Gogo - Q4 2023
February 28, 2024
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to Gogo Inc.'s fourth quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference is being recorded. We'll now hand the conference over to speaker host, Will Davis, Vice President of Investor Relations. Please go ahead.
Will Davis (VP of Investor Relations)
Thank you, Livia, and good morning, everyone. Welcome to Gogo's fourth 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 this 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 10-K and 10-Q and other documents that we have filed with the SEC.
In addition, please note that the date of this conference call is February 28, 2024. 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 fourth-quarter earnings release. The call is being broadcast on the Internet and 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, everybody. 2023 was a busy year for Gogo. We continued to grow our high-margin service revenue and to drive Gogo's strong cash flows, propelled by accelerating adoption of Gogo's AVANCE platform and fueled by strong business aviation demand for connectivity. At the same time, we're making great strides in our investments to future-proof our business by extending the technology frontier in aviation with Gogo 5G and our low-Earth orbit satellite product, Gogo Galileo. We believe these new technologies will deliver order-of-magnitude improvements in the speed of Gogo's service, that they'll increase our total addressable market by about 60%, and that they'll extend customer lifetimes by providing easy upgrade paths for existing AVANCE customers.
With the addition of Gogo 5G and Galileo, Gogo will have the most complete product portfolio in the business aviation IFC industry, with products that offer the right performance, the right coverage, at the right total cost, with great customer support for every segment of the highly unpenetrated 39,000 aircraft global business aviation market. We also navigated temporary aviation industry headwinds related to parts and labor shortages and busy maintenance schedules. And though those continue to impact our OEM and dealer partners, we are seeing suspension intervals starting to shorten and reactivation rates starting to pick up, which will hopefully help boost aircraft online this year. The...
Despite the delay in the development of our Gogo 5G chip, the market continues to respond enthusiastically to the 5G value proposition, with ongoing pre-provisioning programs and a flood of STC programs that we believe position us for a highly successful launch late this year. On top of that, we're executing the FCC Secure and Trusted Communications Networks Reimbursement Program, support from the U.S. government to enhance the security of our nation's infrastructure and at the same time, deliver meaningful benefits to Gogo's network and growth trajectory. As Jessi will describe in a moment, based on our new long-term forecasts, we're bullish on Gogo's opportunity for significant growth and long-term value creation. Today, we serve a highly unpenetrated market, with 76% of the world's 39,000 business aircraft flying without a broadband solution, and demand for connectivity in those aircraft growing dramatically from both passengers and operators.
As a result of these trends, we expect global broadband connectivity penetration across all business aircraft to grow from 24% today to the mid-30% range by the end of our 5-year planning horizon. Over that horizon, we expect Gogo's share of global installed aircraft to remain at roughly 75%, with our North American share remaining in the low 80s, and Gogo's rest of world share growing from 0% today to the high 20% range by 2028, which equates roughly to 600 aircraft. To be conservative in our Gogo projections, we've assumed that Starlink achieves its currently published STC schedule and launches a small antenna in the next 2 years. And for planning purposes, we project that as Galileo and Starlink come online, share will shift away from today's geostationary satellite incumbents, and then Gogo and Starlink will benefit from that shift.
And though we have to muscle through a tough investment year to deliver 5G and Galileo, our long-term projections are driven by strong recurring service revenue that drives strong cash flow and a strong balance sheet, which acts as a flywheel to drive investment in further enhancing our products and further securing our competitive advantage in the future. Now, I'll highlight some demand trends and provide an overview of our Q4 results before I dive more deeply into progress in our strategic initiatives. Demand for Wi-Fi in aircraft continues to grow. Data consumption per flight hour in Q4 was once again up 15% compared to prior year, and up 74% from Q4 2019, demonstrating a step change in passenger expectations for in-flight connectivity. Demographic trends bode very well for connectivity penetration.
Though all ages want better in-flight connectivity, demand for connectivity increases as the age of the flyer decreases. Gogo's 2023 flight counts were down 2% versus 2022, but the gap narrowed to a 0.5% in Q4, and actually turned the corner and noted a 2% increase in January over prior year, which certainly signals demand for in-flight connectivity remaining strong. I'm sorry, for flight remains strong. More importantly, flights are significantly elevated from pre-COVID levels, with Q4 up 28% from Q4 2019, signaling to many industry observers that stronger private aviation demand is here to stay, which is further supported by strong OEM order books and very strong fractional sales, which we expect will drive Gogo's shipment growth over the next few years. Now let me turn to our Q4 performance.
Revenue was down roughly 10% from our record Q4 2022 performance, which was driven by a 2022 post-COVID surge in equipment orders. On the positive side, we achieved record service revenue in the quarter, driven by record total AVANCE activations, which were up 20% from prior quarter and 15% from prior year, driven by accelerating reactivations and record upgrades from classic to the AVANCE platform. At the end of Q4, we reached 7,205 ATG aircraft online, representing 55 incremental ATG units in the quarter and reached 3,976 AVANCE aircraft online, representing 192 incremental AVANCE units in the quarter, up 21% from prior year and now representing 55% of our installed base.
We view every addition of an AVANCE unit, whether a new customer or an upgrade, to be a strategic win for Gogo, because it extends the lifetime value of that customer. That's because once an AVANCE platform product is installed, it is far easier and cheaper for a customer to upgrade to new technology, such as 5G and LEO satellite connectivity, with Gogo than moving to a competitor's product to upgrade that technology. The reason for that is generally, the only work inside the aircraft to upgrade to a new technology with AVANCE is to add or replace an antenna on the outside of the aircraft. The rest of the upgrade can be achieved on the AVANCE box inside the aircraft with a simple software upgrade. This gives Gogo a huge advantage in our distribution channels.
Because AVANCE is already line-fit on every currently produced make and model of aircraft, OEMs have lower engineering and line-fit cut in expense when they adopt Gogo Galileo than a new product from one of our competitors, because they have already engineered and tuned their production for the Gogo equipment that goes inside the aircraft. On the dealer side, because there are already STCs for AVANCE on all makes and models of business aircraft, they can upgrade their STCs or field approvals far more quickly than doing whole new designs for competitive products. On the fleet front, if they have AVANCE installed, they can invest in one of- one set of AVANCE hardware inside the aircraft and then upgrade incrementally by adding antennas at far lower costs than replacing full systems.
To give an example of where we think this will work to our advantage, today, there are more than 2,100 heavy jets flying with Gogo ATG connectivity in North America, many of which also utilize geostationary satellite products when they fly outside North America. Today, 61% of those have AVANCE installed, providing an easy path to upgrade from GEO to LEO connectivity when they so desire. We believe this advantage will only grow as we migrate the 3,200 customers still in our classic ATG products to the AVANCE platform as part of our FCC Secure Networks program customer conversion campaign. Moving from service revenue to equipment, those shipments paled compared to our blockbuster year last year. 2023 was our second highest AVANCE shipment year ever, which we believe portends more good things for the strategic customer reasons I mentioned a moment ago.
Finally, given the strong activations last year, Gogo inventory in the field normalized, and we're now down to roughly 180 units in the field that are not committed to a particular buyer, of which only 37 are at dealers that do not regularly move large amounts of inventory. On the earnings side for the quarter, despite our revenue headwinds, EBITDA came in higher than planned, and free cash flow set a new record, which demonstrates the durability of our business model. I'm proud of the Gogo team and want to thank them for their commitment to our strategy and strong execution throughout 2023. Now, for our progress on our strategic initiatives. Gogo is focused on accelerating growth with a three-pronged strategy.
First, we want to expand our addressable market globally by expanding outside North America and developing products and pricing that fit every segment of the 39,000 aircraft global market. Second, we want to drive customer loyalty by continually improving our networks and leveraging the AVANCE platform to provide an easy upgrade path as new technologies emerge. Third, we're focused on offering the best product and customer support to each segment of the market at the lowest total cost of ownership. We're making great strides on our strategic initiatives to achieve these goals. Let me start with 5G. I'll begin with a little bit of bad news, which is that due to a non-technical contractual issue between sub-suppliers, we've had a slip in our 5G delivery from Q3 to Q4 of this year.
However, we believe that issue has been resolved, and we are back in fabrication mode on the chip. Despite the shift in timing, we're really encouraged by the commercial and certification progress we're making, bringing this product to market. And we've already shipped 198 5G pre-provision kits with MB13 5G antennas, 59 of which have already been installed and are flying today on our 4G network with an L5-4G box. Once our chip is ready, we will start shipping the LX5 box to those customers. And because the LX5 and L5 have the same form factor, they can make a quick swap and begin five service and 5G service immediately, saving downtime and expense. We have orders from five OEMs, one of which is already line-fit installing the MB13s, and we have stock orders for 46 systems from our dealer network.
On the certification front, we have 31 STCs in work, representing 41 aircraft models and more than 9,700 North American jets. Of those, 10 STCs have already been completed for the MB13 antennas, and because the LX5 is the same form factor as the L5, will be quickly upgraded once we ship them the LX5 boxes with the 5G chip inside. The other 21 programs are awaiting the LX5 before completing work, which again, because they're the same form factor, is a relatively modest effort. We also hit an exciting milestone earlier this month when we received our first FPGA version of the 5G chip and began testing the 5G chip software in our Chicago lab.
We're excited to bring Gogo 5G to market, and with mean speeds around 25 Mbps and peaks of 75-80 Mbps, we believe it's the perfect product for mid-sized and smaller business aircraft that fly North American missions and want great connectivity at a better value than competitive satellite products. Galileo. Let me turn to our LEO-based global broadband initiative. Galileo comes in two versions, a smaller HDX terminal and a larger FDX terminal. Galileo HDX terminal is a small antenna that fits on almost all business aircraft and targets, A, the almost 12,000 mid-sized and smaller jets that domicile outside North America and have absolutely no broadband solution today. And B, those jets, out of the 11,000 midsize and smaller jets that domicile inside North America, that often fly international missions.
The Galileo FDX terminal is a larger antenna that delivers significantly higher bandwidth and targets the roughly 7,000 global, super mid-sized and larger heavy jets that fly transcontinental missions. For Galileo, peak speeds and mean speeds will be in close proximity, with HDX delivering speeds to the aircraft in the high 50 Mbps range, and FDX delivering speeds close to 200 Mbps, which is comparable to the speed Starlink publishes for its 39-inch antenna. As I mentioned earlier, a huge advantage for us is that Galileo is a simple upgrade from any AVANCE installed plane. One only needs to add our HDX or FDX antenna on the fuselage and then run data and power cabling into the aircraft.
As I also mentioned earlier, given that AVANCE is already a line-fit option at every OEM and has STCs on every currently produced model of aircraft, it will be relatively easy from an engineering and certification perspective for OEMs and dealers to offer Galileo as an option to their customers. We've already signed one line-fit agreement and have discussions underway with several others, and six Gogo dealers have already either verbally committed or are under MoU for 10 STCs, representing 28 different aircraft models and a global TAM of 8,000 aircraft. We remain on track to start shipping HDX terminals in Q4 and FDX terminals in the first half of 2025. We hit an exciting milestone this month when we received the first fully constructed prototype of the Gogo Galileo HDX antenna, which marks a significant step in design validation, preparing for flight tests this summer.
With that, we're one step closer to our goal of offering a global broadband connectivity solution for every business aircraft everywhere. Now, let me turn to the FCC Secured Networks program. You'll recall that two years ago, Gogo was awarded a $334 million grant under this program to reimburse it for expenses associated with accelerating the removal of Chinese telecom technology from our 4G network. Because there were more qualified grants than originally planned, funding for all grants were cut back to 39% of the original award, which in Gogo's case, was a cutback to $132 million. As we mentioned last quarter, the White House included full funding for the program in its supplemental funding request to Congress last year. Given that full funding has broad bipartisan support in Congress, we feel that it has a chance of passage this year.
Partial funding will cover about 70% of our reimbursable cost of replacing all EVDO ground equipment and moving Gogo Classic customers to AVANCE equipment that is compatible with the replacement ground equipment. That is why what we are projecting in the long-term guidance we shared today. Based on changes we've made to our evolution program, we no longer believe we will need, nor would we receive $334 million. However, if full funding is approved, we would be able to accelerate our program and cover all reimbursable costs. On the customer side of this transition, our goal is to convert all 3,200 tails still flying with our classic product today to new LRUs with LTE air cards over the next two years, and we are funding very attractive conversion rebate plans to encourage them to do so.
We've been in conversations with more than 95% of these customers. So far, 55% have indicated a preference, with the overwhelming majority leaning towards an AVANCE upgrade, and almost half of those choosing L5s over L3s. This program has considerable benefits for Gogo and its customers, including a 40% improvement in connectivity performance for AVANCE L3 customers, a doubling of the number of aircraft that the ATG 4G network can simultaneously manage, and an acceleration of Gogo Classic customers upgrading to AVANCE, which has the strategic benefit of extending Gogo customer lifetimes due to the ease of upgrading to 5G and Galileo and other new technologies I described a few moments ago. Perhaps the biggest news in the quarter was announced after the quarter was over, and that is the 10-year extension of our 20-year relationship with NetJets.
NetJets is by far the largest operator of business jets in the world, with roughly 600 aircraft in North America, which they plan to go to 1,000 over the next 5 years, and another 85 aircraft operating in NetJets Europe. Of the North American aircraft, roughly 40% are on AVANCE today and 60% are classic Gogo ATG product. They are planning upgrades to AVANCE for all their North American aircraft, and then future upgrades to either 5G and/or HDX, depending on mission. NetJets Europe flies 70 aircraft that are equipped with Gogo equipment today, largely to provide in-flight entertainment, but 40% of those are already on the AVANCE platform, and they plan to upgrade all of those 70 to AVANCE with HDX Galileo in tow. Most importantly, NetJets is the bellwether of the business aviation industry.
In order to curry business in NetJets, OEMs and dealers make sure that they can provide the products and service that NetJets wants to install, and that should create great pull-through demand for Gogo. As I mentioned at the outset, 2024 is an exciting year for Gogo as we deliver Gogo 5G and Galileo and continue to execute on our strategy. We are more in demand, more innovative, and more poised for valuation than ever. Now I'll turn it over to Jessi for the numbers.
Jessi Betjemann (EVP and CFO)
Thanks, Oak, and good morning, everyone. Gogo continued to demonstrate strong demand for our products and services in the fourth quarter, setting new records operationally and financially. Despite the unfortunate delays of our 5G program we discussed on our Q2 earnings call, the industry headwinds we've endured, and the significant strategic investments we've undertaken in Gogo, 5G, and Galileo, we delivered solid bottom-line financial performance and record free cash flow in 2023. Our ability to achieve these results is a testament to the strength of our business model, financial position, and investment strategy. With the bulk of our strategic investments coming to completion at the end of 2024, we expect our free cash flow to accelerate substantially in 2025. In my remarks today, I'll start by walking through Gogo's fourth quarter and full year financial performance. I will turn to our balance sheet and capital allocation priorities.
Next, I will provide an overview of the financial impact of the FCC program. And finally, I will provide additional context on our 2024 financial guidance and the long-term targets we announced this morning. For the fourth quarter, Gogo's total revenue was $97.8 million, down 10% year-over-year, and remained relatively flat sequentially. Gogo's top line was driven by record service revenue of $80.9 million, up 5% year-over-year and 2% sequentially. In the fourth quarter, our ATG aircraft online reached 7,205, up 4% year-over-year and 1% sequentially. Total AVANCE aircraft online grew to 3,976, an increase of 21% year-over-year and 5% sequentially, driven by a record number of total activations, as Oak described.
We expect another strong year of AVANCE activations in 2024 as we plan to aggressively upgrade our classic Gogo Biz ATG customers as part of the FCC program, while maintaining a reasonably conservative view on improvements in the maintenance cycle times that have slowed installations over the past year. Upgrading our customers to AVANCE is a critical part of our strategy, as it extends customer lifetimes due to the easy upgrade path to Gogo 5G and Gogo Galileo. However, it will mute the ATG aircraft online growth, growth rate. Total ATG ARPU grew 1% year-over-year to $3,387, driven by a shift in product mix.... The launch of Gogo 5G and Gogo Galileo will further expand our ARPU growth opportunity over time. Turning now to equipment revenue.
Gogo delivered $16.9 million in equipment revenue in the fourth quarter, a 45% decrease year-over-year. We had a tough comparison to our record prior year quarter, compounded by the parts and labor dynamics and order slowdown in anticipation of our new product launches. Equipment revenue decreased by 8% sequentially, as the 5% increase in, to 202 AVANCE units sold in the fourth quarter was offset by a $4 million reserve, primarily driven by a specific customer circumstance. Now on to profitability. Gogo delivered service margins of 78% in the fourth quarter, remaining relatively flat compared to the prior year quarter, and one percentage point higher sequentially. We expect service margins to be in the 75% range this year, with a slight decrease in future years as Gogo Galileo's concentration on product mix increases over time.
Service revenue and margin continues to be the primary lever for free cash flow generation and long-term value creation. Equipment margins were 9% in the fourth quarter, 23 percentage points lower than the prior period, prior year period. The decrease was primarily due to an increase in production costs as a percentage of revenue due to lower equipment revenue in the quarter, and also by increased inventory reserves, which negatively impacted equipment margin by 9 points. Equipment margins were 24 percentage points lower sequentially, driven largely by the $2 million accrual taken in the third quarter for the expected FCC reimbursement of costs incurred in prior periods for aircraft replacements, along with the increased inventory reserves I just mentioned.
We expect equipment margins in the 20% range in the near term and to decrease slightly in the long term as the mix of lower margin Galileo units sold increases over time. Moving on to operating expenses. Fourth quarter combined engineering, design and development, sales and marketing, and general and administrative expenses increased 20% year-over-year and 19% sequentially to $35 million. The increase in the fourth quarter is primarily due to approximately $3 million in legal expenses related to the SmartSky patent litigation and global licensing efforts to support Galileo. Gogo expects 2024 to be a significant investment year as we continue to invest in our Gogo 5G and Galileo program. We expect these new products will accelerate revenue and free cash flow growth over the long term and are the key foundation for our long-term financial targets that I will discuss shortly.
In terms of Gogo 5G, in the fourth quarter, our $2 million of 5G spending was comprised of $0.4 million in OpEx and $1.6 million in CapEx. The 5G delay has pushed approximately $10 million of CapEx and approximately $7 million of OpEx from our original plan in 2023 into this year. The delay also dampens revenue, EBITDA, and free cash flow in the coming quarters. We expect 2024 will include approximately $8 million of 5G OpEx and approximately $12 million in CapEx. We continue to maintain our estimate of $100 million in total external development and deployment costs for our 5G program and anticipate no negative impact on the overall program costs from the delay. All of these impacts are reflected in our 2024 financial guidance. Now on to Gogo Galileo initiative.
In the fourth quarter, Gogo recorded $2.5 million in operating expenses related to Galileo. We continue to expect external development costs for both the HDX and FDX solutions to be less than $50 million in total, of which $9 million was incurred in 2023. Approximately $25 million is projected in 2024, and the remainder in 2025. We anticipate approximately 90% of Gogo Galileo's external development costs will be in OpEx. Moving on to our bottom line, Gogo recorded $35.1 million in adjusted EBITDA in the fourth quarter, a 24% decrease year-over-year and 19% decrease sequentially, driven by lower equipment profit and an increase in legal expenses, as I previously described.
Gogo delivered net income of $14.5 million in the fourth quarter, down 48% year-over-year, translating to $0.11 in basic and diluted earnings per share. As a reminder, our financial statements reflect non-cash income tax expense as we continue to generate positive pre-tax income. Based on our substantial NOL position at the end of 2023, including $446 million in federal net operating losses and $377 million in state net operating losses, this results in a net deferred income tax asset of $217 million. We do not expect to pay meaningful cash taxes through our 5-year planning horizon. As a reminder, our shareholder rights plan that was designed to preserve NOLs expired in September 2023. Thus, there are no limitations to shareholders buying over 5% of our equity.
In the fourth quarter, we generated record free cash flow of $28.4 million, an increase from $25 million in the year ago period, and $21 million last quarter. The year-over-year increase was primarily driven by lower CapEx associated with 5G and lower net working capital. I will now turn to a discussion on our balance sheet. Gogo ended the quarter with $139 million in cash and short-term investments, and $606.9 million in outstanding principal on our term loan, with our $100 million revolver remaining undrawn. Gogo's net leverage remains at 2.9x, in line with our target range of 2.5x-3.5x. As previously mentioned, we have a hedge agreement in place, and we currently have 87% of our loan hedged.
The next step down in the hedge to $350 million occurs in July 2024, with an increase in strike rate from 0.75% to 1.25%. Our cash interest paid for 2023, net of hedged cash flow, was $41.5 million, which includes approximately $10 million for two months of interest expense related to 2022. Assuming no further debt paydown, the cash interest paid for 2024, net of hedged cash flow, is expected to be approximately $33 million. Now I will provide a recap of our 2023 full year results. Gogo generated total revenue of $397.6 million, down 2% from 2022 at the top, but at the top end of our guidance range.
We delivered record service revenue of $318 million, up 7% from 2022, driven by a record number of total AVANCE activations, including Classic to AVANCE upgrades. Gogo's equipment revenue was $79.6 million, down 26% from 2022. We reached adjusted EBITDA of $162.1 million, down 7% from 2022, but above our 2023 guidance range, despite lower revenue throughout the year. Net income increased 58% year-over-year to $145.7 million, primarily driven by a $48.1 million tax benefit due to the partial release of the valuation allowance on our deferred tax assets in the second quarter.
We delivered record free cash flow of $82.7 million, up 43% from $57.8 million in 2022, due to lower CapEx and lower net working capital. While revenue was well below our expectations due to the industry dynamics we have discussed, the 5G delay and the resulting wait-and-see situation, our bottom line and free cash flow were better than expected. The increasing demand from customers for connectivity and Gogo's robust business model is a testament to the strategy we are employing for long-term financial growth and success. Now let me turn - let me provide a recap of Gogo's capital allocation priorities, which are in service of our current strategic goals. We are focused on, first, maintaining adequate liquidity. Second, investing in strategic opportunities to drive competitive positioning and financial value, including Gogo 5G and Galileo.
Third, maintaining an appropriate level of leverage for the economic environment, with a target net leverage ratio of 2.5-3.5 times. And finally, returning capital to shareholders as appropriate in the future. As you mentioned last quarter, we were comfortable moving to priority four in returning capital to shareholders, as our board of directors approved a share repurchase program in September, with no set expiration date, that grants authority to repurchase up to $50 million of shares of common stock. In the fourth quarter, Gogo repurchased approximately 480,000 shares for a total cost of approximately $4.8 million, and an additional 566,000 shares for a total cost of approximately $5.2 million in January, reflecting our confidence in the long-term value of Gogo and in the strength of our balance sheet.
Looking ahead, we need to continue to balance the use of cash over the next year across our capital allocation priorities, but believe we are well positioned to execute our investment schedule, continue to evaluate further debt paydowns, especially in consideration of the upcoming hedge step-down I previously mentioned, and expect to have more opportunities to return capital to our shareholders in the future. I will now provide an update on the expected financial impact of the FCC reimbursement program. Gogo expects to receive $132 million from the program as it is partially funded. However, we are awaiting Congress's decision on full funding, which could substantially increase our reimbursement up to the approved $334 million. As a reminder, we submitted our first claim in July 2023, which triggered the start of the one-year clock to complete the program by July 21st, 2024.
In our application, we stated that we will need to have multiple extensions to complete the program and are planning to request an extension in the near term. Gogo has incurred and will continue to incur costs for this program in three main areas. First, network equipment for cell sites and data centers. Second, airborne equipment for the swaps of LTE air cards to replace EVDO air cards, and partial rebates for customer installation costs to enable existing customer aircraft to communicate to the new network. And third, operating expenses. We expect the spend will be partially offset by the FCC reimbursement. As of December 31, 2023, we recorded an $18.3 million receivable from the FCC, as we spent approximately $20 million of reimbursable expenses and recouped approximately $2 million in cash reimbursement.
This receivable is included in prepaid expenses and other current assets in our balance sheet, with corresponding reductions to property and equipment, inventory and contract assets, and with a pickup in the income statement. Since the program is currently partially funded, we have some optionality in what we request reimbursement for, which could impact where grant money received will be recorded between the income statement and balance sheet. As we mentioned last quarter, we are currently seeing reimbursements coming in quicker than expected, potentially changing this thing effect on free cash flow over the years. However, with partial funding, we are forecasting that we will run out of reimbursement funds in late 2025, and we'll need to continue to spend money in support of the program through 2026, which will negatively impact 2026 free cash flow.
Now I'll turn to the guidance and long-term targets we announced this morning, starting with some additional color on our 2024 projections. So the 2024 projections reflect our anticipated increase in Galileo spend and the impact of the push out of 5G spend from 2023. These investments, coupled with lower shipments and the aviation industry dynamics, challenging aircraft online in 2023 and the delay of Gogo 5G, will constrain our 2024, 2024 performance, as we stated previously. Gogo expects 2024 revenue to be in the range of $410 million-$425 million. This implies 5% overall growth, with equipment revenue expected to grow faster than service revenue.
Service revenue growth will be slower than the growth rate in 2023, as we project a significant number of upgrades from classic to AVANCE, driven by the FCC program, and while strategically important, will dampen aircraft online growth. We anticipate 2024 adjusted EBITDA in the range of $110 million-$125 million. This guidance reflects approximate operating expenses of approximately $40 million for strategic and operational initiatives, including approximately $8 million in expected Gogo 5G spend, approximately $20 million of Gogo Galileo development spend, approximately $9 million in LTE spend that is not reimbursable by the FCC, and approximately $3 million in additional operational initiatives. Our adjusted EBITDA guidance also includes approximately $4 million related to legal expenses tied to the SmartSky patent litigation.
We expect 2024 CapEx to be approximately $45 million, which includes approximately $25 million for the following strategic initiatives: approximately $12 million for Gogo 5G and $5 million for Galileo, and approximately $8 million for the LTE network build-out related to the FCC reimbursement program. We also expect free cash flow of $20 million-$40 million, which includes approximately $56 million of expected FCC spend, including non-reimbursable development spend and approximately $45 million in FCC reimbursement. Now turning to our long-term targets. We recently updated our long-term model, which reflects the launch of Gogo 5G and Galileo in the fourth quarter of 2024, and the build-out of the LTE network and associated customer conversion related to the FCC reimbursement program by 2026.
Our long-term targets are as follows: We expect revenue growth at a compound annual growth rate of approximately 15%-17% from 2023 through 2028, with Galileo contributing to revenue beginning in 2025. We expect we continue to expect free cash flow in the range of $150 million-$200 million in 2025. This does not take into account the effect of the FCC program. The projected significant increase of free cash flow in 2025 is due to increased EBITDA, driven by revenue growth, the launch of Gogo 5G and Galileo, reduced engineering design and development OpEx, and lower CapEx as investment in these strategic programs are completed, and positive net working capital, driven by inventory purchases and prepayments planned in 2024 for 2025 equipment shipments.
We expect annual adjusted EBITDA margin to be reaching 40% by 2028. While still projecting healthy margin, it is lower than our prior expectations of mid-40%, driven by the delay in 5G launch and increased share of Galileo revenue, with lower incremental margins compared to ATG. These updates reflect our expectations to perform strongly and drive further value creation for our customers and shareholders as we execute our strategy. Gogo's business continues to perform well. Our outlook underscores the 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 are anticipated to extend and enhance our long-term growth.
Before we open the call up for questions, I would like to join Oak in thanking the entire Gogo team for their hard work and dedication to our business and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks. We're now ready for our first question.
Operator (participant)
Thank you. Ladies and gentlemen, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, simply press star one one again. Please stand by while we compile the attendee roster. Our first question coming from the line of Simon Flannery from Morgan Stanley. Your line is open.
Simon Flannery (Managing Director)
Great, thank you very much. Good morning. Thanks for all the detail. If I could turn to Galileo, there's been concern about some delays on the OneWeb constellation, particularly around ground stations. You didn't really reference any delay concerns around that. I wonder if you could just help us understand what's the status of your understanding with OneWeb, and then any risk of some further delays because they could continue to delay commercial launch? And then on Starlink, you talked about small antennas. Can you just help us understand what you're assuming in terms of Starlink's ability to address your existing fleet? Is that small antenna gonna be competitive with the HDX antenna?
And just on the kind of cost, both of install and of service that you're seeing from these satellite services versus your existing ATG. Thank you.
Oakleigh Thorne (Chairman and CEO)
Sure. So, we believe Starlink—I mean, I'm sorry, OneWeb will have the ground network complete to our satisfaction by the time we launch. You know, we don't anticipate operating in the Soviet Union or China or, you know, North Korea, places like that. So people always need to be clear, "Oh, is it totally global?" Well, no, not really. You're not gonna be able to fly over places, you might get shot down. But, but generally, we think that they will be, they'll be, they'll be done in time for us, so we're, we're pleased about that. Your second question was about, I believe, the Starlink small antenna. You know, they haven't announced the small—
Simon Flannery (Managing Director)
Yes, exactly, and the pricing around Starlink versus your ATG band. Yeah.
Oakleigh Thorne (Chairman and CEO)
Yeah. So, well, we don't, they haven't announced a small antenna, so just for planning purposes, you know, we've assumed that they will. We don't know that they will. That's, you know, that's their decision, not ours. So we don't, you know, we don't know what it is. They've got, you know, various applications at the FCC for a wide variety of antennas of various different sizes, mostly for consumer market. But then they could, you know, repackage, you know, one of the smaller versions of those for aviation. It's difficult to do. We're not sure that those really are gonna be aviation grade in the long run and have the reliability and durability of our equipment, which is, you know, designed from the ground up for aviation.
But, so, you have to ask Starlink that question about what they might launch in terms of a small antenna. For us, it was just a planning assumption. Okay?
Simon Flannery (Managing Director)
Understood.
Oakleigh Thorne (Chairman and CEO)
I think your last, your last question was about install costs, all in.
Simon Flannery (Managing Director)
Yeah. Just when you're thinking about people looking at GEO versus LEO, are you gonna have a dual system where people use Galileo over water and use ATG domestically? And how do those—are you dramatically cheaper than a satellite solution?
Oakleigh Thorne (Chairman and CEO)
Yeah. I mean, today, it costs about $700,000 to install a GEO satellite solution. You know, we're much cheaper today than that. I think, you know, we will be less than half that cost in terms of, equipment sale plus installation. And that's for a new installation. Of course, if you have AVANCE, that'll be a lot cheaper because you won't have to do anything really inside the aircraft. You just have to add the antenna and the two cables, power in and power out, and the data in. So, we're considerably cheaper. We'll be considerably cheaper on service as well, as will Starlink. And we just used their recently announced $10,000 a month, you know, unlimited plan.
You know, today, you pay $30,000-$40,000 a month to a geostationary satellite provider for, you know, an unlimited global plan. So, you know, they're either gonna have to cut their their pricing a lot to compete, or, which will be a big hit to them in terms of their cash flow, or, or, you know, or lose business. That's a pretty tough choice. I think that, you know, the superiority of LEO over GEO is substantial, having used both. I mean, it's just, it's an order of magnitude improvement when you go to, to LEO. The latency is, you know, obviously much faster, and then, you know, the, the capacity is, is also greater. So it's a, it's a, it's a much better experience.
So when you combine the fact that it's gonna be much cheaper to install, it's gonna be much cheaper to operate, and the performance is much better, you know, we think that if Starlink keeps coming into the market, that they will impact, they'll have a big impact on the GEO players, and our Galileo product will do the same. And we think we have a few advantages or getting in some parts of that heavy jet market, which are that we do have 1,300 jets on AVANCE already. For them, it's a very easy upgrade to add our product. So, as I said in my script, I think we see, Starlink, if they enter, and us both, having a pretty significant impact on the GEO satellite players.
Simon Flannery (Managing Director)
Great. Just one last one. On SmartSky, you referenced some of the litigation expense. Any updates there on their kind of presence in the marketplace?
Oakleigh Thorne (Chairman and CEO)
No, not really. They, we don't see any progress by them in terms of installing aircraft.
Simon Flannery (Managing Director)
Great. Thanks a lot.
Oakleigh Thorne (Chairman and CEO)
Thanks, Simon.
Operator (participant)
Thank you. And our next question coming from the line of Rick Prentiss with Raymond James. Your line is open.
Ric Prentiss (Managing Director)
Thanks. Good morning, everybody.
Oakleigh Thorne (Chairman and CEO)
Good morning, Rick.
Jessi Betjemann (EVP and CFO)
Good morning.
Ric Prentiss (Managing Director)
Hey, a couple questions to follow along Simon's questions there, too. So as you think about the addressable market, how are you taking a shot at what you think your market share will be as we look over, say, the next decade? And then who do you share that market with? Is it SpaceX Starlink? Is it other LEO operators that you're starting to keep an eye on as well? But just help us understand kind of your, your base assumption to hit those free cash flow targets and the revenue CAGR targets about what the addressable market split up share might be?
Oakleigh Thorne (Chairman and CEO)
Yeah. So, I can't give you 10-year because we didn't do that. We just did 5.
Ric Prentiss (Managing Director)
Hope that [audio distortion]
Oakleigh Thorne (Chairman and CEO)
Will do. Okay. So yeah, this is all part of our, you know, annual long-term model update that, you know, creates the guidance and everything else. So yeah, we build it from the bottom up. We go both North America, we divide the world into North America and rest of world. We divide it into different segments of jets, and then we, you know, look at everybody's value proposition and where we think they're gonna be going in terms of pricing, product, et cetera, and then, you know, build the numbers up from there. So, you know, obviously, we've got a big head start over everybody in the small, mid-sized jet market. We actually have the largest share of the heavy jet market today, which a lot of people don't realize.
We've got 2,200 heavies, and I think the next biggest player has about 1,800. So, you know, we have our, we add our project rollout plans to that in terms of what we think we're gonna be getting in terms of upgrades, you know, new wins, et cetera. We look at, you know, our OEM positions and what the OEMs are gonna be producing and what our attachment rate is at those OEMs. You know, we go through the dealer channel, and we look at everything that's being sold there and estimate what our share is gonna be. So we build it. Really, it's very granular and bottom-up approach. I think, you know, I shared the numbers in my script. Today, if you look at the global market, and we include turboprops in our market, okay?
We have, of the installed planes, we're in the low 70% of the, of the global market. We're in the sort of low 80s in the U.S. market, which is by far the largest market. And even though there's gonna be a shift over the next 5 years, we kind of just maintain those market share levels. The overall market penetration, globally, today, only about 24%, I think, of, of aircraft, business aircraft, have in-flight connectivity installed, and I think we see that going up almost to 50%-60% over the next 5 years to, the mid-30s. So the reason we can kind of maintain share while others are also winning planes is that, of course, that the overall market's growing quite a bit in terms of installed aircraft.
We, you know, Starlink, in our, for planning purposes, and we don't know what Starlink's gonna do or if they're gonna succeed, but we take sort of a worst case view of the world, and so we plan on their succeeding on their FCC schedule as they've published it, and then we make the sort of bold assumption that they'll probably want to add a second antenna at some point. And so, you know, based on that, they and we have about an equal penetration of the heavy jets outside the U.S. And, you know, I think we get to 20% of that market, so I think they would get to something similar in our projections. And, you know, we think that given those assumptions, you know, they have a relatively strong start.
I'm not gonna give out the exact numbers where we think they are in five years, but it would be a very, a very successful program, compared to, you know, the, the launch of GEO satellite products, for instance, in, you know, the mid, around 2015, 2016. You know, they got up to, you know, 1,500, something like that, jets in about five or six years. I think, you know, you'd see something similar for Starlink.
Ric Prentiss (Managing Director)
Okay. That's very helpful and very granular, like you said. Thank you. I want to come back to the 2024 free cash flow guidance. Can you walk us through how we get from EBITDA, taking into account no cash taxes? You talked about cash interest. So help us walk through the start of the EBITDA of about $110 million-$125 million. How do we end up at $20 million-$40 million on free cash flow? Obviously, there's a lot of FCC stuff going on there. There's working capital. But just kind of help us bridge that EBITDA all the way down to free cash flow in 2024.
Jessi Betjemann (EVP and CFO)
Yeah. So, you know, so exactly, our adjusted EBITDA range is $110-$125. Our CapEx is projected to be at $45, and then we do have negative net working capital, so just kind of the main part of the difference, and there is a, you know, a lot of buildup of inventory that we're doing in 2024, in anticipation of 2024 and 2025 shipments. And then, of course, we also have the net interest that we have as well, included in there too.
Ric Prentiss (Managing Director)
Okay, so it really is the working capital and the inventory buildup that probably is the bigger swings there, and the—
Jessi Betjemann (EVP and CFO)
Yeah, the net working capital and interest.
Ric Prentiss (Managing Director)
Yeah. Yeah. Okay. And then, Jessi, I think you mentioned that, under the current funding for, as we call it, rip and replace, their spending will continue, but reimbursement would be played out unless they increase it. You mentioned that there could be a 2026 free cash flow hit. Can you put a fence post around that and let us know kind of what the current program funding and your current thoughts would be as far as the hit in 2026 free cash flow from the program?
Jessi Betjemann (EVP and CFO)
So, you know, as Oak mentioned, we, we don't anticipate, you know, needing the entire $334 million. And the reimbursements, you know, will end around the, you know, towards late 2025. So there'll be some impact in 2025, but a greater impact in 2026. You know, it's probably going to be somewhere in the range of $30 million-$40 million in 2026.
Ric Prentiss (Managing Director)
Okay. And, and the 25 long-term guidance of 150-200 excludes any effect from FCC. Would that be a negative effect in the 25 number as well from the FCC program? I know it's pretty complicated and a lot of moving pieces in D.C., but just wondering, is that a negative hit that would hit 25 from that versus that 150-200?
Jessi Betjemann (EVP and CFO)
So we—I mean, the reason why we've been saying it excludes, our guidance excludes it, is to be able to do the comparison to when we originally provided the targets. So that's why we wanna, you know, an apples-to-apples comparison. There is going to be a small impact in 2025. It's not as big as 2026. But yeah.
Ric Prentiss (Managing Director)
Okay.
Oakleigh Thorne (Chairman and CEO)
I think that we believe we'd still end up in the range even—
Jessi Betjemann (EVP and CFO)
Yeah, we do believe
Oakleigh Thorne (Chairman and CEO)
We end up in the range even with the FCC in 2025.
Jessi Betjemann (EVP and CFO)
Right. Obviously, depending upon timing, but as of, you know, what we're seeing now and the timing of the reimbursements, we expect that we will be in the range both with and without FCC.
Ric Prentiss (Managing Director)
Okay, that's helpful. And then last one for me. I think you mentioned you're getting your, your first Hughes antenna coming in, start trial in the summer. What's the—first, did I hear that correctly? And second, what is kind of the thoughts then of being able to ramp that up, following behind Simon's question about, you know, waiting for OneWeb, obviously, to hit the ground all the way there before launch. But where are you at on Hughes, and, and what's the kind of the ramp as far as getting antennas from Hughes?
Oakleigh Thorne (Chairman and CEO)
No, we're right on schedule to launch this product in mid-fourth quarter. So, that's the update. And this, you know, Hughes has performed exceptionally well so far, and this antenna arrived right on time, as called for in the project plan, and is testing well. So, you know, we're very pleased with the progress there and remain on track.
Ric Prentiss (Managing Director)
Okay. Thanks, everyone.
Oakleigh Thorne (Chairman and CEO)
Thanks, Rick.
Operator (participant)
Thank you. Our next question coming from the line of Louie DiPalma with William Blair. Your line is open.
Oakleigh Thorne (Chairman and CEO)
Hey, Louie.
Louie DiPalma (Research Analyst of Industrials)
Oak. Good morning, Oak, Jessi, and Will. I have a general question on hardware equipment costs. One of the main, you know, value propositions of AVANCE is the inexpensive and, you know, easier upgrade to 5G and the Galileo networks. And I was wondering, in general, what would you estimate is the difference in equipment cost for a customer to upgrade to hypothetically 5G versus if they were to rip and replace and try to go to a competitor's like LEO satellite solution.
Oakleigh Thorne (Chairman and CEO)
It all depends where you start, right? So if you've got, you know, L5 installed on the DDA antennas.
Louie DiPalma (Research Analyst of Industrials)
Yeah.
Oakleigh Thorne (Chairman and CEO)
It's gonna be. Yeah, it's gonna probably be about that. That's gonna be probably two-thirds the cost for equipment and installation that going to a competitor's satellite product would be.
Louie DiPalma (Research Analyst of Industrials)
Okay. That, that makes sense. Thanks for that. And, secondly, Oak, you referenced the FPGA 5G testing. When should we know if and when the new 5G chip is ready for production?
Oakleigh Thorne (Chairman and CEO)
Well, right now, it's actually, you know, these are very technical terms. So production in chip world means you're in mass production, and they're not there yet, obviously. But they are in production in our sense. They're in the pattern and mask generation phase right now, and that's what happens right before you start fabrication of the, you know, the chip silicon layer by layer. So that's where we are.
Louie DiPalma (Research Analyst of Industrials)
Okay. But when should we know if the new chip works in terms of, like, the 5G components and the non-5G components, in order to clear the hurdles that weren't cleared from last year?
Oakleigh Thorne (Chairman and CEO)
Yeah. Well, so the FPGA will let us test whether the software side of the chip works, 'cause that's what it is. It's sort of a big, it's a very big box. I went and spent some time with it yesterday. But it emulates the physical structure of the FPGA, and you can run the—I mean, of the 5G chip, and you can run the actual 5G chip software on it. So you get all the software testing out of the way in the FPGA stage, which is sort of novel and is giving us the ability to really accelerate the program. So, you know, I would say we'll know whether that is all going well in April, May timeframe. There's a lot of tests. It's very complicated.
You know, we've got 14 layers of the chip that have our - that are unique to us and run our software, and it's all about this, you know, accommodating things like how fast radio waves move at the speed of light, the Doppler effect and signal strength, and it's massively complicated. But we got a lab here in Chicago that emulates all that, and that's what we're doing now in doing that testing. So you'll know, we think April, May, if that software is all doing well, and then it'll probably - we don't have the fabrication masking just started, and you know, it'll probably be several weeks before we understand exactly how long it'll take to lay each layer of silicon.
And then once we know that pace, we'll know when the chip will come out of the fab. And then, and then, you know, we have to go through bring-up to actually test it to make sure it's all working. So, you know, we'll probably update people on that on the second quarter call, or if we have any milestones between now and then that we can announce publicly.
Louie DiPalma (Research Analyst of Industrials)
Great, thanks. And for Jessi, as it relates to the 2025 free cash flow guidance, you mentioned how it does not include the FCC reimbursement program, and you also discussed, I think, how for this year you have an $18 million receivable such that, like, the cash inflows seem to lag your cash outflows. And so is the FCC program expected to be negative for free cash flow in 2025, and is there any way to frame that?
Jessi Betjemann (EVP and CFO)
Yeah, as I was answering Rick before, that we there is going to be a small negative impact in 2025 for two reasons. One is the, you know, continue to get a little bit of that lag, but then the funds do run out in late 2025. But as mentioned, in terms of the guidance we provided, we feel that, you know, even with that, of course, if the timing of things change with the FCC reimbursement cycle, then that potentially can change things. But regardless, we do feel that we will still be within that range with FCC. But it is slightly negative in 2025.
Louie DiPalma (Research Analyst of Industrials)
Great. And my final one, you referenced the potential for debt paydown. Is there any framing in terms of how much, like, debt paydown would you be looking for, like, potentially to keep, like, the cash interest expense, you know, at that same, like, $33 million dollar, like, annual run rate? And is that what you're looking to do?
Jessi Betjemann (EVP and CFO)
No, I mean, I think that when we look at this, we wanna make sure that we kind of balance the use of our cash between debt paydown and, you know, potential additional returning, returning of capital to shareholders. So we'll look at both and, you know, kind of assess. We also need to see where our interest rate's gonna be going. But, you know, with all of this, we do need to consider the hedge stepping down. So we haven't necessarily identified an exact target yet that we're willing to share, but, but we'll, you know—
Louie DiPalma (Research Analyst of Industrials)
Okay.
Jessi Betjemann (EVP and CFO)
Keep all these different factors in mind.
Oakleigh Thorne (Chairman and CEO)
Well, and, the other major factor is share price. With the share price down where it is.
Louie DiPalma (Research Analyst of Industrials)
Right.
Oakleigh Thorne (Chairman and CEO)
Returning capital to shareholders becomes more attractive relative to paying down debt than if the share price were higher. Yeah, so the board will, you know, we're gonna have active conversations with our board on our plan. And as you know, we spent $10 million on share buybacks in Q4 and Q1 so far, and we can't trade today, so but we'll be in conversation with the board tonight about what we're gonna do.
Louie DiPalma (Research Analyst of Industrials)
Excellent. I think you're implying something, Oak. Thanks. Thanks a lot, everyone.
Will Davis (VP of Investor Relations)
Thanks, Louis.
Operator (participant)
Thank you. And our last question coming from the line of Sergey Dluzhevskiy with GAMCO Investors, Inc. Your line is open.
Sergey Dluzhevskiy (Research Analyst)
Good morning. Thank you for taking the questions. My first question is on Galileo. As you launch that product, what markets or market segments would you prioritize in your push to sell global broadband over the next two or three years?
Oakleigh Thorne (Chairman and CEO)
Well, I think you're asking what markets we would prioritize?
Sergey Dluzhevskiy (Research Analyst)
Geography.
Oakleigh Thorne (Chairman and CEO)
Geography?
Sergey Dluzhevskiy (Research Analyst)
Yeah.
Oakleigh Thorne (Chairman and CEO)
Oh, oh, geography.
Sergey Dluzhevskiy (Research Analyst)
Yeah.
Oakleigh Thorne (Chairman and CEO)
Yeah. Well, look, I guess I always start with the most attractive market. So to us, those are probably Europe, Middle East, India will be early on the list. You know, that, but you know, South America is very attractive markets as well, so we will be paying attention down there. And then probably Asia after that. That's rough order of events.
Sergey Dluzhevskiy (Research Analyst)
Got it. And, my second question, given where the company is today and significant organic growth opportunity, how do you guys think about, M&A? Maybe if you could remind us your M&A philosophy and, what makes sense for Gogo over medium term that could, accelerate the realization of your current strategy or just, enhance overall shareholder value in general?
Oakleigh Thorne (Chairman and CEO)
Yeah, I think our view is that our organic growth is the right place for us to invest capital to grow the company, and we see really nice returns on that, and we also feel that that is less risky than M&A. So we don't have an active M&A program right now, just based on that.
Sergey Dluzhevskiy (Research Analyst)
Got it. Thank you.
Oakleigh Thorne (Chairman and CEO)
Thank you.
Will Davis (VP of Investor Relations)
Thanks, Sergey.
Operator (participant)
Thank you, and I will now turn the call back over to Will.
Will Davis (VP of Investor Relations)
Hello, this concludes our fourth quarter earnings call. Thank you for your participation. You may now disconnect.
Operator (participant)
Ladies and gentlemen, that does end our conference for today. Thank you for your participation. You may now disconnect.