Gogo Inc. (NASDAQ:GOGO) Q1 2024 Earnings Call Transcript May 7, 2024

Gogo Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to Gogo Inc's First Quarter 2024 Earnings 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. [Operator Instructions] I would now like to hand the call over to William Davis, Vice President, Investor Relations. Please go ahead.

William Davis: Thank you, Atif, and good morning, everyone. Welcome to Gogo's first quarter of 2024 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO, 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 May 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. 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 first 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's now my great pleasure to turn the call over to Oakleigh.

Oakleigh Thorne: Thanks, Will, and good morning, everyone. And thanks for joining us on this call. So Gogo achieved strong results in the first quarter, setting a record for free cash flow in open market share repurchases, even as we continue to invest in bringing our next-generation products to market, Gogo Galileo, our lower orbit satellite product, and Gogo 5G, our next-generation North American air to ground products. We believe these products will accelerate our revenue growth beginning next year, as they deliver first order of magnitude improvements in the speed of Gogo service. Second, deliver a 60% increase in our total addressable market and third, extend customer lifetimes by providing easy and compelling upgrade path for our advanced install base.

Our first quarter performance was fueled by advanced equipment revenue, which experienced a rebound from Q4 2023 and record service revenue, driven by a modest price increase and record advanced upgrades. We consider every advanced installation, a strategic win, because it provides that customer with easy upgrade paths to new technologies like 5G and LEO with Gogo rather than going to the expense of installing equipment from competitors. The jump in orders we had in Q1 is great proof of that point. Our surge in orders was driven by two factors. First, OEMs that want to line-fit install of anti IL fives, often with 5G antennas so that those plans are ready for easy upgrades to 5G or Galileo. And second, pull through in the OEM and aftermarket channels from net jets who also wants to sell all five and NB13 to be ready for either 5G or Galileo.

This morning, I'm going to start by highlighting some demand trends we're seeing in the BA market to continue to underpin our bullish outlook, then provide an overview of our Q1 results and finally, dive into our progress on strategic initiatives. Jessi will then walk through the numbers and discuss our 2024 and long-term guidance. Overall, demand for business aviation flights and demand for connectivity on those slides remains strong. Gogo equipped BA flight counts were up slightly year over year, our reversal of last year's slightly downward trend. And more importantly, flights remained significantly elevated from pre-COVID levels with Q1 up 29% from Q1 2019. As for data demand, consumption per flight hour was up 13% from the year ago quarter and up 101% from pre-COVID Q1 2019, demonstrating strong demand growth.

Further evidence of this is as twice as many customers requested service plan upgrades in the quarter as requested downgrades. This demand is further demonstrated by strong OEM order books and very strong fractional sales, all of which we expect will drive Gogo shipment growth over the next few years. Now let me turn to our Q1 performance. Revenue was up 6% year-over-year, with service revenue up 4% and equipment revenue up 13%, quarter-over-quarter total revenue was up 7% with service revenue up 1% and equipment revenue up 34%. Our record service revenue was driven by a 19% increase in AVANCE service revenue over prior year and a 5% sequential increase over Q4 2023, offset by a decline in Gogo Classic service revenue as customers migrate to AVANCE.

We grew total AVANCE units online 19% over prior year to 4,110 aircraft or 58% of our ATG installed base. Our AVANCE base beachhead will only grow faster as we incent our 3,200 Gogo Classic customers to migrate to LTE as part of our participation in the FCC, secure and trusted network program, better known as rip and replace. We had a slight decline in overall units online for the quarter as we implemented an inflation driven 4% price increase, which included adding minimums to our hourly plans. And as expected, some hourlys dropped their service accounting for a loss of less than $400,000 of annual service revenue. Equipment revenue was driven by AVANCE equipment sales being up 24% year-over-year and 39% sequentially from Q4 2023 and was partially offset by declines in our old narrowband satellite equipment revenue.

As I mentioned, the increase in equipment orders was driven by NetJets pull-through demand and a shift of a few OEM annual bulk shipments into Q1 from later in the year. And no inventory in the channel grew, the number of units that are not committed to a particular customer went down to 84 units from 108 units at the end of Q4 2023. On the earnings side, in the quarter, we achieved our highest Q1 EBITDA ever, driven by first strong equipment sales, second, some permanent OpEx savings, and third, some changes in the timing of project related OpEx. I'm also proud that Gogo set a new free cash flow record, which demonstrates the strength of our business even as we invest deeply in the Gogo 5G and Galileo programs. Now for our progress and strategic initiatives.

Gogo's focus on accelerating growth with a three-pronged strategy. First, we wanted to expand our addressable market by taking our broadband offerings global for the first time and by leveraging the AVANCE platform to deliver products at pricing that serves each segment of the 39,000 aircraft level BA market. Second, we want to drive customer loyalty by continually improving our ATG networks to drive conversion of Classic customers to the AVANCE platform, so that they have easy upgrade paths to new technologies as they emerge. And 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 the strategic initiatives along all three of these prongs.

Let me start with Gogo Galileo, and I'll start with a little bit of background. After we sold our Commercial Aviation division in 2020, we went through deep dive strategic planning around the BA business and came to two conclusions; first, that ESA antennas and LEO satellite constellations are going to change everything in business aviation connectivity. It would support lightning fast connectivity. They would enable small antennas that would fit well on all BA aircraft, they could be cheaper and easier to install than GEO antennas that would provide truly global broadband coverage for the first time ever and their service pricing can be very competitive with GEO satellite pricing. And most important, that the dramatic increase in value created by LEO offerings would accelerate IOC penetration dramatically in the global BA market.

The second thing we realized was that StarLink would become a significant competitor and that has now happened, as they entered the market with STCs and two aircraft lines earlier this year. Gogo has a history of disrupting our own industry. In fact, Galileo isn’t our first LEO product launch. In 2000, we migrated 1,500 customers for more than analog ATG system to LEO Iridium. We designed and manufactured the airborne systems, some of which are still line fit at OEMs today, and we still service more than 4,000 aircraft globally on the Iridium network. Flying 24 years ago, our focus with Galileo has been on developing an aviation grade product suite, tailored to the unique needs of the DA customers. StarLink on the other hand, is focused on mass producing consumer off-the-shelf products, for much bigger markets and then trying to repurpose those for aviation.

They may have some initial success, if for no other reason than the allure of Mr. Musk, but ultimately, the simplicity of our Galileo terminal installation, the superior reliability of our equipment and the white glove customer support, we offer position Gogo to compete well and capture a significant share of this market. So with that background, let me give you an update. Galileo comes in two versions, smaller HDX terminal and a larger FDX terminal. The HDX terminal is a small antenna, that will deliver a very consistent 60 megabits per second, which is 12 to 60 times the speed of our current product offerings and will fit on all Business Aircraft, targeting two major market segments. The first roughly 12,000 mid-sized jets, small jets and turboprops registered outside North America that have absolutely no broadband solution available today.

And second, those aircraft inside the roughly 11,000 midsize and smaller jets to domicile inside North America that often fly international missions or want faster connectivity than ATG alone can provide. The Galileo FDX terminal is a larger antenna that will deliver very consistent speeds, approaching 200 megabits per second, roughly 40 to 200 times the speed of our current product offerings and it targets the roughly 7,000 global super mid-size and larger heavy jets that generally fly intercontinental or long-range missions. A huge advantage for us is at Galileo is a simple upgrade from any AVANCE installed plane. One only needs to add our HDX or FDX and turn on the fuselage and then run data and power cabling into the aircraft. And given that AVANCE is already line-fit option at every OEM and has STCs on every currently produce model of aircraft, it will be relatively easy from an engineering and certification perspective for OEMs and dealers to offer Galileo.

We've already signed four STCs agreements for Galileo. We have 10 were verbally committed and three in negotiations, which all in will cover 10,500 jets and 6,200 turboprops globally. We remain on track to start shipping HDX terminals in Q4 and FDX terminals in the first half of 2025. We achieved a number of exciting milestones since our last conference call. In March, we completed end to end connectivity using the HDX antenna on the fully deployed Eutelsat OneWeb LEO satellite network. The next three big milestones will be aircraft installation in July, engineering flight testing in August and parts manufacturing authority or PMA in Q4. In April, we announced our first STC partnership, which significantly is with a European MRO for a very small size aircraft the CJ series, demonstrating that we indeed can fit on any aircraft and that we have global distribution reach.

Also in April, Gogo was granted Earth Station in Motion approval from the Federal Communication Commission to commercialize and operate the Galileo HDX and FDX antennas. This is important not only for commercializing Galileo in the United States, but acts as a precedent for authorization in many other countries. To conclude, we are very excited about Galileo. It will be a game changer for the business aviation industry and will be a major accelerant for the growth of Gogo. Now let me turn to Gogo 5G. As you all know, more than a year ago, we completed our initial 150 tower network rollout. We completed our 5G data center upgrade. We received PMA for our MB13 5G airborne antennas and for our LX5 5G jet box, but with a 4G chip. As you also know, we're still waiting for our 5G chip.

That chip has failed, bring up twice, but has now been redesigned and it was meant to go into account fabrication again this month. On the good news front, we've been able to start flight testing on the actual network using the chip software on an FPGA simulation of the chip. Unfortunately, in testing and issue was identified that has chip hardware design implications. That issue has led to a minor chip hardware redesign, which is now an integration testing and must be complete before fabrication can begin. We currently expect the launch of Gogo 5G to occur a few months later than previously stated fourth quarter of 2024 and are working with our vendors to finalize that schedule, which we will discuss on our Q2 earnings call. The good news is that this was discovered now before the chip was refund, saving what could have been a much longer delay.

Despite this, the market continues to respond enthusiastically to the 5G 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 244 5G pre-provision kits with MD13 5G antennas, approximately 80 of which have already been installed and are flying today using our 4G network. We have commitments from five OEMs with most of those under agreements and minority installing the NB13s with 65s line fit today. Because L5 is the same form factor as the LX5, once the 5 chip is certified, those customers can simply swap the LX5 for the L5, and they'll be on the 5G network. On the certification front, we have 11 STCs for MB13s, completed 16 more in the works, representing 8,371 North American registered aircraft.

We're confident that between our FPGA flights in a virtual simulator, our team has built that replicates our entire 5G network that we will be able to test and validate 90% of our 5G functionality and network. Before we received the final 5G chip. Gogo 5G should achieve mean speeds of around 25 megabits per second, five to 25 times our current product lines, and peak speeds of 75 megabits to 80 megabits per second. And we believe it is the perfect product for midsize and smaller business aircraft that fly North American missions on great speed at a better value than competitive satellite products. Now, let me turn to the FCC rip and replace program. The program was enacted under the Trump administration to incent wireless carrier carriers to accelerate the removal of Chinese telecom technology from their networks.

Gogo was awarded a $334 million grant under that program. Because there are more qualified grants than originally planned, funding for all brands were cut back to 39% of the original award, which in Gogo's case, was cut back to $132 million. The White House included full funding for the program and its supplemental funding request to Congress last year. And there are two bills in Congress with bipartisan support that would fully fund the program right now. Based on changes we've made to our FCC 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. But the current partial funding, about 70% of the reimbursable costs of replacing all EVDO ground equipment and moving Gogo Classic customers to LTE, would be covered by the grant.

And that is what is reflected in our long-term guidance there. There's also another $25 million of spend associated with the program that is non-reimbursable, and that is also reflected in our long-term guidance. This program has considerable benefits for Gogo and its customers. It will improve the speed of our 4G network 40% for customers using our advanced L3 product. It will double the number of aircraft that the ATG 4G network can simultaneously manage and it will accelerate the number of Gogo Classic customers upgrading to advance, which has the strategic benefit of extending Gogo customer lifetimes due to the ease of upgrade to 5G and Galileo from advanced platform equipment. We have 3,200 aircraft still on our old classic product line that will need to convert from EVDO to LTE versions of the hardware inside their plane, around 900 of which are in fleets and a little more than 2,200 of which are smaller customers.

All of the fleet customers are in active discussions and how they plan to convert and most are leaning towards upgrading to L5 so that in the future, they can easily upgrade either 5G or Galileo. On the smaller customer side, we've had conversations with all, but 150 of them. Of those we've spoken with, 60% have already voiced a preference for what they would like to convert to. And almost all of them indicate that we'll move to one ADVANCE product or another. We currently have customer promotions in place to incent conversion, and our dealers are doing a great job configuring their operations to transition customers, at scale. We also have a special product we will introduce later this year called C1, which will house both an EVDO and an LTE Air Card in a form factor is an exact replication of our classic product.

These will not provide any enhanced performance. However, they will be relatively inexpensive and will only require a few hours to swap with the old classic boxes. We call this a time machine because it allows customers who delay swapping to ADVANCE, before our cutover date time to convert to events after the cutover. To zoom out, Gogo is approaching an exciting inflection point in our product cycle, as we anticipate the launches of Gogo 5G and Gogo Galileo, Gogo will soon have the most complete product portfolio in the BAIFC Industry with products that offer the right performance, the right coverage, at the right total cost and great customer support for every segment of the highly un-penetrated 39,000 aircraft global BA market. We're excited about our future, and believe Gogo is well positioned to capitalize on the significant opportunity in our market and deliver long-term value creation to shareholders.

And now, I'll turn it over to Jessi, for the numbers.

Jessi Betjemann: Thanks, Oak, and good morning, everyone. Gogo generated record service revenue and free cash flow in the first quarter with adjusted EBITDA coming in well above expectations. While our results benefited from some timing related to equipment revenue and expenses. They highlight the strength of our core business as we invest in our new products, Gogo 5G and Galileo. We continue to believe that 2024 is the trough year for our growth and profitability within our long-term plan through 2028. With most of our strategic investments concluding 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 first quarter financial performance.

Then I will turn to our balance sheet and capital allocation priorities. And finally, I'll conclude with a positive update to our 2024 guidance and additional context on the reiteration of our long-term targets. For the first quarter total revenue was $104.3 million, up 6% year-over-year and 7%, sequentially. Top line was driven by record service revenue of $81.7 million, up 4% year-over-year and 1%, sequentially. Our ATG aircraft online reached 7,136, up 1% year-over-year and down 1%, sequentially. The quarterly decline was driven by higher deactivations, of which approximately 80% was attributed to the attrition of ROV contract aircraft, as a result of the price changes we implemented this quarter. However, the loss of these aircraft has a very low impact on service revenue of less than 0.1% for the quarter due to the low-ARPU they generate.

Another driver for high deactivations this quarter was due to an increase in the number of aircraft sold that we believe a majority of which will reactivate in the coming months under new owners based on historical trends. Importantly total ADVANCE aircraft online through 4,110, an increase of 19% year-over-year and 3% sequentially. And now comprise 58% of our total fleet. Our number of ADVANCE aircraft online has doubled in less than three years. We continue to expect a strong year of ADVANCE activations in 2024, as we upgrade our classic ATG customers, 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 ADVANCE is a critical part of our strategy, and it extends customer lifetimes due to the easy upgrade path to Gogo 5G and Galileo, once launched.

However, consistent with our prior comments, this process will mute the ATG aircraft online growth rate over the coming quarters. As Oak mentioned, we had record ADVANCE upgrades in the first quarter. Total ATG ARPU grew 2% year-over-year and 2% sequentially to $3,458, driven by pricing changes. The launch of Gogo 5G and Galileo is anticipated to further expand our ARPU growth opportunity over time. Moving to equipment revenue, Gogo demonstrated a strong rebound from the prior quarter and delivered a record first quarter equipment revenue of $22.6 million and 13% year-over-year increase due to a pull-in of shipments for two significant OEM partners earlier than planned, demonstrating strong demand for global connectivity. Gogo's equivalent revenue typically ramps toward the back half of the year.

But given the shipments we had in Q1, we expect that dynamic to shift for 2024. On a sequential basis, equipment revenue rose 34%, reflecting the strong order flow this quarter as well as the $4 million reserve we recorded in Q4 2023 due to a specific customer circumstance that reduced revenue last quarter. We continue to expect a strong rate of growth from equipment revenue in 2024 driving the overall revenue growth for the rate for the year. We shipped 258 advanced units this quarter, which is a record for our first quarter up 16% year-over-year and up 28% sequentially. Turning to profitability, Gogo delivered service margins of 78% in the first quarter, better than expectations due to lower network and data center costs and relatively flat sequentially.

We continue to expect service margins to be in the 75% range this year with a slight decrease in future years. As Google Galileo service revenue increases as a percentage of the mix, service revenue and service margin continued to be the primary levers for free cash flow generation and long-term value creation. Equipment margins were 30% in the first quarter, 20 percentage points higher than the prior year period and well above expectations. The increase was primarily due to higher equipment revenue that came in earlier than planned and non-reimbursable costs related to the FCC reimbursement product program in the prior year. Equipment margins were 21 percentage points higher sequentially, also driven by the higher equipment revenue in the quarter, coupled with lower inventory reserves due to extended warranty and reserves recorded in the prior quarter, driven by a customer contract renewal.

We expect equipment margins to be in the low 20% range this year with a slight decrease in future years as the mix of Gogo Galileo units sold increases overtime. Now onto operating expenses. First quarter, combined engineering, design and development, sales and marketing and general and administrative expenses increased 11% year-over-year and decreased 8% sequentially to $32.2 million. The year-over-year increase was mainly driven by legal expenses related to the SmartSky patent litigation as well as higher spend on Galileo. We continue to expect higher legal expenses in the coming quarters relating to the launch of Galileo and the ongoing SmartSky patent litigation. 2024 will be a significant investment year as we continued to invest in our global 5G and Galileo programs.

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 5G in the first quarter, our $1.6 million of 5G spending was comprised of $0.6 million in OpEx and $1 million in CapEx. We now expect 2024 will include approximately $6 million of 5G OpEx and approximately $14 million in CapEx with total 5G spending for 2024 remaining unchanged at approximately $20 million. 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 most recent delay of described. Moving onto our Gogo Galileo initiative, in the first quarter, global recorded $2.6 million in operating expenses related to Galileo.

We now expect 2024 will include approximately $17 million of Galileo OpEx and approximately $6 million in CapEx. We continue to expect external development costs for both the HDX and FDX solutions to be less than $50 million in total, of which $30 million was incurred in 2022 and 2023, $23 million is projected in 2024, and the remainder is expected in 2025. We anticipate approximately 90% of Gogo. There's external development costs will be in OpEx. Moving on to our bottom line, Gogo delivered $43.3 million in adjusted EBITDA in the first quarter, a 9% increase year-over-year and 23% increase sequentially. The growth was primarily driven by strong equipment sales, an increase in service gross profit driven by record service revenue. Adjusted EBITDA exceeded expectations driven by the timing of OEM orders and certain 5G and Galileo related project spend shifting to later in the year.

The timing shift and equipment orders and spend contributed to our record -- contributed to our record result in the first quarter. And while we have narrowed our 2024 adjusted EBITDA guidance to the high end of the range, we expect that the first quarter will be the high EBITDA quarter for the year. Net income was $30.5 million in the first quarter, up 49% year-over-year. The increase was primarily due to a $13.1 million unrealized pre-tax gain, which was $9.9 million net of tax from the $5 million investment in a convertible note offering of our key chipset supplier to support continued progress on our 5G chip. Net income in the second quarter may be negatively impacted from this investment. If there is an unrealized loss based on the share price on June 30.

For any future share price volatility will affect our net income in future quarters from mark-to-market adjustments to the fair value. Based on our substantial NOL position at the end of 2023 include -- the including $446 million in federal net operating losses and $377 million in state net operating losses, we had a net deferred income tax asset of $206 million at the end of the quarter. We do not expect to pay meaningful cash taxes through our five-year planning horizon. I will now provide a status update on our SEC reimbursement program. In the first quarter, we received $11.9 million and SEC grant funding and our program to-date total received is $13.5 million. As of March 31, 2024, we recorded a $15.2 million receivable from the FCC, and we incurred $8.8 million in reimbursable spend during the quarter.

This receivable is included in prepaid expenses and other current assets on our balance sheet with corresponding reductions to property and equipment, inventory and contract assets and with a pickup in the income statement. Gogo's original one-year term to complete the FCC reimbursement program was set for July 21, 2024. However, we filed our for our first six month extension, which was granted by the FCC on March 29, extending the program completion deadline to January 21, 2025. In our application, we stated that we would need to have multiple extensions to complete the program and are planning to record request the next extension in the fourth quarter. As a reminder, the partial funding, 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 2026 free cash flow.

In the first quarter, we generated record free cash flow at $32.1 million, an increase from $20 million in the year ago period and $28 million last quarter. Both the year-over-year and quarterly increases were primarily driven by FCC reimbursements from our rip and replace program this quarter, higher EBITDA and our cash interest. Now I'll turn to a discussion of our balance sheet. Gogo ended the quarter with $152.8 million in cash and short-term investments and $605 million in outstanding principal on our term loan with our $100 million revolver remaining undrawn. Gogo's net leverage of 2.7 times remained in line with our target range of 2.5 times to 3.5 times. As we previously mentioned, we have a hedge agreement in place and we currently have 87% of our loans 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 the first quarter net of hedge cash flow was $7.7 million, assuming no further debt paydown to cash interest paid for 2024, net of hedge cash flow is expected to be approximately $34 million. Now let me turn -- let me provide a recap of good capital allocation priorities. First, maintaining adequate liquidity. Second, continuing to invest 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 times to 3.5 times. And finally, returning capital to shareholders.

We have executed across all priorities with an authorization of up to $50 million for our share repurchase program, our Board of Directors approved in September 2023. We continue to maintain a strong balance sheet and cash position, while executing on our share repurchase program. As a reminder, Gogo repurchased approximately 480,000 shares for a total cost of approximately $4.8 million in the fourth quarter of 2023. In the first quarter this year Gogo repurchase approximately 1.1 million shares for a total cost of approximately $10.1 million. In April 2024, the company repurchased approximately 1.1 million shares for $9.3 million. We believe we are well-positioned to execute our product investment schedule, evaluate further debt paydown and opportunistically repurchase shares.

Our flexibility to pay down further debt and return capital to shareholders should increase as our free cash flow ramps up in 2025. Now I'll turn to our financial outlook. We positively updated our 2024 financial guidance, while reiterating our long-term targets. Importantly, note that our 2024 financial guidance and long-term financial targets do not reflect a potential delay in Gogo 5G beyond 2024. To the extent that we become aware of additional information about the timing of the Gogo 5G launch as the year progresses, we will determine whether to update this guidance during our regularly quarterly earnings announcements as appropriate. For our 2024 financial guidance, we continue to target 2024 revenue in the range of $410 million to $425 million, implying 5% overall growth with equipment revenue growing faster than service revenue.

While we had better than expected equipment revenue for the quarter, it was mostly due to timing within the year. We continue to believe service revenue growth will be slower than the growth rate in 2023 as you project a significant number of upgrades from Classic to the AVANCE driven by the STC program. And while strategically important will dampen aircraft online growth. We now expect adjusted EBITDA at the high end of the previously guided range of $110 million to $125 million, reflecting operating expenses of approximately $33 million for strategic and operational initiatives, including Gogo 5G and Galileo. Our guidance also includes approximately $5 million in legal expenses tied to the SmartSky litigation The increase in adjusted EBITDA guidance is mainly due to a shift in spend from OpEx to CapEx in our strategic programs and some OpEx savings realized in the first quarter.

We expect 2024 CapEx to be approximately $45 million, which includes approximately $30 million for the strategic initiatives, including Gogo 5G, Galileo and the LTE network buildout. We anticipate free cash flow of $20 million to $40 million, which includes approximately $56 million of expected SEC spend, including non-reimbursable development spend and approximately $45 million in SEC reimbursements. Free cash flow guidance remains the same despite an increase to adjusted EBITDA guidance as there was a shift in spend from OpEx to CapEx and fluctuations in networking capital. Our long-term targets remain unchanged. We reiterate that we expect revenue growth at a compound annual growth rate of approximately 15% to 17% from 2023 through 2028, with Galileo materially contributing revenue beginning in 2025.

We continue to expect annual adjusted EBITDA margin to be reaching 40% by 2028. Finally, we expect free cash flow in the range of $150 million to $200 million in 2025, which reflects increased EBITDA driven by revenue growth with the launch of 5G and Galileo and 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. This does not take into account the effect of the FCC program. In conclusion, Gogo continues to perform well as we invest in the launches of Gogo 5G and Galileo. Our outlook illustrates 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 we believe will extend and enhance our long-term growth.

Before we open the call up for questions, I would like to join us 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 your first question.

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