investments like Gogo 5G and our Global Broadband Product or GBP. This is a true testament to the strength of our underlying business model and financial position. 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 and capital allocation strategy, including the paydown of debt we executed today, and I'll finish off with some additional comments on our 2023 and long-term outlook. Total revenue of $98.6 million in the first quarter grew 6% year-over-year. Our top-line was driven by record service revenue of $78.5 million, up 11% year-over-year and 1% sequentially. Our ATG aircraft online reached a record 7,046 units at the end of the first quarter, representing 8% growth versus the prior year and 2% growth sequentially. AVANCE units online grew to 3,447 units, up 28% year-over-year and now comprised 49% of our total fleet. We expect our advanced aircraft online growth rate to accelerate in the coming months as dealers resolve staffing challenges that are contributing to slower installation rates and more of the equipment we shipped at the end of last year is brought online. We continue to expect the primary service revenue growth driver to be from additional aircraft online as we execute in a global market that is only 22% penetrated with in-flight connectivity, and we launched two new products: 5G and GBP. Total ATG ARPU grew 2% year-over-year to $3,389, driven by recurring revenue and higher-priced service plans. The launch of Gogo 5G in Q4 this year, followed by our GBP product in the second half of 2024, are catalysts to further expand our ARPU growth opportunity over time. Moving to equipment, Gogo delivered $20.1 million in equipment revenue in the first quarter, a 9% decrease year-over-year and a 35% decrease sequentially from the seasonally high and record fourth quarter. We shipped 223 AVANCE units this quarter, down 9% year-over-year and down 43% sequentially, reflecting standard seasonality for our business that was particularly pronounced due to record shipments in the second half of last year, as well as the normalization towards pre-pandemic order dynamics that Oak discussed. We remain confident that the strong secular underlying drivers of IFC demand and our strong position in an underpenetrated BA market will continue to propel our equipment sales in the future. We ended the quarter with a strong backlog, with about half of our expected 2023 equipment revenue budget already secured. Overall, we're expecting our 2023 top-line performance to skew towards the second half of the year with stronger activations and shipments in the third and fourth quarters. Now turning to profitability. Gogo delivered strong service margins of 79% in the first quarter, consistent with the prior year period and slightly above our budget, driven by lower network costs. We continue to expect long-term service margins in the 75-plus percent range and to be the primary lever for free cash flow generation and long-term value creation. Equipment margins were 10% in the first quarter, 26 percentage points lower than the prior year period and 22 percentage points lower sequentially. The decrease in our equipment margin was primarily due to additional costs related to the FCC reimbursement program and increased production costs driven by our expected 5G launch in the fourth quarter. As Oak described, we have determined to participate in the FCC reimbursement program, and in doing this, we incurred $1.3 million in inventory write-off costs. Additionally, we incurred $1 million in costs this quarter, replacing a large number of BDO air cards in advanced equipped aircraft with dual modem air cards. These FCC-related costs drove down equipment margins by 12 percentage points. We expect equipment margins to return to planned levels in the 25% to 30% range in the quarters ahead. Now moving on to operating expenses. First quarter combined engineering, design and development, sales and marketing, and general and administrative expenses increased 15% year-over-year to $29 million, and on a sequential basis, operating expenses were flat. The year-over-year increase reflects development expenses for GBB as well as higher personnel costs. As we previously stated, we expect that 2023 and 2024 will continue to be investment years as we complete our 5G program and ramp up spending for GBB. We continue to anticipate that these investments will support sustained strong topline growth and, once completed, will be a key driver to significant free cash flow growth in 2025 and beyond. In terms of global 5G spending, we continue to stay on track and on budget for Gogo's 5G's commercial launch in the fourth quarter of 2023. While our timeline has shifted, we have remained on track with the cost expectations we set back in 2019 that Gogo 5G's external development and deployment costs would be approximately $100 million. In the first quarter, our $2.6 million of 5G spending was comprised of $2.2 million in CapEx and $0.4 million in OpEx. Now, on to our GBB initiative. In the first quarter, Gogo incurred $1.5 million in operating expenses related to GBB. We continue to expect external development costs for GBB to be less than $50 million over three years, with approximately $14 million in 2023 and the remaining spending to occur in 2024. As we previously stated, we anticipate that approximately 95% of GBB external development costs will be in OpEx. This spending profile is reflected in our 2023 adjusted EBITDA and free cash flow guidance. Moving on to our bottom line, Gogo's first quarter adjusted EBITDA decreased 7% year-over-year to $39.7 million, primarily due to lower equipment revenues and increased operating expenses, including GBB. Gogo delivered net income of $20.4 million in the first quarter, down 8% year-over-year, translating to $0.16 in basic earnings per share and $0.15 in diluted earnings per share. As a reminder, our financial statements reflect non-cash income tax expenses as we continue to generate positive pre-tax income. Based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period, but we may pay a modest amount by the end of our planning horizon. We continue to expect additional reversals of portions of our valuation allowance against deferred tax assets within the 2023 fiscal year. In the first quarter, we generated $20 million in free cash flow, up $11.2 million compared to Q1 2022 due to a decrease in net working capital from lower accounts receivable, and lower 5G CapEx. Free cash flow was down $5 million sequentially, primarily driven by employee-based bonus payments made in the first quarter. Now I'll turn to a discussion on our balance sheet. We ended the quarter with $712.3 million in outstanding principal on our term loan and $188 million in cash and short-term investments, with our $100 million revolver remaining undrawn. At the end of the quarter, Gogo had a net leverage of 3.1x, in line with our target range of 2.5x to 3.5x. As we announced on May 1, Gogo made a strategic decision to pay down an aggregate principal amount of $100 million on our outstanding term loan debt facility. As mentioned in previous calls, while we have a hedge agreement in place and before the paydown were more than 90% hedged, the first step down to $525 million will occur in July. The paydown will materially reduce our interest expense, minimizing our exposure to the current volatile financial environment and ultimately strengthen our financial and strategic viability. As a result of the paydown, Gogo will reduce its term loan B outstanding principal to $612.3 million. Gross leverage at the end of Q1 was 4.2x, and it will be reduced to 3.6x after the paydown. On an annualized basis, we expect to reduce cash interest by approximately $8.5 million based on current silver rates. In 2023, interest cost will be reduced by approximately $4.5 million based on the April forward silver rates. As a result of executing a more conservative financial policy with a lower leverage target and paying down our debt, Moody's upgraded our credit rating to B1 with a stable outlook. The pay down of our debt is in line with our balanced capital allocation strategy. As a reminder, our priorities are: first, to maintain adequate liquidity; second, investing in strategic opportunities to drive competitive positioning and financial value, including 5G and GBP; third, maintaining an appropriate level of leverage for the economic environment with a target net leverage ratio of 2.5x to 3.5x; and finally, returning capital to shareholders as appropriate in the future. Now I'll turn to our outlook. For those reiterating our fiscal 2023 financial guidance and long-term targets. We continue to target 2023 revenue in the range of $440 million to $455 million. While we've had a slower start to 2023 due to the dynamics I discussed earlier, we continue to believe 2023 will be a strong year for aircraft online growth, as the record units we shipped in 2020 are activated, driving recurring high-margin service revenue, and additional equipment sales follow, particularly in the second half of the year. We expect 2023 adjusted EBITDA in the range of $150 million to $160 million, reflecting operating expenses of approximately $30 million for strategic and operational initiatives, including $9 million in expected 5G spending, which reflects the shift of $6 million from 2022 to 2023 related to the chip delay, approximately $14 million of GBP development spend, and approximately $7 million in additional operational initiatives focused on penetrating the 78% of the global business aviation in-flight connectivity market that remains untapped and maintaining our long-term competitiveness. We expect 2023 free cash flow of $80 million to $90 million, which includes capital expenditures of approximately $30 million to $40 million, of which $20 million is tied to Gogo 5G. Even with our investments in exciting new products, we expect year-over-year free cash flow growth in 2023 of nearly 50% at the midpoint of the guidance. Importantly, our 2023 guidance does not reflect the impact of Gogo’s participation in the FCC's secure and trusted communications network investment program. As previously mentioned, Gogo plans to proceed with the FCC program by submitting an initial reimbursement request before the July deadline. Since the program is currently partially funded, we have some optionality in what we request reimbursement for that could impact where money received will be recorded between the income statement and balance sheet. We will solidify our plans over the next couple of months, but in the interim, I want to provide some directional context on how the reimbursement program could impact our 2023 outlook. At a high level, we expect free cash flow to be impacted by increased use of working capital as we build airborne inventory into our equipment. The government reimbursement may partially lag those purchases, and then we see a cash flow benefit in subsequent years as the program unfolds. We will update our guidance on our Q2 call to reflect the program once our plans are finalized and provide more complete information on the financial impact of the SEC reimbursement program. Our long-term targets also remain unchanged, reflecting our expectations for the launch of Gogo 5G in late 2023 and the launch of our GBP product in the second half of 2024. We reiterate that we expect revenue growth at a compound annual growth rate of approximately 17% from 2022 through 2027, with global broadband materially contributing to revenue in 2025. We also expect annual adjusted EBITDA margins to be in the mid-40% range by 2027, which includes continued investments in engineering, design, and development to fund innovation and market competitiveness in the out years. Finally, we continue to expect free cash flow of more than $200 million in 2025 and growing in 2026 and beyond. We believe that our value proposition is underpinned by strong growth in free cash flow as we complete our 5G and GBB investments and execute in an underpenetrated global market. Gogo's business continues to perform extremely well. Our outlook underscores the immense value creation potential for our customers and shareholders that we expect to unlock as we execute our strategy and invest in the strategic initiatives that will extend and enhance our long-term growth. Before we open the call up for questions, I would like to thank the entire Gogo team for their continuous hard work, dedication to our business, and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks. We are now ready to take up this question.

Operator, Operator

Thank you. Your first question comes from the line of Ric Prentiss with Raymond James.

Ric Prentiss, Analyst

Thanks good morning, guys.

Oakleigh Thorne, Chairman and CEO

Hi, Ric.

Ric Prentiss, Analyst

Hi, good morning. A couple of questions, if I could. First, Oak, you started with, obviously, the state of business. You mentioned 15,000 business jets out there, you guys have about 50% of that 50% or bounced help people understand why do you think that market is so underpenetrated. You talked a little bit about the technology changes and demographic shifts, but help people understand how you think that curve plays out of what drives people to say, 'Yes, I want in-flight connectivity on that pool of business jets.' And then on the 10,000 turbojets sticking with the US, what is it there? Does it require price? Is it antenna? What is it that gets turbojets to come on board? And then the third part of the question is obviously the global side of it. What do you think spurs people to come to say, 'Yes, I'm ready to pay for in-flight connectivity?'

Oakleigh Thorne, Chairman and CEO

We'll start with the Jet market. A 50% figure after about 10 years of this service being available isn’t bad when you consider that many jets are older than that. Most will need to rely on aftermarket services. I believe that service levels play a significant role in this, and the substantial increase in capacity from 5G and GBB will encourage installations. Additionally, the installation process typically takes considerable time. Our systems install faster than others, but we still need to improve on that. We're focusing on minimizing installation times so that customers won't have to wait for major maintenance events and might choose to do standalone upgrades or installations instead. The lower end of the business jet market is somewhat price-sensitive, which is where we have positioned L3 with competitive pricing plans, contributing to our success in the light jet market recently. This shift is also generational; many business jets owned five to ten years ago belonged to older individuals who did not see the need for connectivity. That perspective has changed significantly now, as a recent survey indicated that 67% of our users are from Generation X, Y, and Z, rather than baby boomers. As a result, we’ve observed a real turnaround with a faster installation rate in that market. In the turboprop segment, there are a few considerations, with price being a notable factor. We have been targeting this market and announced some partnerships, such as with our Cerus deal for fractional ownerships, though it's for a small jet, it’s relevant to a similar market. Increasingly, there’s interest in the turboprop sector, particularly in charter services, as passengers now expect connectivity when they charter flights. This shift is promising. With our AVANCE product, we are creating new, smaller form factors to accommodate compact aircraft. While the turboprop market may not be high-end, it is large enough that we can compete effectively based on quality. Internationally, a significant challenge is that most aircraft lack options—of the 14,000 business aircraft outside the US, only about three are heavy jets with service options, and less than a third of those actually utilize the service. This situation primarily stems from high installation and service costs, influencing market demand. Our GBB product is well-suited for these challenges. For medium-sized jets and smaller, there are generally no viable overseas options. Although Europe has the EAN ATG network, it hasn’t been marketed to business aviation effectively. The bright side is that GBB’s compact design and competitive pricing will allow it to be fitted onto a variety of aircraft, presenting a significant opportunity for us.

Ric Prentiss, Analyst

Great. That's very helpful and will help people to frame it. I think Jessi mentioned that GBB could be material in 2025. Is that kind of the hope, and is that GBB opens up and unlocks that 14,000 global opportunity that hasn't had the availability before? What do you think material might mean in 2025?

Oakleigh Thorne, Chairman and CEO

I'm not in charge of the definition of material, so I'll let Jessi deal with that. But we're looking to commercially launch the GBB antenna and network in the fourth quarter of 2024. So you can imagine installs starting to hit at the end of 2024, going into 2025. That’s why we say material; we'll start getting service revenue really in 2025.

Jessi Betjemann, Executive Vice President and CFO

It's still going to be heavily weighted towards the equipment side, but you'll start getting some service revenue.

Ric Prentiss, Analyst

Great. Last one for me. And, of course, I know I love service revenue guidance rather than just total revenue again, because I do think the overall value of the company is going to be more driven by service than the one-time equipment revenue. But the final one, the $100 million debt pay down, that sounds nice way to get debt reduced as the hedge comes down for the step down. How much cash do you think you need on hand to run the business particularly as you look at maybe the working capital pressure with the FCC program, and then remind us of what the other step downs on the hedges are in terms of timing.

Jessi Betjemann, Executive Vice President and CFO

Yes. The cash that we would like to have on hand. As a reminder, we have the $100 million revolver available to us. So we always have that, but somewhere between $50 million to $75 million, we'd like to be a little bit more conservative and ensuring that we have that cash on hand, especially as you noted, with some inventory requirements with the FCC initially until we get the reimbursement back from the government. There could be a small lag in that initially. Regarding the hedge pay down, we've got the $125 pay down that will happen in July of this year, and then the next pay down is in December of 2024. It will go from $525 million down to $350 million, and then it will step down to $250 million in terms of what's hedged. It will step down to $250 million in December of 2025, and then in December 2026 down to $200 million.

Ric Prentiss, Analyst

Great. That helps a lot. All right. Thanks, everybody. Stay well.

Oakleigh Thorne, Chairman and CEO

Thanks, Ric.

Operator, Operator

Thank you. Your next question comes from the line of Phil Cusick with JPMorgan.

Phil Cusick, Analyst

Okay. Thanks. Just a couple of follow-ups on Rick's questions. Maybe talk about the long-hauls to launch the GBP network. Any update on OneWeb's progress there? And what else has to happen for you to get that up and launched in 2024? What are the big pieces? And you talked about what the alternatives are today, but what are the alternatives that look like they're coming down the line? Who else is working on products for global private aircraft? Thanks.

Oakleigh Thorne, Chairman and CEO

Yes, absolutely. There are two main long-hauls to discuss. The first is related to the OneWeb network, which has now successfully launched all the necessary satellites to complete its global coverage. They do have a couple more launches planned, but those are intended as spare satellites. They now need to position these satellites in their designated orbits and get them operational. I anticipate this will be completed by the middle of next year, which is a bit sooner than our own project involving the construction of our aircraft terminal in collaboration with Hughes. That initiative is progressing well, and working with Hughes has been a fantastic experience; their operational and program maturity is impressive. We’ve managed to expedite our delivery timeline from early 2025 to the fourth quarter, and we see potential for further advancements. I cannot reveal too much, but we are planning to unveil something exciting at the EBACE event in Geneva at the end of May during the Global Business Aviation Convention. Both of these projects are currently on track. As for alternatives in the market right now, Starlink is the primary competitor, equipped with a large antenna measuring 39 inches by 31 inches, which is quite substantial for Business Aviation. This antenna has been installed on some Embraer 145s operated by JSX Airlines and on a number of G650s, primarily owned by a Scandinavian airline. However, they seem to be facing challenges in obtaining the necessary STCs and are progressing slowly in trying to enter this market. I have a lot of respect for Starlink and the SpaceX team; they are indeed very skilled. We believe our combination of ATG and LEO offerings will make us highly competitive. We are confident that our product will stand out in terms of return link and other crucial aspects, and we aim to keep our pricing competitive. Moreover, it doesn't seem logical for Starlink to enter this particular market. While they excel in certain areas of satellite services, they typically target large markets like direct-to-home services, which are simpler to manage and support through mass marketing. This approach allows them to achieve remarkable economies of scale. They also effectively handle large customized projects, such as defense contracts, which are valuable opportunities for them. However, entering niche markets that demand extensive customization and have high associated costs does not align with their business model. Their attempt to adapt consumer-grade antennas for aviation use is problematic, as they need to be designed to withstand aviation standards, which differ significantly from what is typically used in homes. The same principle applies to routers and all other components. This level of customization required for a limited number of units is not feasible for them. If they were to drastically lower their prices, it would compress the current service revenue market of $300 to $400 million down to around $150 million, which would be inconsequential for their broader financials. I believe Satcom Direct has a partnership with OneWeb, as we do, but there hasn’t been much advancement from their side, as they seem to be focusing on other products more aggressively. We always recognize them as a serious competitor.

Phil Cusick, Analyst

That’s helpful. Thanks, Oak.

Operator, Operator

Thank you. Your next question comes from the line of Landon Park with Morgan Stanley.

Landon Park, Analyst

Good morning, everyone. Thanks for taking the questions. I was wondering if we could try on the OEM side. I'm wondering if you could comment on what kind of take rates you guys have been seeing out of that channel and maybe how that's trended over the last couple of years. And any early indications you've had from them regarding GBB, just what the outlook looks like there? And then separately, I was just wondering if you could talk about what the EBITDA cadence might look like on through the year, given that the Q1 level was already at sort of the high end of your guidance, it seems to include some one-time expenses. So how should we think about the puts and takes through the rest of the year there?

Oakleigh Thorne, Chairman and CEO

Sure. The OEM part - I'll leave Jessi with the hard numbers regarding EBITDA. Our take rates vary widely by OEM. We have very high take rates at Textron and Embraer today, less so at Gulfstream coming out of line fit, but we often get put in the aftermarket there, same with Bombardier. It's a bit hard to say exactly what the take rate is because often we're installed simply after it comes off the line in a service center or something like that. However, I think that a good estimate is that about 65% of OEM deliveries stay in the United States. We're on almost all Textron planes delivered to that market, a very high percentage of Embraers, and less so, like I just said, on Gulfstream and Bombardier and Dassault. However, we have high penetration of the Bombardier, Gulfstreams, and Dassault. But again, that generally comes in the aftermarket. I would say our take rates have been growing, which is good. I would also say that regarding GBB, the receptivity is outstanding. I've never seen the OEMs as excited as I see them now across that product.

Jessi Betjemann, Executive Vice President and CFO

In terms of the EBITDA for the rest of the year, so definitely, revenue is going to be higher in the second half of the year than the first half as we passed through, but we will have some increase in expenses. In Q1, the GBB expenses were only $1.5 million and 5G expenses were only $0.4 million. For both 5G and GBB, those expenses are going to be picking up as well as the other operational initiative expenses. So that will have some impact on the EBITDA going forward while revenue grows.

Landon Park, Analyst

Understood. That's very helpful. I would like to follow up regarding the OEM side, particularly about the aftermarket installations that follow shortly after delivery. Of the 700, with 65% in the U.S., is it approaching 90% or more in terms of what you can achieve from that? Also, on a broader scale, are you noticing any macro trends? Have you detected any customer sensitivity or similar factors?

Oakleigh Thorne, Chairman and CEO

Look, we haven't shared the attachment rates at the OEMs. We can contemplate sharing those in the future. I'm not going to give you exact numbers, but if you look at Textron deliveries in the U.S., we're probably close to 90%, something like that. If you look at Gulfstream, it's going to be at the other end, it's going to be around 20%. Because sometimes in the aftermarket, if it’s a relatively new Gulfstream, it’s going to be at a Gulfstream aftermarket facility generally. We don’t look at that, I would say, as a line-fit OEM install, so we don’t really count it that way. However, that's complete. We are planning on sharing more in the future, but I wanted to give you some color.

Landon Park, Analyst

That's very helpful. And is there anything on the macro that you want to add?

Oakleigh Thorne, Chairman and CEO

No. And when you say macro, you mean the macro economy?

Landon Park, Analyst

Yes, the macro economy.

Oakleigh Thorne, Chairman and CEO

It impacts people’s feelings. We did a little poll of our Dealer Advisory Council and visited dealers. Only one mentioned the economy being an issue. There are many other factors that were mentioned that might ultimately be economic, but they seem more micro in reality. There’s been no real impact on orders at the OEMs; they continue to be strong. From the dealer perspective, they are busier than they can really handle right now, catching up on maintenance over time. Planes are literally parked on the tarmac, unable to fly, because they’re no longer compliant on their maintenance logs. Dealers are trying to get that work done so those planes can start flying again. So, everybody is very busy. I don't think the macro economy has really hurt the market.

Landon Park, Analyst

Great. Thanks so much for taking the questions.

Oakleigh Thorne, Chairman and CEO

Thanks, Landon.

Operator, Operator

Thank you. Your next question comes from the line of Lance Vitanza with TD Cowen.

Lance Vitanza, Analyst

Thanks guys for taking the question. Maybe just to stay with the theme of the dealers and the shipments and activations and the turbulence there, I think the concern is that it raises the specter of perhaps the macro pressures bleeding into the business jet demand. Just to be clear, it sounds like really what happened is that the dealer has requested a lot of shipments historically because the lead times have become concerning, and now that's reversing. It doesn’t sound like the underlying final demand has changed much. Is that fair? And I think you said, if anything, it's stronger than pre-COVID and presumably, it's also stronger than where it was before the supply chain got challenging. Is that fair?

Oakleigh Thorne, Chairman and CEO

Yes. I think that's all fair. We had huge Q3 and Q4 shipments, record-breaking. Some of that, I think, was driven by the still COVID ordering patterns. Our equipment prices go up every January 1, so I think people were loading up on equipment ahead of time before the price increases kicked in. They bought enough inventory to last well into this year. The important thing to us is getting the plane to gear on time and activating it to produce service, as Ric pointed out earlier; that’s the key. We had a really good activation quarter, which doesn’t show much in AOL because when people go into maintenance or they put the aircraft up for sale, they tend to turn off the service for a couple of months, or however long it takes to sell the aircraft. There is a little dampening there because those sales activities have picked up and the maintenance activities are as well. But that’s all temporary; most of those that go for sale come back online, often with an upgrade, which we like. The ones that go into the shop tend to turn it back on as they come out of the shop. So if they’re grounded while waiting to get into the shop, they typically don’t turn it on; they’re counting the expenses. So those dampen AOL a little, but overall, we had good demand on the install side and activation side. We feel pretty good about that. The issue we encountered a few times is that a plane is meant to come in for two months to get all the required upkeep, but if there are labor issues, that gets extended by two weeks, and sometimes customers won’t accept that extension to their maintenance window. So, those are the types of things that dampen it a bit. But we had our second best activation quarter ever and certainly our best first quarter activation.

Lance Vitanza, Analyst

Great. Thanks. Appreciate it.

Operator, Operator

Thank you. And our next question comes from the line of Louie DiPalma with William Blair.

Louie DiPalma, Analyst

Oak, Jessi, and Will, good morning, and Jessi, congrats on your first call as CFO.

Jessi Betjemann, Executive Vice President and CFO

Thank you.

Louie DiPalma, Analyst

Oak, you provided several metrics for the 5G pre-provisioning. What are the next technical milestones to look for with the 5G launch, and is there a risk that the launch could slip to early next year?

Oakleigh Thorne, Chairman and CEO

Well, we're on track right now in terms of getting the chip fabrication completed at Samsung and getting that chip to GTT, Airspan and us on schedule. That looks set and ready to go. We’ve done almost all the testing we need to do on this system already, but we have not tested anything that just relates to the 5G chip. Clearly, that testing needs to take place, which will happen generally late in the second quarter or early third quarter. We’ll be flying it in the third quarter. There’s always a possibility that something could go wrong at Samsung again, but with the amount of attention Samsung, Airspan, GTT, and we have all paid to this chip at this point, it would be shocking if something did occur. So we're quite confident we'll be delivering in Q4, and it appears to be completely on schedule.

Louie DiPalma, Analyst

Okay. Excellent. And Oak, you also discussed how the 5G service is expected to be five times to ten times faster than your current AVANCE ATG product. As it relates to small and midsized aircraft that only fly in the US, I know you were just talking about Textron aircraft. But do you think that those aircraft, the small and midsized aircraft would be good candidates for the global broadband product? Or do you think, for small and midsized aircraft that only fly within the US, they will most likely stick with your ATG products, as that appears to be fast enough for most of their needs regarding streaming, video gaming, and phone calls?

Oakleigh Thorne, Chairman and CEO

Yes, that's 100% right. I think also, it will be priced to appeal to that market. So, I think that ATG, if the mission is generally US, is a very good answer, and 5G is a very good answer. So that’s where we're positioning that product. The GBB product, we’re really positioning for international claims that fly outside the US most of the time. For heavy jets in the US that often fly outside the US, they need to have a system that can handle their international flights. In that market today, we have over 50% of the US heavies that have our system; our ATG system is installed. Probably about half of the super mids have our system, and many of those are already advanced. So for them to add GBB is going to be straightforward. Additionally, it can replace their existing GEO satellite products. Many have both our systems and the GEO product. So, a lot of that market is looking for a simpler solution with one provider and straightforward pricing, thus benefiting from a bundled package to pay one bill. I think that LEO will provide a better quality of service than GEO. So, that market is another reason GBB is a fit.

Louie DiPalma, Analyst

Great. And one last one for Jessi. Will there be a material step-up in recurring service expenses with the launch of 5G this year and the global broadband networks next year? Will there be significantly higher backhaul costs and power expenses and other data center software fees that we should be thinking about? I know Oak and Jessi previously outlined expectations for significant margin expansion, and I'm just wondering what types of additional costs we should be thinking about.

Jessi Betjemann, Executive Vice President and CFO

So 5G backhaul is in our guidance and long-term forecast. There will be some increase in the 5G backhaul. As mentioned, with GBB, we're paying by the drink on that with one left. So that will be flowing through the cost to those as well. But we still expect the margins to remain in the 75-plus percent range in the long term. That's included all in our plans.

Louie DiPalma, Analyst

Great. Thanks, Jessi. Thanks, Oakleigh.

Oakleigh Thorne, Chairman and CEO

Thank you.

Operator, Operator

I would now like to turn the call back over to Vice President of Investor Relations, Will Davis for any closing remarks.

Will Davis, Vice President of Investor Relations

Thank you, everyone, for joining our first quarter earnings call. This now concludes our call, and you may disconnect. Thank you.