
Chalk up another record revenue quarter for Gogo. The business aviation connectivity company brought in $79.1 million in service revenue for Q2 2023. But the company expects the next couple years to be rough, with downward revisions on revenue, free cash flow, and other metrics. Shares dropped more than 18% on Monday after the numbers were released.
Our few headwinds do not change our view that Gogo is poised for explosive growth in 2025 and beyond.
– Oakleigh Thorne, Gogo CEO
The good news
In addition to record service revenue the company is selling new systems and more than half the equipped systems now are flying with the AVANCE platform. Driving installations of AVANCE is key to the company. As CEO Oakleigh Thorne reiterated in the call, AVANCE “enables customers to easily upgrade to new networks and technologies with Gogo…driving high margin recurring service revenue.”
Activations were also strong, with 229 aircraft added to the rolls. The company also sold 277 new ATG systems. Despite this ostensibly good news, only 18 more aircraft were online at the end of Q2 than Q1 2023.
Maintenance challenges
Thorne pinned the blame for subscription suspensions squarely on maintenance activity, not activations, “We’re having a record year of activations. It is not the pace at which equipment is going into aircraft that it hurting us, it is the pace of suspensions.” More aircraft are suspending subscriptions than ever, and the suspensions are lasting longer.
A year ago 45% of maintenance suspensions lasted less than 30 days. This year that number shrank to 34%. Eventually Thorne expects about 200 more aircraft back in service once the maintenance issues are resolved.
Still, the maintenance backlog on affected aircraft suggests it will be at least another couple quarters before Gogo’s customers start to see a more normal flow of their aircraft through the maintenance process. And competitors are going to try to capture conversions during that window.
Thorne did note that the company surveyed a subset of suspended accounts. None of the subset of those which responded had defected to a competing provider. That does not, however, cover the entire installed fleet.
Longer term outlook
Also, while Gogo focused on the the maintenance issues creating a service revenue backlog, the company also revised its long-term free cash flow (FCF) numbers lower. While forecasting “explosive growth” from 2025, Gogo also revised its 2025 FCF estimates to a range of $150 million to $200 million in 2025; previously it estimated greater than $200 million. Thorne did not provide an explanation for the lower long-term outlook during the call.
Some of it can be attributed to a delay in installations of the company’s new Gogo 5G network hardware. The company now expects to begin shipping hardware in Q3 2024 and start seeing higher service revenue numbers late that year or early in 2025. And a decent chunk of the initial revenue boost is from the high margin hardware as the product launches. Still, that discrepancy remains notable in the company’s report.
Gogo did note that there are no chip issues with its planned Galileo product launch. It still expects the half duplex ESA to be available from Hughes in the back half of 2024 and the full duplex model in the first half of 2025. That service will take advantage of the OneWeb LEO constellation and Thorne expects to match or exceed SpaceX Starlink performance on its implementation.
Also on the longer term outlook, Gogo confirmed its expectations of at least $132 million in reimbursement from the US government to replace Chinese hardware in its network. The company is hopeful that Congress will further fund the program. Currently only 39% of requests will be covered.
When that new network goes live Gogo anticipates a 40% throughput improvement compared to the existing AVANCE L3 network. The new network will also double the number of aircraft that can be supported online.
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