Gogo Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the Gogo Inc. 2nd Quarter Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Instructions will be given at that time.

Operator

As a reminder, this call may be recorded. I would now like to turn the call over to Will Davis, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, Michelle. Good morning, everyone. Welcome to Gogo's Q2 of 2024 earnings conference call. Joining me today to talk about our results are Oakley Thorne, Chairman and CEO Jesse Betchman, 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.

Speaker 1

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 ks 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 August 7, 2024. Any forward looking statements that we make today are based on assumptions as of this date, and we undertake no obligation to update these statements as a result of more information or future events. During this call, we'll present both GAAP and non GAAP financial measures.

Speaker 1

We have included a reconciliation and explanation of adjustments and other considerations of our non GAAP measures to the most comparable GAAP measures in our 2nd quarter earnings release 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 and A session with the financial community only. It's now my great pleasure to turn the call over to Oakley.

Speaker 2

Thanks, Will. Good morning, everyone, and thanks for joining us today. Gogo's 2nd quarter performance reflects the strength of our recurring cash generative service revenue model. Even as we navigate a product lifecycle transition and continue to invest in bringing out our next generation Gogo Galileo LEO satellite product and our Gogo 5 gs North America near to ground product. Gogo is approaching an exciting inflection point in our product lineup.

Speaker 2

In the months ahead, we 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 of ownership and with great customer support for every segment of the highly unpenetrated 40,000 plus aircraft global business aviation market. We believe 5 gs and Galileo will accelerate our revenue growth beginning next year as they deliver order of magnitude improvements in the speed of Gogo service, expand our total addressable market by 60% and extend customer lifetimes by providing easy and compelling upgrade paths for our advanced installed base. It's worth noting that because of record upgrade activity in the Q2, Avance now makes up 60% of Gogo's fleet. We consider every Avance installation a strategic win because it provides the customers with easier and cheaper paths to upgrade to new technologies like 5 gs and LEO with Gogo today and new network technologies in the future rather than to move to another connectivity provider. As we get close to launch, we're seeing our aftermarket customers adjust their purchasing behavior in anticipation of the Gogo 5 gs and Galileo products.

Speaker 2

This dynamic is reflected in our Q2 equipment revenue and in our revised guidance expectations for 2024. And this customer behavior isn't unique to Gogo. It's typical of what you see at other companies as they launch next generation products. Just look at Apple when it debuts the new iPhone. Sales of the older products start to slow as customers anticipate the arrival of newer, superior technologies.

Speaker 2

This morning, I'm going to start by highlighting some demand trends we're seeing in the BA market that underpin our bullish outlook, then provide an overview of our Q2 results and finally dive into progress on our strategic initiatives, which are aimed at reigniting our growth by launching products that meet the unique needs of every segment of the BA market. Jesse will then walk through the numbers and discuss our 2024 and long term guidance, which now reflects our most current expectations for 5 gs launch timing. Overall demand for business aviation flights and demand for connectivity on those flights remain strong and continues to support our growth trajectory. Demographic trends bode well for connectivity penetration as younger flyers are coming into the market. Though all ages want better in flight connectivity, demand for connectivity increases as the age of the flyer decreases.

Speaker 2

The good news is that Gogo has different products to satisfy all types of flyers depending on their connectivity needs. In the Q2, Gogo equipped BA flight counts were up slightly at 1.1% year over year And more importantly, flights remained significantly elevated from pre COVID levels with Q2 flight hours per day up 35% from Q2 2019. As for data demand, average megabyte consumption per day on our networks has risen 165% from Q2 twenty nineteen, demonstrating a step change in passenger demand and average megabytes consumed per flight hour, which has risen 96% over that same period and ran at 17% annual growth in Q2. We're seeing the biggest surge in demand at the high end of the market where cloud data storage and video conferencing are driving demand for much higher bandwidth than our traditional products we're designed to provide and where Galileo and 5 gs are well positioned to meet that demand. Finally, on demand, we see OEM order books and fractional sales of aircraft looking very strong and those trends will continue to drive growth in Gogo units online.

Speaker 2

The trend towards increasingly voracious data usage on aircraft is important to Gogo in 2 ways. First, of course, it creates a strong demand tailwind for our products. And second, it highlights the importance of the decisions we made when we sold our commercial aviation business 4 years ago to invest heavily in new technologies to dramatically improve the capacity and quality of our products to our customers. Gogo's continuous focus on future proofing our technology and infrastructure were patient and will continue to remain key to our long term success. Now let me turn to our Q2 performance.

Speaker 2

Revenue was slightly down about 1% year over year as record service revenue was offset by a decline in equipment revenue. On the equipment side, we saw a decrease in revenues of 17% year over year and 11% sequentially in the 2nd quarter. We attribute much of this to the product lifecycle dynamic I described earlier. Customers are delaying purchases in anticipation of Gogo 5 gs and Gogo Galileo. With that said, we still expect our 2nd highest year for Advanced shipments ever and grew total Advanced units online at quarter end 17% over the prior year to 4,215 aircraft or approximately 60% of our ATG installed base.

Speaker 2

Our advanced base will only grow faster as we incent our almost 3,000 Gogo Classic customers to migrate to LTE as part of our FCC secured networks program over the next 20 months. As a reminder, we also warned on our last call that our usual pattern of higher second half shipments might be reversed this year as we saw a boost in equipment orders last quarter driven by NetJets pull through demand and a shift of a few OEM annual bulk shipments into Q1 from later in the year. Within service, we achieved record revenue. This is the fuel of our long term business model, driven by Avance upgrade, even as total ATGU and its online and total declined slightly due to modest net deactivations in our classic product line. On the earnings side, Q2 EBITDA decreased 30% sequentially, mostly due to lower equipment revenues and increased operating expenses, mostly in legal fees as a result of the SmartSky litigation and a series of vendor financing issues, almost all of which will go away over the next year.

Speaker 2

On a positive note, as we invest deeply in the 5 gs and Galileo programs, free cash flow remains solid. Now for our progress on strategic initiatives. Gogo is focused on accelerating growth with a 3 pronged strategy. First, we want to expand our addressable market by expanding globally and by leveraging the flexibility of our Vans platform to deliver products at pricing that suits each segment of the highly unpenetrated 40,000 Business Aircraft Global Business Aviation market. 2nd, we want to drive customer loyalty by continually improving our ATG networks to drive conversion of classic customers to the advanced platform because they then have easy upgrade paths to new technology, which is 5 gs, Ku band LEO Networks and other new network technologies as they emerge.

Speaker 2

And 3rd, 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 in our strategic initiatives to achieve these goals. Let me start with Gogo Galileo. This is a very exciting time at Gogo as we ramp up our go to market plans, our regulatory approval process and production to support the Galileo HD X and FD X launches. As a reminder, this product category was born out of 2 conclusions during a deep dive strategic planning process in 2020 2021 after we sold the Commercial Aviation division.

Speaker 2

First, that ESA antennas and LEO satellite constellations were going to change everything in business aviation connectivity. They would support lightning fast connectivity with the extremely low latency critical to supporting applications like video conferencing. They would have high capacity to support heavy data applications like cloud based file sharing. They would enable small antennas that would fit well on all business aviation aircraft. They could be cheaper and easier to install than GEO antennas.

Speaker 2

They would provide truly global broadband coverage for the first time ever. They would enable service pricing that is very competitive with GEO satellite pricing and perhaps most important that the dramatic increase in value created by these offerings could accelerate IFC penetration dramatically in the global BA market. The second thing we anticipated in that planning process was that STARLINK would become a significant competitor, which has become evident as they ramped up installations in Q2. Though we will launch a little later than StarLink, we will launch with a product that addresses much more of the market and their offering and they have done us a big favor. They've made the BA market aware of how much better ESA LEO technology is for BA in flight connectivity than traditional GEO satellite solutions.

Speaker 2

Our Head of Sales captured it well, when he displays a picture of a fat mouse eating the cheese out of an already sprung mousetrap and observes that the second mouse gets the cheese. And we feel that Gogo is incredibly well positioned to get the cheese. Business aviation customers tend to be demanding, reliability is critical, space on the aircraft is at a premium, ease of installation is important and customer support is imperative. It's clear that StarLink's offering is just a repurposing of their consumer off the shelf products for aviation use and does not meet those demands. And that opens the door for meaningful product differentiation on our part, centered in 3 areas.

Speaker 2

Our equipment is aviation grade and designed from the aircraft up and satellite down for the specific needs of the business aviation market. Theirs is consumer grade. You could buy it at Best Buy and is repurposed and poorly suited for aviation. 2nd, our business model is business aviation focused with the type of personal customer support someone who just bought an $80,000,000 just spent $80,000,000 on an aircraft would expect from a service provider. While theirs is a web based appointment only chat service that does not allow customers direct access to aviation technicians.

Speaker 2

And finally, our partner OneWeb Network is an enterprise grade network designed to serve B2B customers with service level guarantees, while theirs is a consumer grade network aimed at 5,000,000,000 global consumers and many other markets with highly variable speed levels, a best efforts only service obligation and no commitment to fix pricing. Galileo comes in 2 versions, a smaller HDX terminal and a larger FDX terminal. So I should add, our FDX is still dramatically smaller than the StarLink terminal. The Galileo HDX terminal is our first to market midsize and smaller aircraft antenna and will deliver a very consistent almost 60 megabits per second, 12 to 60 times our current product offerings. It primarily targets 2 market segments, the roughly 12,000 midsized jets, small jets and turboprops registered outside North America that have absolutely no broadband solution today and those aircraft in the roughly 11,000 midsize and smaller size range that domicile inside North America that often fly international missions or want faster mean connectivity speeds than the 25 megabits per second that our 5 gs product will provide.

Speaker 2

The Galileo AFPX terminal is our best in class antenna and targets the roughly 9,700 super midsize and larger jets that fly global missions with a product that will deliver very consistent speeds in 145 to 195 megabits per second range, 40 to 200 times faster than our current product offerings. A huge advantage for us that is really resonating with Avance customers right now is that Galileo is a simple upgrade from any Avance installed plane. One only needs to add our HDX or SDX antenna on top of the fuselage and then run data to the already installed AVANCE box on the aircraft and power cabling from the aircraft to the Galileo terminal and you are done, cutting roughly $100,000 off the cost of a Galileo installation. Another advantage is that Advance is already both a line fit option in every OEM and an STC option on every currently produced model of aircraft in the aftermarket, rendering it relatively easy from an engineering and certification perspective for OEMs and dealers to offer Galileo. We've already signed 8 SDC agreements for Galileo covering 11 popular models of aircraft and have another 21 verbally committed covering another 17 unique aircraft models, which in total, these will all have a global service market of 17,585 aircraft.

Speaker 2

And I should note, we started taking orders from many of the dealers that have committed to developing SCCs. We've already signed 1 AM OEM for line fit on 4 models of aircraft and they've already set cut in dates for 3 of those models next year and those aircraft account for more than 100 deliveries a year. And we're actively engaged with several other OEMs on line fit deals. We remain on track to start shipping HDX terminals in Q4 and FDX terminals in the first half of twenty twenty five. We achieved a number of exciting milestones since our last conference call.

Speaker 2

We've announced our equipment and service pricing with a modest premium to our competitor, justified by our superior aviation grade equipment, our superior network of reliability and our superior levels of customer support. We're finishing up our go to market campaign and we'll launch our sales force this month focused on aggressively driving market penetration in order to capture the lifetime value of every Galileo customer and drive long term value and drive long term value creation for Gogo. In July, we started aircraft installation on our Challenger 300 and the next big certification milestones will be engineering flight testing in August and parts manufacturing authority or PMA in Q4. To conclude on Galileo, we're very excited. It will be a game changer for the business aviation industry and will be a major accelerant to Gogo's growth.

Speaker 2

Now let me turn to Gogo 5 gs, which is targeted at segments of the 21,000 midsize and smaller business aircraft market that slide predominantly in North America and want a good connectivity experience at a more affordable price in satellite solutions. Gogo 5 gs should achieve mean speeds of around 25 megabits per second, 5 to 25 times our current product lines and peak speeds of 75 to 80 megabits per second. On the aircraft, it consists of 2 belly mounted MB-thirteen antennas in an internal box containing a 5 gs air core. On the ground, it consists of 150 Gogo installed 5 gs base stations, solid towers across the United States and Southern Canada. As you all probably recall, on our Q1 call, we discussed a minor chip hardware redesign issue that would further delay our 5 gs launch.

Speaker 2

And we announced that we would provide guidance on the timing of our 5 gs launch on this call. That chip is going back into pattern and mass generation now and we have recalibrated all of our milestones and planned shipping 5 gs in the Q2 of 2025. We're continuing to work very closely with our vendor partners to smooth the path towards fabrication and launch. Importantly, the market continues to respond enthusiastically to the 5 gs value proposition with ongoing pre provisioning programs and a flood of STC programs that position us for a highly successful launch. We've already shipped 292 5 gs pre provision kits with MB13 5 gs antennas, which is up from 240 kits last quarter and 105 of those kits have already been installed and are flying using our 4 gs network with an L5 4 gs LRU.

Speaker 2

We've commitments from 5 OEMs with 1 already installing the MB-13s with the L5 line fit today. Because the L5 is the same form factor as the LX5, once the 5 gs chip is certified, those customers that has installed L5s with MB-thirteen can simply swap the LX5 in for the L5 and they'll be on the 5 gs network. On the certification front, we have 16 STCs for MB-13s completed with one version of Avance or another, covering 18 unique models of aircraft and 16 more in the works, covering 15 United models of aircraft. And in total, all of those representing 8,700 North American registered aircraft. We're confident that between our FPGA flights and a virtual simulator our team has built that replicates our entire 5 gs network that we will be able to test and validate 90% of our 5 gs gs program, which we refer to as Gogo Evolution.

Speaker 2

As a reminder, Gogo was awarded a $334,000,000 grant from the SEC under this program to incent us to accelerate the removal of Chinese telecom equipment from our 4 gs network. Overall, we're making great progress upgrading our customers from the old classic product line to LTE versions of the hardware and our AVANCE L3 and L5 products. This program has considerable benefits for Gogo and its customers. It will improve the speed of our 4 gs network 40% for customers using our Valuor and Avance L3 product. It will double the number of aircraft that the ATG4 gs network can simultaneously manage and it will accelerate the number of Gogo Classic customers upgrading to Avance, which has the strategic benefit of extending Gogo customer lifetimes due to the ease of upgrade to 5 gs and Galileo and other new technologies.

Speaker 2

We have a little under 3,000 customers still in our old classic product line that will need to convert from eBDO to LTE versions of the hardware before year end 2025. A little more than 900 of which are in fleets and a little more than 2,000 of which are smaller customers. We've had conversations with all about 150 of our customers and how they plan to convert. The vast majority have already indicated they will move to 1 Avance product or another. We currently have customer promotions in place to incent conversions and our dealers are doing a great job configuring their operations to transition customers at scale.

Speaker 2

We also have a special product we'll introduce later this year called C1, which will house both an eBDO and an LTE air card in a form factor that is an exact replica of our classic product. This will not improve service levels like upgrading to Avance, but will allow customers who delay swapping to Avance before we cut over networks more time to convert to Avance after the cut over. As I mentioned at the outset, Gogo is continuing to deliver outstanding service and solid performance as we invest and prepare to launch Gogo 5 gs in GALILEO. I want to thank the Gogo team. They've done an incredible job getting us to this point.

Speaker 2

Our long term outlook is supported by strong demand trends and we're strategically, operationally and technologically well positioned to continue to meet and exceed the needs of IFC passengers for the long term with the most complete product portfolio in the business aviation market. Gogo has the right strategy in place to continue to capitalize on the significant opportunity in our market and deliver long term value creation. And now, I will turn it over to Jesse for the numbers.

Speaker 3

Service revenue and solid free cash flow in the second quarter. We believe our performance continues to demonstrate the strength of our core business, fueled by recurring service revenue as we invest in our new products, Gogo 5 gs and Galileo. With the pull in of OEM equipment orders and timing shift of expenses, which resulted in high adjusted EBITDA in the Q1, our 2nd quarter adjusted EBITDA declined sequentially, but was ahead of expectations. We continue to believe that 2024 is the trough year for our growth and profitability within our long term plan extending through 2028. As the majority of our current strategic investments wrap by early 2025, we continue to target a significant acceleration in our free cash flow in 2025.

Speaker 3

In my remarks today, I'll start by walking through Gogo's Q2 financial performance, then I will turn to our balance sheet and capital allocation priorities. And finally, I'll conclude with additional context on our revised 2024 guidance and long term targets, which now reflects the currently expected timing for Gogo 5 gs launch. For the Q2, Gogo's total revenue was $102,100,000 a decrease of about 1% year over year and 2% sequentially, driven by a decline in equipment revenue. Gogo delivered record service revenue of $81,900,000 up 4% over the prior year and just slightly higher than in the Q1. Our ATG aircraft online was 7,031, a 0.5% decline year over year and down 1% sequentially.

Speaker 3

The quarterly decline was driven by higher classic deactivations and lower new activations due to as Oak mentioned the product lifecycle dynamic we are experiencing as customers defer purchases of the launch of Gogo 5 gs and Galileo. Total advanced aircraft online grew to 4,215, an increase of 17% year over year and 3% sequentially and now comprises 60% of our total fleet. Our progress driving advanced penetration reflects the record upgrade activity in the Q2 from classic to advanced within our existing fleet. Avance aircraft online has doubled in less than 3 years. Converting our Classic base to Avance remains a priority and we expect these conversions to accelerate in 2025.

Speaker 3

We continue to maintain a conservative view on improvements in the maintenance cycle times that have slowed installations. Every upgrade to Avance is a strategic win for Gogo as it prolongs customer retention by providing a seamless upgrade path to Google 5 gs and Galileo once launched. However, as previously mentioned, the upgrade process and product life cycle dynamics will continue to put pressure on ATG aircraft online over the coming quarters. Total ATG ARPU grew 3% year over year to $3,468 0.3% growth sequentially, reflecting the price increase we initiated in the Q1. The launches of Gogo 5 gs and Galileo are anticipated to further expand our ARPU growth opportunity over time.

Speaker 3

Moving to equipment revenue, Gogo delivered 2nd quarter equipment revenue of $20,100,000 with 231 advanced shipments. Equipment revenue was in line with expectations and declined 17% year over year and 11 percent sequentially, which we attribute to a combination of the pull forward OEM shipments in the Q1 and our overall place in the product lifecycle. Gogo's equipment revenue typically ramps toward the back half of the year, but given the strong first quarter shipments and the product lifecycle dynamic in the channel, we expect that trend to reverse for 2024. Turning to profitability, Gogo delivered service margins of 77% in the 2nd quarter, higher than our expectations due to lower network and data center costs. We continue to expect service margins to be in the 75% range this year with a slight decrease in future years as Go Galileo service revenue increases as a percentage of the mix.

Speaker 3

Service revenue and service profit margin are the primary levers for free cash flow generation and long term value creation. Equipment margins were 18% quarter, in line with expectations and lower than prior year and prior quarter periods, primarily as a function of lower revenue due to lower shipments. We expect equipment margins to decline in the back half of twenty twenty four due to lower shipments largely due to the product lifecycle dynamic. Now on to operating expenses. 2nd quarter combined engineering design and development, sales and marketing and general administrative expenses increased 36% year over year and increased 28% sequentially to $41,200,000 The year over year increase was mainly driven by legal expenses.

Speaker 3

External legal expenses in the 2nd quarter comprised $9,500,000 out of the total general and administrative spend of $22,000,000 driven by litigation matters, support for vendor financing issues and global expansion efforts. As we have discussed, 2024 is a significant investment year as we continue to invest in Gogo 5 gs and Galileo programs. Our free cash flow target in 2025 assumes that many of these costs roll off as we head into next year. We expect that these product investments will support revenue growth acceleration and significant free cash flow growth in 2025 and beyond. In terms of Gogo 5 gs, in the 2nd quarter, our $3,200,000 of 5 gs spending was comprised of $1,000,000 in OpEx and 2 $200,000 in CapEx.

Speaker 3

We now expect 2024 will include approximately $5,000,000 of OpEx and approximately $8,000,000 in CapEx with total 5 gs spend for 2024 at approximately $13,000,000 This is a shift from our previously mentioned $6,000,000 of 5 gs OpEx and $14,000,000 in CapEx. This adjustment reflects the push of Gogo's 5 gs timing to the Q2 of 2025, as well as the more efficient allocation of resources and the timing of expected milestone payments to our vendor partner. We continue to maintain our estimate of $100,000,000 in total external development and deployment costs for our 5 gs program and anticipate no negative impact on the overall program costs from the most recent delay. Moving on to our Gogo Galileo initiative. In the Q2, Gogo recorded $2,200,000 in OpEx and $1,000,000 in CapEx related to Gogo Galileo.

Speaker 3

We now expect 2024 will include approximately $15,000,000 of Gogo Galileo OpEx due to a shift of expense to 2025 approximately $4,000,000 in CapEx. We continue to expect external development costs for both the HDX and FDX solutions to be less than $50,000,000 in total, of which $13,000,000 was incurred in 20222023, dollars 19,000,000 is projected in 2024 and the remainder is expected in 2025. Additionally, we anticipate approximately 90% of Gogo Galileo's external development costs will be an OpEx. Moving on to our bottom line, Gogo delivered $30,400,000 in adjusted EBITDA in the 2nd quarter, a 31% decrease year over year and 30% decrease sequentially. The decrease was primarily driven by lower equipment revenue and increased operating expenses as anticipated.

Speaker 3

Net income of $800,000 in the 2nd quarter decreased 99% year over year and 97 percent sequentially. The decline was primarily due to an $11,000,000 after tax unrealized loss related to a fair market value adjustment to the convertible note investment we made in our key chipset supplier to support continued progress on our 5 gs chip that we called out on our Q1 earnings call. Potential future share price volatility will continue to affect our net income as we account for mark to market adjustments to the fair value of this investment. Based on our substantial net operating loss balances at the end of 2023, including $446,000,000 in federal net operating losses and $377,000,000 in state net operating losses, we had a net deferred income tax asset of $207,000,000 at the end of the quarter. We do not expect to pay meaningful cash taxes through our 5 year planning horizon.

Speaker 3

I will now provide a status update on our SEC reimbursement program. In the Q2, we received a $5,700,000 in FCC grant funding and our program to date total received is $19,200,000 As of June 30, 2024, we recorded a $17,500,000 receivable from the FCC and we incurred $8,000,000 in reimbursable spend during the quarter. 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. In line with the plan we submitted to the FCC, we were granted our 1st 6 months extension last quarter, pushing the program completion deadline to January 21, 2025. In our application, we stated that we will need to have multiple extensions to complete the program and are planning to request the next extension in the Q4.

Speaker 3

As a reminder, with partial funding of the program, we are forecasting that we will run out of reimbursement funds in late 2025 and will need to continue to spend money in support of the program through 2026, which is expected to negatively impact 2025 and 2026 free cash flow. On to free cash flow, in the 2nd quarter, we generated a solid $24,900,000 in free cash flow, an increase from $13,300,000 in the year ago period, driven by lower cash interest and improved net working capital. Free cash flow decreased from $32,100,000 last quarter, primarily due to lower EBITDA and the timing of the SEC reimbursement from our rip and replace program this quarter. Now I'll turn to a discussion of our balance sheet. Gogo ended the quarter with $161,600,000 in cash and short term investments and $603,000,000 in outstanding principal on our term loan, with our $100,000,000 revolver remaining undrawn.

Speaker 3

Gogo's net leverage of 2.9 times remains in line with our target range of 2.5 times to 3.5 times. Our cash interest paid for the 2nd quarter net of hedge cash flow was $7,800,000 As we previously mentioned in prior quarters, we have a hedge agreement in place and had 87 percent of our loan hedge. At the end of July, the hedge stepped down to $350,000,000 with the strike rate increasing from 0.75 percent to 1.25%, resulting in 58% of the loan currently hedged. Starting in the Q4, the hedge cash flow is expected to decline approximately $3,000,000 per quarter. Assuming no further debt pay down, the cash interest paid for 2024 net of hedge cash flow is expected to be approximately $34,000,000 Now let me provide a recap of Gogo's capital allocation priorities.

Speaker 3

1st, maintaining adequate liquidity. 2nd, continuing to invest in strategic opportunities to drive competitive positioning and financial value, including Gogo 5 gs and Galileo. 3rd, maintaining an appropriate level of leverage for the economic environment with a target net leverage ratio of 2.5 to 3.5 times. And finally returning capital to shareholders. We have executed across all priorities.

Speaker 3

In the second quarter, we repurchased approximately 1,500,000 shares at a total cost of $13,000,000 and over 3,100,000 shares for approximately $28,000,000 in the last three quarters. Gogo has approximately $22,000,000 remaining of the $50,000,000 repurchase authorization our board approved in September 2023. We believe we are well positioned to execute our product investment requirements, evaluate further debt pay downs and opportunistically repurchase shares. Our flexibility to pay down further debt and return to our shareholders is expected to increase as our free cash flow ramps up in 2025. Now, I'll turn to our financial outlook.

Speaker 3

We have updated our 2024 financial guidance and our long term targets to reflect 2 changes. First, for the Gogo 5 gs launch timing that is now expected to occur in Q2 2025 and second for the lower aircraft online at the end of 2024 than originally projected. However, note that we have not completed a full bottoms up long term plan at this time, as we normally do that annually in the January timeframe. For our 2024 fiscal year, we now anticipate 2024 revenue in the range of $400,000,000 to $410,000,000 versus our prior guidance of $410,000,000 to $425,000,000 The reduction is primarily tied to lower equipment revenue in the second half of the year due to the product lifecycle dynamic in the channel ahead of the launch of the Gogo 5 gs and Galileo. Secondarily, lower than expected aircraft online is anticipated to reduce our service revenue growth.

Speaker 3

We now expect 2024 CapEx to be approximately $35,000,000 versus our prior guidance of $45,000,000 Our revised target includes approximately $20,000,000 for strategic initiatives including Gogo 5 gs, Galileo and the LTE network build out and is a decrease compared to the $30,000,000 for these initiatives stated in the prior quarter. The reduction in strategic spending is primarily due to the $6,000,000 shift in 5 gs spend to 2025, LTE spend shift to 2025 and also some cost savings. We anticipate 2024 free cash flow in the range of $35,000,000 to $55,000,000 which is an increase from our prior guidance of $20,000,000 to $40,000,000 This includes approximately $45,000,000 of expected FCC spend, including non reimbursable development spend and approximately $40,000,000 of FCC grant reimbursements received. The decrease in SEC reimbursements and spend compared to prior expectations as a result of timing shifts within the program. The increase in our free cash flow guidance is reflective of the lower expected CapEx and lower expected net FCC program spend.

Speaker 3

In addition, we continue to target adjusted EBITDA at the high end of the previously guided range of 100 and $10,000,000 to $125,000,000 However, we now expect operating expenses for strategic and operational initiatives, including Gogo 5 gs and Galileo to reduce to approximately $26,000,000 compared to $33,000,000 previously. Despite lower revenue, we are maintaining adjusted EBITDA guidance, reflecting the shift in spend to 2025 for strategic initiatives, offset by an increase in legal expenses incurred to date and expected to continue in the rest of the year. For our long term targets, we are now targeting free cash flow of $150,000,000 in 2025, excluding the effect of the FCC program versus our prior target of a range of $150,000,000 to 200,000,000 The change from prior guidance is tied to top and bottom line impacts of the latest timing of Gogo 5 gs launch to Q2 2025 and lower than expected aircraft online at the end of 2024. Over the long term, we reiterate that we expect revenue growth at a compound annual growth rate of approximately 15% to 17% from 2023 through 2028, with Gogo Galileo materially contributing to revenue beginning in 2025. And we continue to expect annual adjusted EBITDA margin to be reaching 40% by 2028.

Speaker 3

In summary, even in this challenging period in our product lifecycle, Gogo's outlook underscores the significant value creation potential for our customers and shareholders that we expect to unlock by executing our strategy and investing in key initiatives that we believe will drive and sustain long term growth. Before we open the floor for questions, I want to echo Oak's sentiments in expressing my gratitude to the entire Gogo team for their hard work and commitment to our business, as well as their dedication to delivering exceptional service to our customers. Operator, this concludes our prepared remarks. We are now ready to take our first question.

Operator

Thank you. Our first question comes from Sebastiano Petit with JPMorgan. Your line is open.

Speaker 4

Hi, thanks for taking the question. I was hoping you could help us maybe think about expected ARPUs or price points as it relates to GALILEO? And then maybe kind of stepping back, 5 gs being a bit delayed here, but more broadly, any help on helping us think about the 5 gs pricing strategy that we should be like thinking about as it pertains to next year in the long term revenue guidance? Thank you.

Speaker 2

Sorry, everybody, I was on mute. So generally, 5 gs ARPU would be about $2,000 on average higher than our current ARPU. And then the HDX and FDX would be priced at higher price points. And I don't know that we've shared the average ARPU yet, but you can actually see the pricing on our website now. So they were reflecting greater coverage around the world and reflecting higher bandwidth.

Speaker 2

HDX and FDX are priced at premiums to 5 gs.

Speaker 3

Okay.

Speaker 4

And if I can maybe just

Speaker 2

oh, sorry. Hey, Jesse. Yes, Jesse, I don't know if you want to go in any more detail in terms of the exact document we're projecting to those.

Speaker 3

Well, obviously, it depends upon a range depending upon the plan that we're we will be providing. But we are expecting an increase in ARPU as Galileo starts to take off. As a reminder though, I mean in 2025, we won't necessarily see that much impact with regards to the service revenue. It will be more of the equipment revenue and then you'll see the service revenue really start to take off more in 2026. Got it.

Speaker 4

Thank you. And a quick follow-up, just thinking about, yes, Avance, can you help us think about the new planes online between maybe a migration perspective or net new customer standpoint? Just trying to think about the drivers there behind the nice increase you saw. Thank you.

Speaker 2

Jesse, do you want to go into the activations?

Speaker 3

Yes. I mean, so this year, we have been in this quarter, we noted, our units online was impacted by lower new activations than what we were expecting. And that is due to the product lifecycle dynamic that we talked about. We also had the higher deactivation. And I think that our expectation for the rest of the year is that will continue.

Speaker 3

But then come next year, we would expect obviously with the launch of these two products that our new activations would accelerate as well as being able to kind of neutralize our net deactivation rate.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from Ric Prentiss with Raymond James. Your line is open.

Speaker 5

Thanks. Good morning, everybody. Hey, Ric.

Speaker 2

How are you doing?

Speaker 3

Hey, got a couple

Speaker 5

of questions. Obviously, you've called out a couple of times the customer behavior while they pause for the new stuff to come in. How many aircraft are you expecting, APG aircraft are you expecting as you look through the rest of this year into, let's say, Q2 next year?

Speaker 2

Jesse, you can get into more precise numbers. I think we expect a little bit more degradation in total unit online count until we get our new products launched.

Speaker 3

That's right.

Speaker 5

So if you had 105 aircraft net on 2Q that same kind of magnitude 100 each quarter or does it accelerate from there?

Speaker 3

No, we're I mean, we're not anticipating it to reach hopefully reach those levels, but there will be some deterioration, but not necessarily up to the 100.

Speaker 5

Okay. So more coming off, but maybe not at the pacing you saw in 2Q?

Speaker 3

That's right.

Speaker 5

That's right.

Speaker 3

And as a reminder, in Q1, we had that unique situation in Q1 with the hourly day activation.

Speaker 4

Okay.

Speaker 5

You've called out a couple of times, I think the vendor financing hitting some cost side.

Speaker 2

Give us

Speaker 5

a little color on that? What's happening there? And what kind of costs are being incurred?

Speaker 3

Yes. So in general, the legal expenses were very high in the quarter. So I wanted to highlight that inflating our G and A expense. But with regards to the vendor financing issues, as noted, we had an investment in a convertible note in Q1 and Q1 and Q2. And so the activity for that, the legal support of that, which is not normal business, that was one area.

Speaker 3

And then also in our 10 Q, you'll see a disclosure around the supporting a revolver commitment for Airspan that is not necessarily effective until Airspan emerges from bankruptcy, but we have partnered with Fortress to support a revolver. And there's legal support for that as well. So we're really supporting our vendors in this and this unusual activity. So we wanted to kind of call out that unique spend.

Speaker 5

Got you,

Speaker 2

right. Okay. Yes, I mean, in case of AveraSpan, they went through a prepackaged bankruptcy, of course. So we are when that happens, you also have to spend money making sure that you defend your existing rights and your contracts, etcetera. So it was both we helped in terms of helping them with some financing to get through it all, but we also had to protect ourselves.

Speaker 2

Okay.

Speaker 5

And last one for me, following up on Sebastiano's question. Obviously, got the pricing on the website for the Galileo. Oak, you make a point about your network, your bandwidth, your customer service and customer support. What kind of anecdotal or outright detail do you have as far as how are customers valuing price versus coverage versus customer service?

Speaker 2

You mean on a relative basis to each other? Yeah. Yeah. I mean, I think that customers do value having a relationship with somebody that they can trust, who they've been doing business with for a long time, who has a very responsive customer support. Has been very consistent in terms of how they price and the customer feels that they can count on.

Speaker 2

And I think that's probably the highest value of anything. And when you look at the products themselves, our network and our network will perform about the same as StarLink's, frankly, and I think ours will be more stable and reliable in terms of being pinned to a higher mean connectivity rate. So I think that'll be valued by customers. And then the equipment side, we manufacture equipment that can be put anywhere in the aircraft inside the pressure vessel, outside the pressure vessel, doesn't require any maintenance, etcetera, etcetera. StarLink is consumer grade.

Speaker 2

It's what you would have in your home. It's going to work for a while. There's going to be question about how long it's really going to be reliable and how long it can withstand the rigors of business aviation in terms of planes that go from 130 degrees inside the cabin before the passengers arrive to minus 60 at 40,000 feet. So there's reasons we build equipment aviation grade and they really they haven't done that. So I think there's a million little things that are kind of wrong about how they're going at things.

Speaker 2

But right now, people that have had it installed are using it and they're liking it a lot because it's a much better experience than any of the current IFC products out there. In a way that kind of helps us, we don't have to be I don't think we have to be crusaders for LEO. I think people of the markets already seeing that LEO is a real improvement. So I think in the end that kind of helps us. And I think then we'll win with all those little differentiators around service, aviation grade, our aviation focus that will sway a lot of the market towards our products.

Speaker 5

Last one for me is the 5 gs launch now 2Q, are we thinking early 2Q, mid-2Q, 'twenty five, late 2Q, 'twenty five? And what else might cause that to be at risk?

Speaker 2

Well, I would sort of say mid-2Q right now.

Speaker 5

A lot of the risk we will

Speaker 2

be able to retire or has been retiring frankly in 2 ways. 1 is our FPGA flights where we've got all the chip software loaded on an FPGA that we're flying with. That's in a couple of things. First of all, it was one of the ways that we identified some of the issues that our chip provider has to provide. So we got to those early before they cause problems after coming out of fabrication a year down the line or whatever.

Speaker 2

And second of all, that allowed us to validate our own software model of our network, which means that we can actually continue to test virtually now and we are and that will identify a lot of issues inside the network as well before we ever even get the chips. So those two things help a great deal. There's still some risk around the actual chip fabrication, which is thought to begin early in September. And once it comes out, there will be some bring up risk. But the amount of scrutiny that's been paid to this chip at this point, I'd be shocked if there was a problem when it came out.

Speaker 2

Great. Thanks, everybody.

Speaker 6

Thanks, Rick.

Operator

Thank you.

Speaker 2

Thank you, Rick.

Operator

Our next question comes from Scott Searle with ROTH Capital Partners. Your line is open.

Speaker 7

Hey, good morning. Thanks for taking the questions. Hey, good morning, guys. Quick clarification for Jesse. Legal expenses were relatively high this quarter.

Speaker 7

I'm wondering what you're thinking about and factoring into your expectations in the second half of this year. And if you could remind us what they were in the Q1. And then to follow-up on Rick's question around 5 gs, it seems like your comfort level of this launching in mid second quarter is a lot higher than we've had in prior conversations. I'm wondering if you could walk us through the steps and the milestones here. It sounds like now you're expecting chip delivery in September.

Speaker 7

Is there a new spin on that chip? I was wondering if you could just kind of lay out some of the milestones that we should expect over the next couple of quarters?

Speaker 3

Yes. So I can take the first one. The legal expenses, it was $9,500,000 and that was across litigation expenses as well as the vendor financing we spoke about and also global expansion that our normal efforts that we're doing for global expansion. We do expect that to decrease as there was a bit of a high point in Q2. So we'll not be at that level of magnitude going forward in Q3 and Q4.

Speaker 2

Okay. And then, Scott, for milestones, I think I didn't say the chip would be delivered in September. It says it starts fabrication in September. So that's one milestone. Then coming out of fabrication is another.

Speaker 2

Bring up is a third when they complete bring up and then ships to us. And so arrival of chips with us would be another milestone. Now obviously, we will install and start flight testing with it right away. And then it really gets to PMA and STC, which are regulatory and PMA is regulatory and the STCs in terms of approvals for aircraft getting done. I think those are the main milestones going forward.

Speaker 2

Okay, great. And lastly, if I could, competitive

Operator

landscape, I was wondering if you could just give us an update on that

Speaker 7

front. We don't hear a lot about SmartSky. I'm wondering where they fit into the equation. And then specifically on StarLink, while they will be a competitor going forward, given their presence, given their network, there's been a lot of talk recently about the mini kind of factoring in somehow into the equation. I'm wondering if you could address specifically that issue in terms of FAA regulatory issues around something like that in terms of that creeping into the market and or impacting pricing?

Speaker 7

Thanks.

Speaker 6

Sure.

Speaker 2

Well, SmartSky is really not a factor in the market at this point there. They haven't well, I'll just put it this way. I don't think they have any revenue generating customers. In terms of the litigation with us, we think that case in many ways is basically over at this point. They as you might recall, Scott, there were 2 sets of patents, one set that expired in the 2030 and one that expires one set of patents that expires in August of this year.

Speaker 2

In discovery and one of the reasons our legal expenses are so high is that discovery ended up being quite extensive. We had 4 times as many documents to review as we had anticipated and initially However, in that discovery, it was discovered that SmartSky knew about prior art to the patents that were that are expiring in 2,030 and that they did not reveal that prior art to the Patent and Trademark Office. So that has raised a very significant equitable conduct issue for them and most likely lead to those patents being determined to be invalid. And you might recall that we have often said that we thought they didn't have any valid patents that we infringed on and this is the reason why. So that I think eliminates frankly the risk of those long term patents being an issue.

Speaker 2

And then the short term ones, we have always did not infringe on patents. We think we will win on that. However, even if by some miracle we were to lose, 5 gs is not coming out to May now, and those patents expire in August. So there's not going to be a whole lot of damages in terms of would not be a whole lot of damages in terms of the impacts on us. So that's SmartSky.

Speaker 2

The Mini, look, there's all kinds of little toys people use in business aviation, I mean, sorry, general aviation to get connectivity. There are people that fly low with their cell phones on. But that's not typically what people do in business aviation. And you'll see a lot of guys goofing around, who I would consider general aviation flyers, not business aviation flyers, trying to put the mini in the windshield and the like. That is not going to be a solution that's going to satisfy business aviation flyers for a couple of reasons.

Speaker 2

I mean, for instance, you really you're not you got to kind of get the speed through the fuselage of the aircraft, okay? In other words, the radio waves aren't going to penetrate the fuselage of the aircraft and hit the mini sitting inside the aircraft. So you have to put it in the windshield essentially on the dashboard, if you will. These satellites are coming from flying at a very high speed and you've got to pick up one after another in at a very high rate. And that will work okay if you're flying your plane in the direction the satellites are coming from.

Speaker 2

But if you're not flying in that direction, your MINI is not looking the right way, you're not going to have reception. So it's going to lead to very unreliable connectivity and that's fine for some people. But it's not fine for the bulk of the business aviation market. There are also safety concerns and having an antenna fly around if there's a sharp banking or something like that, that doesn't make the FAA happy. The FAA would kind of have to catch you on the runway doing it, and they probably wouldn't like that very much.

Speaker 2

But it's pretty unlikely, frankly, that, that would happen. And frankly, the last thing is that StarLink doesn't want to sell you that at that price. And so when they detect that you're flying, they turn you off. So that's the business model question, maybe StarLink will do something about. But all in, it's not going to be a very satisfactory performance.

Speaker 2

It could have safety implications. And right now, you're not supposed to be able to do it from the vendor.

Speaker 7

Great. Very helpful. Thanks, guys.

Operator

Thank you. Our next question comes from Simon Flannery with Morgan Stanley. Your line is open.

Speaker 6

Great. Thanks a lot. Good morning. To start off, just on the churn or the DX, I think in the past we've had them waiting for maintenance upgrades and so forth. Are any of these customers turning to competitors or where are these aircraft going?

Speaker 2

We have seen a little bit of churn to competitors, Simon. We had 11 that left us for a Ka solution.

Speaker 6

Like a Viasat or something?

Speaker 2

Yes. And then we had 10 that we think left us for StarLink that told us they left us for StarLink. So there's a bit of that on the margin there.

Speaker 6

Okay. And you'd expect that to continue through the balance of the year until we get these products up?

Speaker 2

I would. Yes, I think that, that will. I think it's the good news behind those numbers is that it's happening because people have tremendous demand for connectivity. And I think as I talk to flight departments and the like, especially for larger companies, the issue is that now with all the file sharing going on and everybody's spreadsheets live in the cloud, they don't live on their PC. It's just putting a huge strain on older products like our older products and frankly a lot of the older geo products as well.

Speaker 2

And then you've got multiple video conferences going on in the aircraft at the same time. So that's all those are all applications that LEO is going to support really well. And so I think we're fortunate that we're going to be well positioned to serve those. And I think it will be very competitive. But StarLink is there first with solution.

Speaker 2

And so they're getting a lot of attention at the high end of the market right now. So I think we'll see some pressure there until we get our FDX antenna out.

Speaker 6

Okay. And you talked before about Starlink having a smaller antenna. Do you think the mini is that antenna or do you think they're working on another smaller antenna that's going to be more suited to business aviation?

Speaker 2

I'm not sure that Mini is that solution, but I also don't get the impression right now they're working on a smaller one for business aviation. I think they feel like they can fit this colossal antenna they've got on smaller aircraft and they're going to try and FTC them on those aircraft. And you can put an antenna on anything, but it looks like an AWACs and you have a smaller antenna. So you got to move a lot of other stuff on top of the aircraft when you install it, which drives up installation costs. There's a lot of inconveniences to it.

Speaker 2

So we think that our FDX in particular, which is the antenna that will compete with StarLink, it's our larger antenna still much longer, much smaller than their antenna. It's going to be suitable for a lot more aircraft than they're very large one. But my point there was only that I think that they may think they're okay with just the big one right now.

Speaker 6

Got it. And then maybe you could talk a little bit about OneWeb. I think they've faced some delays before any updates on their network status in terms of being able to support your timeline on Galileo later this year. And I think it'd be really helpful just to understand more about your contracts with them and how the pricing works on your bandwidth consumption. Is it all sort of variable rate bit consumption, any volume discounts, things like that?

Speaker 6

Any color on margins and so forth to help us think about what happens at the bottom line from the revenue flow through?

Speaker 2

Yeah. So we have said before that we have, I guess, traded off lowest price per megabyte for flexibility, because we need to be able to react quickly to pricing changes in the market. And we can't be in a position where we've got a floor price on an aircraft or something like that, that would cause us to not be able to have a margin on whatever we sell. So we haven't gone into much more detail than that, but I'll just put it that way that no matter what we end up selling the product for, we're going to have margin on it. So that's number 1.

Speaker 2

The first part of your question again, Simon?

Speaker 6

Yes, just about their network and their operational readiness to support Galileo.

Speaker 2

Yes, their network, they're still rolling out some of their ground stations, but we feel good about where they're going to be when we launch at the end of this year. And so we feel good about that. They've also they're almost complete with upgrading the software in their network and to handle aviation. So that's also in good shape. So we feel good about it.

Speaker 6

Okay. And that allows you to give kind of QoS guarantees to your customers off their network?

Speaker 2

Yes, yes, it

Speaker 3

does. Simon, just one thing to add, with regards to the margin. So we did indicate obviously that the margins will be slightly lower than the very healthy strong margins we have in ATG. However, when you look at our long term model through 2028, we do still expect our service margins to start with a 7 handle, even with the mix of Galileo.

Speaker 6

Great, thank you.

Operator

Thank you. And our last question comes from Louie DiPalma with William Blair. Your line is open.

Speaker 2

Hey, Louie.

Speaker 8

Both Jesse and Will, good morning.

Speaker 2

Good morning. How are you doing?

Speaker 8

Doing okay. The launch of HD X is a pivotal milestone for Gogo in this dynamic market. You mentioned your expectation to receive the GALILEO HDX PMA in the Q4. When do you expect to receive the STCs and for the first customers to begin generating GALILEO service revenue?

Speaker 2

They'll start coming in

Speaker 8

Q1, Louis. Great. And those STCs and the PMA, that's a regulatory hurdle. Your Twitter account recently blogged how you had, I think, successful motion table testing with the HDX antenna. What are the major technical hurdles that remain that could potentially delay receiving the PMA or just the general functionality of the antenna?

Speaker 2

There's not a lot of technical risk with this technology because this is not like 5 gs, there's a whole new 5 gs chip being developed, which is where the risk has been and it's caused all of our issues. Right now, Hughes is already using different form factors of this antenna in aero. And so it's not unproven technology. So the next step is we finished installing our Challenger 300, which is happening right as we speak, started in July. It should be done very shortly.

Speaker 2

Then we'll go into flight testing. The PA process starts when you start developing a system. So you've been in constant dialogue with the FAA for, in our case, a year plus in this. And what they're trying to do in that is validate the authenticity of all the pieces and parts that go in there because to make sure that they're all aviation grade as you originally stated they would be. So that is something that I don't think has a lot of risk around it at this point.

Speaker 2

We're in touch with the FAA and proving to them that it's got the parts that we said it was going to have in that. So I don't think that that's going to be a huge risk. And then on the SDC side, once we start flying on the Challenger, I think we'd be able to show you can put it on a plane, you can fly it and it works. So I don't think there's a ton of risk there, to be honest.

Speaker 8

Great. And how far behind should the launch of the FDX be relative to the HDX in terms of the launch?

Speaker 2

Well, the FDX is, as we said, first half next year. And I we're going to I'll leave it at that on this call and we'll give more details probably on the next call.

Speaker 8

Great. And one final one for Jesse, if rip and replace funding is increased to cover your full $334,000,000 what would be the significance to like your free cash flow generation in 20252026 potentially?

Speaker 3

Yes. So, I mean, right now we've indicated that, one, we've mentioned that our current plans would not be to deliver all the way up to the 324,000,000 So the total value has decreased a bit. But it would cover the negative hit that we're expecting in 2025 and 'twenty six, but not all of it, because mainly there's probably going to be around 10 $1,000,000 or so that we would still need to spend in $25,000,000 that's not reimbursable. So that piece we would still need to cover, but then in 2026, it would fully, cover everything that we would need to do there for the most part.

Speaker 8

Great. And one final one, should service revenue stay flattish even as aircraft online trend lower over the next year? Should like the you've recently had ARPA slightly pick up, should that offset the decrease in aircraft online? Or how should we think about that?

Speaker 3

Yeah. So I think that, you know, that's the expectation, you know, through next year. Because again, we won't necessarily see an uplift from the new products coming in yet on service revenue. So they'll be either flattish to very modest growth next year.

Speaker 8

Awesome. Thanks everyone. And we'll be looking forward to update for the HD X on the Challenger as you do the flight testing over the next month.

Speaker 2

All right.

Speaker 4

You bet.

Speaker 2

You bet. Thanks, Lee. Thank you.

Operator

Thank you. There are no further questions. I'd like to turn the call back over to Will Davis for closing remarks.

Speaker 1

Thank you, everyone, for joining our 2nd quarter earnings conference call. We look forward to talking with you soon.

Speaker 5

Thank you. You may disconnect.

Operator

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone have a great day.

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Earnings Conference Call
Gogo Q2 2024
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