Gogo Inc. (NASDAQ:GOGO) Q4 2023 Earnings Call Transcript
Gogo Inc. (NASDAQ:GOGO) Q4 2023 Earnings Call Transcript February 28, 2024
Gogo Inc. reports earnings inline with expectations. Reported EPS is $0.11 EPS, expectations were $0.11. 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: Good day and thank you for standing by. Welcome to Gogo Inc. Fourth Quarter 2023 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] Please note that today’s conference is being recorded. I would now hand the conference over to your speaker host, Will Davis, Vice President of Investor Relations. Please go ahead.
Will Davis: Thank you, Olivia, and good morning everyone. Welcome to Gogo’s fourth quarter 2023 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; and Jessi Betjemann, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future performance of the Company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on the conference call. Those risk factors are described in our earnings release filed this morning and are more fully detailed under our risk factors in our annual report on 10-K and 10-Q and other documents that we have filed with the SEC.
In addition, please note that the date of this conference call is February 28, 2024. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events. During the call, we will present both GAAP and non-GAAP financial measures. We have included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter earnings release. This 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 will host a Q&A session with the financial community only.
It is now my great pleasure to turn the call over to Oakleigh.
Oakleigh Thorne: Thanks, Will, and good morning, everybody. 2023 was a busy year for Gogo. We continued to grow our high margin service revenue and to drive Gogo's strong cash flows propelled by accelerating adoption of Gogo's AVANCE platform and fueled by strong business aviation demand for connectivity. At the same time, we're making great strides in our investments to future proof our business by extending the technology frontier in aviation with Gogo 5G and our low earth orbit satellite product, Gogo Galileo. We believe these new technologies will deliver order of magnitude improvements in the speed of Gogo service that they'll increase our total addressable market by about 60% and that they'll extend customer lifetimes by providing easy upgrade pass for existing ADVANCE customers.
With the addition of Gogo 5G and Galileo, Gogo will have the most complete product portfolio in the business aviation IFC industry with products that offer the right performance, the right coverage at the right total cost with great customer support for every segment of the highly unpenetrated 39,000 aircraft global business aviation market. We also navigated temporary aviation industry headwinds related to parts and labor shortages and busy maintenance schedules. And though those continue to impact our OEM and dealer partners, we are seeing suspension intervals starting to shorten and reactivation rates starting to pick up, which will hopefully help boost aircraft online this year. Despite the delay in the development of our Gogo 5G chip, the market continues to respond enthusiastically to the 5G value proposition with ongoing pre-provisioning programs and a flood of STC programs that we believe position us for a highly successful launch late this year.
And on top of that, we're executing the FCC Secured Networks Program, the support from the U.S. Government to enhance the security of our nation's infrastructure and at the same time deliver meaningful benefits to Gogo's network and growth trajectory. As Jessi will describe in a moment, based on our new long-term forecast, we're bullish on Gogo's opportunity for significant growth and long-term value creation. Today, we serve a highly unpenetrated market with 76% of the world's 39,000 business aircraft flying without a broadband solution and demand for connectivity in those aircraft growing dramatically from both passengers and operators. As a result of these trends, we expect global broadband connectivity penetration across all business aircraft to grow from 24% today to the mid-30% range by the end of our five-year planning horizon.
Over that horizon, we expect Gogo's share of global installed aircraft to remain at roughly 75%, with our North American share remaining in the low-80s and Gogo's rest of world share going from 0% today to the high 20% range by 2028, which equates roughly to 600 aircraft. To be conservative in our Gogo projections, we've assumed that Starlink achieves its currently published FTC schedule and launches a smaller antenna in the next two years. And for planning purposes, we projected as Galileo and Starlink come online, Sheryl will shift away from today's geostationary satellite incumbents and then Gogo and Starlink will benefit from that shift. And though we have to muscle through a tough investment year to deliver 5G and Galileo, our long-term projections are driven by strong recurring service revenue that drives strong cash flow and a strong balance sheet, which acts as a flywheel to drive investment in further enhancing our products and further securing our competitive advantage in the future.
Now, I'll highlight some demand trends and provide an overview of our Q4 results before I dive more deeply into progress in our strategic initiatives. Demand for Wi-Fi and aircraft continues to grow. Data consumption per flight hour in Q4 was once again up 15% compared to prior year and up 74% from Q4 2019, demonstrating a step change in passenger expectations for in flight connectivity. Demographic trends bode very well for connectivity penetration. Though all ages want better in-flight connectivity, demand for connectivity increases as the age of the flyer decreases. Gogo equipped VA 2023 flight counts were down 2% versus 2022, but the gap narrowed to 0.5% in Q4 and actually turned the corner and knocked a 2% increase in January over prior year, which certainly signals demand for in flight connectivity remaining strong -- I'm sorry, for flight remains strong.
More importantly, flights are significantly elevated from pre-COVID levels with Q4 up 28% from Q4 2019 signaling to many industry observers that stronger private aviation demand is here to stay, which is further supported by strong OEM order books and very strong fractional sales, which we expect will drive Gogo shipment growth over the next few years. Now, let me turn to our Q4 performance. Revenue was down roughly 10% from our record Q4 2022 performance, which was driven by a 2022 post-COVID surge in equipment orders. On the positive side, we achieved record service revenue in the quarter, driven by record total ADVANCE activations, which were up 20% from prior quarter and 15% from prior year, driven by accelerating reactivations and record upgrades from Classic to the AVANCE platform.
At the end of Q4, we reached 7,205 ATG aircraft online, representing 55 incremental ATG units in the quarter and reached 3,976 AVANCE aircraft online, representing 192 incremental AVANCE Units in the quarter, up 21% from prior year and now representing 55% of our installed base. We view every addition of an AVANCE unit, whether a new customer or an upgrade, could be a strategic win for Gogo because it extends the lifetime value of that customer. That's because once an AVANCE platform product is installed, it is far easier and cheaper for a customer to upgrade to new technologies such as 5G and LEO satellite connectivity with Gogo then moving to a competitor's product to upgrade that technology. The reason for that is generally the only work inside the aircraft to upgrade to a new technology with AVANCE is to add or replace an antenna on the outside of the aircraft.
The rest of the upgrade can be achieved on the AVANCE box inside the aircraft with a simple software upgrade. This gives Gogo a huge advantage in our distribution channels because AVANCE is already line fit on every currently produced make and model of aircraft, OEMs have lower engineering and line fit expense when they adopt 5G or Galileo than a new product from one of our competitors because they have already engineered and choose their production for the Gogo equipment that goes inside the aircraft. On the dealer side, because there are already STCs for AVANCE in all makes and models of business aircraft, they can upgrade their STCs or field approvals far more quickly than doing whole new designs for competitive products. And on the fleet front, if they have AVANCE installed, they can invest in one set of AVANCE hardware inside the aircraft and then upgrade incrementally by adding antennas at far lower cost than replacing full systems.
To give an example of where we think this will work to our advantage, today there are more than 2,100 heavy jets flying with Gogo ATG connectivity in North America, many of which also utilize geostationary satellite products when they fly outside North America. Today, 61% of those have AVANCE installed, providing an easy path to upgrade from GEO to LEO connectivity when they so desire. We believe this advantage will only grow as we migrate the 3,200 customers still in our Classic ATG products to the AVANCE platform as part of our FCC Secure Networks Program customer conversion campaign. Moving from service revenue to equipment, those shipments paled compared to our blockbuster year last year. 2023 was our second highest ADVANCE shipment year ever, which we believe portends more good things for the strategic customer reasons I mentioned a moment ago.
And finally, given the strong activations last year, Gogo inventory in the field normalized, and we're now down to roughly 180 units in the field that are not committed to a particular buyer of which only 37 are dealers that do not regularly move large amounts of impact. On the earnings side for the quarter, despite our revenue headwinds, EBITDA came in higher than planned and free cash flow set a new record, which demonstrates the durability of our business model. I'm proud of the Gogo team and want to thank them for their commitment to our strategy and strong execution throughout 2023. Now for our progress on our strategic initiatives, Gogo is focused on accelerating growth with a three-pronged strategy. First, we want to expand our addressable market globally by expanding outside North America and developing products and pricing that fit every segment of the 39,000 aircraft global market.
Second, we want to drive customer loyalty by continually improving our network and leveraging the ADVANCE platform to provide an easy upgrade path as new technologies 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, and we're making great strides on our strategic initiatives to achieve these goals. Let me start with 5G. I'll begin with a little bit of bad news, which is that due to a non-technical contractual issue between sub suppliers, we've had a slip in our 5G delivery from Q3 to Q4 of this year. However, we believe that issue has been resolved and we are back in fabrication mode on the chip. Despite the shift in timing, we're really encouraged by the commercial certification progress we're making bringing this product to market.
And we've already shipped 198 5G pre-provision kits with MB13 5G antennas, 59 of which have already been installed and are flying today on our 4G network with an L5 4G box. Once our chip is ready, we will start shipping the LX5 box to those customers. And because the LX5 and L5 have the same form factor, they can make a quick swap and begin 5G service immediately, saving downtime and expense. We have orders from 5 OEMs, one of which is already line fit installing the MB13 and we have stock orders for 46 systems from our dealer network. On the certification front, we have 31 STCs in work, representing 41 aircraft models and more than 9,700 North American Jets. Of those, 10 STCs have already been completed for the MB13 antennas. And because the LX5 is the same form factor as the L5, we'll be quickly upgraded once we ship them the LX5 boxes with the 5G chip inside.
The other 21 programs are awaiting the LX5 before completing work, which again, because they are the same form factor, is a relatively modest effort. We also hit an exciting milestone earlier this month when we received our first FPGA version of the 5G chip and began testing the 5G chip software in our Chicago lab. We're excited to bring Gogo 5G in the market. And with mean speeds around 25 megabits per second and peaks of 75 to 80 megabits per second, we believe it's the perfect product for midsize and smaller business aircraft to fly North American missions and want great connectivity at a better value than competitive satellite products. Galileo. Let me turn to our LEO-based global broadband initiative. Galileo comes in two versions, a smaller HDX terminal and a larger FDX terminal.
The Galileo HDX terminal is a small antenna that fits on almost all business aircraft and targets, A, the almost 12,000 midsize and smaller jets that domicile outside North America and have absolutely no broadband solution today and B, those jets out of the 11,000 midsize and smaller jets that domicile inside North America that often fly international missions. The Galileo FDX terminal is a larger antenna that delivers significantly higher bandwidth and targets the roughly 7,000 global super midsize and larger heavy jets that fly transcontinental missions. For Galileo, peak speeds and mean speeds will be in close proximity with HDX delivering speeds to the aircraft in the high 50 megabit per second range and FDX delivering speeds close to 200 megabits per second, which is comparable to the speed Starlink publishes for its 39 inches antenna.
As I mentioned earlier, a huge advantage for us is that Galileo is a simple upgrade from any AVANCE installed plane. One only needs to add our HDX or FDX antenna on the fuselage and then run data and power cabling into the aircraft. As I also mentioned earlier, given that AVANCE is already a line fit option at every OEM and has STCs on every currently produced model of aircraft, it will be relatively easy from an engineering certification perspective for OEMs and dealers to offer Galileo as an option to their customers. We've already signed one line fit agreement and have discussions underway with several others and 6 Gogo dealers have already either verbally committed or are under MOU for 10 STCs representing 28 different aircraft models and a global TAM of 8,000 aircraft.
We remain on track to start shipping HDX terminals in Q4 and HDX terminals in the first half of 2025. We hit an exciting milestone this month when we received the first fully constructed prototype of the Gogo Galileo HDX antenna, which marks a significant step in design validation and preparing for flight tests this summer. With that, we're one step closer to our goal of offering a global broadband connectivity solution for every business aircraft everywhere. Now let me turn to the FCC Secured Networks Program. You'll recall that two years ago Gogo was awarded a $334 million grant under this program to reimburse it for expenses associated with accelerating the removal of Chinese telecom technology from our 4G network. Because there were more qualified grants than originally planned, funding for all grants were cut back to 39% of the original award, which in Gogo's case was a cut back to $132 million.
As we mentioned last quarter, the White House included full funding for the program in its supplemental funding request to Congress last year. Given that full funding has broad bipartisan support in Congress, we feel that it has a chance of passage this year. Partial funding will cover about 70% of our reimbursable cost of replacing all EVDO ground equipment and moving Gogo customers to ADVANCE equipment that is compatible with the replacement ground equipment. And that is what we are projecting in the long-term guidance we shared today. Based on changes we have made to our evolution program, we no longer believe we will need nor would we receive $334 million. However, if full funding is approved, we would be able to accelerate our program and cover all reimbursable costs.
On the customer side of this transition, our goal is to convert all 3,200 tails still flying with our Classic product today to new LRUs with LTE air cards over the next two years, and we are funding very attractive conversion rebate plans to encourage them to do so. We've been in conversations with more than 95% of these customers. So far, 55% have indicated a preference with the overwhelming majority leaning towards an ADVANCE upgrade and almost half of those choosing L5s over L3s. This program has considerable benefits for Gogo and its customers, including a 40% improvement in connectivity performance for AVANCE L3 customers, a doubling of the number of aircraft that the ATG 4G network can simultaneously manage and an acceleration of Gogo Classic customers upgrading to AVANCE, which has the strategic benefit of extending Gogo customer lifetimes due to the ease of upgrade to 5G and Galileo and other new technologies I described a few moments ago.
Perhaps the biggest news in the quarter was announced after the quarter was over and that is the 10-year extension of our 20-year relationship with NetJets. NetJets is by far the largest operator of business jets in the world with roughly 600 aircraft in North America, which they plan to go to 1,000 over the next five years and another 85 aircraft operating in NetJets Europe. Of the North American aircraft, roughly 40% are on AVANCE today and 60% are Classic Gogo ATG product. There are planning upgrades to advance for all their North American aircraft and then future upgrades to either 5G and/or HDX depending on mission. NetJets Europe flies 70 aircraft that are equipped with Gogo equipment today, largely to provide in flight entertainment, but 40% of those are already on the AVANCE platform and they plan to upgrade all of those 70 to AVANCE with the HDX Galileo antenna.
Most importantly, NetJet is the bellwether of the business aviation industry. In order to carry business in NetJet, OEMs and dealers make sure that they can provide the products and service that NetJets wants to install and that should create great pull through demand for Gogo. As I mentioned at the outset, 2024 is an exciting year for Gogo as we deliver Gogo 5G and Galileo and continue to execute on our strategy. We are more in demand, more innovative and more poised for value creation than ever. Now, I'll turn it over to Jessi for the numbers.
Jessi Betjemann: Thanks, Oak, and good morning, everyone. Gogo continued to demonstrate strong demand for our products and services in the fourth quarter, setting new records operationally and financially. Despite the unfortunate delays of our 5G program we discussed on our Q2 earnings call, the industry headwinds we've endured and the significant strategic investments we've undertaken in Gogo, 5G and Galileo, we delivered solid bottom-line financial performance and record free cash flow in 2023. Our ability to achieve these results is strength of our business model, financial position and investment strategy. And with the bulk of our strategic investments coming to completion at the end of 2024, we expect our free cash flow to accelerate substantially in 2025.
In my remarks today, I'll start by walking through Gogo's fourth quarter and full year financial performance. Then I will turn to our balance sheet and capital allocation priorities. Next, I will provide an overview of the financial impact of the FCC program. And finally, I will provide additional context on our 2024 financial guidance and the long-term targets we announced this morning. For the fourth quarter Gogo's total revenue was $97.8 million, down 10% year-over-year and remained relatively flat sequentially. Gogo's top line was driven by record service revenue $80.9 million, up 5% year-over-year and 2% sequentially. In the fourth quarter, our ATG aircraft online reached 7,205, up 4% year-over-year and 1% sequentially. Total AVANCE aircraft online grew to 3,976, an increase of 21% year-over-year and 5% sequentially, driven by a record number of total activations as Oak described.
We expect another strong year of AVANCE activations in 2024 as we plan to aggressively upgrade our Classic Gogo Biz ATG customers as part of the FCC program, while maintaining a reasonably conservative view on improvements in the maintenance cycle times that have slowed installations over the past year. Upgrading our customers to AVANCE is a critical part of our strategy as it extends customer lifetimes due to the easy upgrade path to Gogo 5G and Galileo. However, it will mute the ATG aircraft online growth rate. Total ATG ARPU grew 1% year-over-year to $3,387 driven by a shift in product mix. The launch of Gogo 5G and Galileo will further expand our ARPU growth opportunity over time. Turning now to equipment revenue. Gogo delivered $16.9 million in equipment revenue in the fourth quarter, a 45% decrease year-over-year.
We had a tough comparison to our record prior year quarter compounded by the parts and labor dynamics and order slowdown in anticipation of our new product launches. Equipment revenue decreased by 8% sequentially as the 5% increase to 202 AVANCE units sold in the fourth quarter was offset by a $4 million reserve primarily driven by a specific customer circumstance. Now on to profitability, Gogo delivered service margins of 78% in the fourth quarter remaining relatively flat compared to the prior year quarter and 1 percentage point higher sequentially. We expect service margins to be in the 75% range this year with a slight decrease in future years as Google Galileo's concentration on product mix increases over time. Service revenue and margin continues to be the primary lever for free cash flow generation and long-term value creation.
Equipment margins were 9% in the fourth quarter, 23 percentage points lower than the prior period, prior year period. The decrease was primarily due to an increase in production cost as a percentage of revenue due to lower equipment revenue in the quarter and also by increased inventory reserves, which negatively impacted equipment margin by 9 points. Equipment margins were 24 percentage points lower sequentially driven largely by the $2 million accrual taken in the third quarter for the expected FCC reimbursement of costs incurred in prior periods for aircraft replacements along with the increased inventory reserves I just mentioned. We expect equipment margins in the 20% range in the near-term and to decrease slightly in the long-term as the mix of lower margin Galileo units sold increases over time.
Moving on to operating expenses. Fourth quarter combined engineering design and development, sales and marketing and general and administrative expenses increased 20% year-over-year and 19% sequentially to $35 million. The increase in the fourth quarter is primarily due to approximately $3 million in legal expenses related to the SmartSky patent litigation and global sensing efforts to support Galileo. Gogo expects 2024 to be a significant investment year as we continue to invest in our Gogo 5G and Galileo program. We expect that these new products will accelerate revenue and free cash flow growth over the long term and are the key foundation for our long-term financial targets that I will discuss shortly. In terms of Gogo 5G in the fourth quarter, our $2 million of 5G spending was comprised of $0.4 million in OpEx and $1.6 million in CapEx. 5G delay has pushed approximately $10 million of CapEx and approximately $7 million of OpEx from our original plan in 2023 into this year.
The delay also dampens revenue, EBITDA and free cash flow in the coming quarters. We expect 2024 will include approximately $8 million of 5G OpEx and approximately $12 million in CapEx. We continue to maintain our estimate of $100 million in total external development and deployment costs for our 5 Gs program and anticipate no negative impact on the overall program costs from the delay. All of these impacts are reflected in our 2024 financial guidance. Now onto Gogo Galileo initiative. In the fourth quarter, Gogo recorded $2.5 million in operating expenses related to Galileo. We continue to expect external development costs for both the HDX and FDX solutions to be less than $50 million in total, of which $9 million was incurred in 2023, approximately $25 million is projected in 2024 and the remainder in 2025.
We anticipate approximately 90% of Gogo Galileo's external development costs will be in OpEx. Moving on to our bottom-line, Gogo recorded $35.1 million in adjusted EBITDA in the fourth quarter, a 24% decrease year-over-year and 19% decrease sequentially, driven by lower equipment profit and an increase in legal expenses as I previously described. Gogo delivered net income of $14.5 million in the fourth quarter down 48% year-over-year, translating to $0.11 in basic and diluted earnings per share. As a reminder, our financial statements reflect non-cash income tax expense as we continue to generate positive pretax income. Based on our substantial NOL position at the end of 2023 including $446 million in federal net operating losses and $377 million in state net operating losses.
This results in a net deferred income tax asset of $217 million. We do not expect to pay meaningful cash taxes through our five-year planning horizon. As a reminder, our shareholder rights plan that was designed to preserve NOLs expired in September 2023. Thus there are no limitations to shareholders buying over 5% of our equity. In the fourth quarter, we generated record free cash flow of $28.4 million, an increase from $25 million in the year ago period and $21 million last quarter. The year-over-year increase was primarily driven by lower CapEx associated with 5G and lower net working capital. I will now turn to a discussion on our balance sheet. Gogo ended the quarter with $139 million in cash and short-term investments and $606.9 million in outstanding principal on our term loan with our $100 million revolver remaining undrawn.
Gogo's net leverage remains at 2.9 times in line with our target range of 2.5 times to 3.5 times. As previously mentioned, we have a hedge agreement in place and we currently have 87% of our loan hedged. The next step down in the hedge to $350 million occurs in July 2024 with an increase in strike rate from 0.75% to 1.25%. Our cash interest paid for 2023 net of hedge cash flow was $41.5 million, which includes approximately $10 million for two months of interest expense related to 2022. Assuming no further debt pay down, the cash interest paid for 2024 net of hedge cash flow is expected to be approximately $33 million. Now I'll provide a recap of our 2023 full year results. Gogo generated total revenue of $397.6 million, down 2% from 2022 at the top end of our guidance range.
We delivered record service revenue of $318 million, up 7% from 2022 driven by a record number of total ADVANCE activations including Class A to ADVANCE upgrades. Gogo's equipment revenue was $79.6 million down 26% from 2022. We reached adjusted EBITDA of $162.1 million down 7% through 2022, but above our 2023 guidance range despite lower revenue throughout the year. Net income increased 58% year-over-year to $145.7 million primarily driven by a $48.1 million tax benefit due to the partial release of the valuation allowance on our deferred tax assets in the second quarter. We delivered a record free cash flow of $82.7 million up 43% from $57.8 million in 2022 due to lower CapEx and lower net working capital. While revenue was well below our expectations due to the industry dynamics we have discussed, the 5G delay and the resulting wait and see situation, our bottom line and free cash flow were better than expected.
The increasing demand from customers for connectivity and Gogo's robust business model is a testament to the strategy we are employing for long-term financial growth and success. Now let me provide a recap of Gogo's capital allocation priorities, which are in service of our current strategic goals. We are focused on first maintaining adequate liquidity. Second investing in strategic opportunities to drive competitive positioning and financial value include Gogo 5G and Galileo. Third maintaining an appropriate level a leverage for the economic environment with a target net leverage ratio of 2.5 to 3.5 times. And finally, returning capital to shareholders as appropriate in the future. As we mentioned last quarter, we were comfortable moving to priority four in returning capital to shareholders as our Board of Directors approved a share repurchase program in September with no set expiration date that grants authority to repurchase up to $50 million of shares of common stock.
In the fourth quarter, Gogo repurchased approximately 480,000 shares for a total cost of approximately $4.8 million and an additional 566,000 shares for a total cost of approximately $5.2 million in January, reflecting our confidence in the long-term value of Gogo and in the strength of our balance sheet. Looking ahead, we need to continue to balance the use of cash over the next year across our capital allocation priorities, but believe we are well positioned to execute our investment schedule, continue to evaluate further debt pay downs, especially in consideration of the upcoming hedge step down I previously mentioned and expect to have more opportunities to return capital to our shareholders in the future. I will now provide an update on the expected financial impact of the FCC reimbursement program.
Gogo expects to receive $132 million from the program as it is partially funded. However, we are awaiting Congress's decision on full funding, which could substantially increase our reimbursement up to the approved $334 million. As a reminder, we submitted our first claim in July 2023, which triggered the start of the one year clock to complete the program by July 21, 2024. In our application, we stated that we will need to have multiple extensions to complete the program and are planning to request an extension in the near-term. Gogo has incurred and will continue to incur cost for this program in three main areas. First, network equipment for cell sites and data centers; second, airborne equipment for the swaps of LTE air cards to replace e-video air cards and partial rebates for customer installation costs to enable existing customer aircraft to communicate to the new network; and third, operating expenses.
We expect that the spend will be partially offset by the FCC reimbursement. As of December 31, 2023, we recorded an $18.3 million receivable from the FCC as we spent approximately $20 million of reimbursable expenses and recouped approximately $2 million in cash reimbursement. This receivable is included in prepaid expenses and other current assets in our balance sheet with corresponding reductions to property and equipment, inventory and contract assets and with a pickup in the income statement. Since the program is currently partially funded, we have some optionality in what we request reimbursement for, which the impact of the grant money received will be recorded between the income statement and balance sheet. As we mentioned last quarter, we are currently seeing reimbursements coming in quicker than expected, potentially changing the swing effect on free cash flow over the years.
However, with partial funding, we are forecasting that we will run out of reimbursement funds in late 2025, and we'll need to continue to spend money in support of the program through 2026, which will negatively impact 2026 free cash flow. Now, I'll turn to the guidance and long-term targets we announced this morning starting with some additional color on our 2024 projections. Those 2024 projections reflect our anticipated increase in Galileo spend and the impact of the push out of 5G spend from 2023. These investments coupled with lower shipments and the aviation industry dynamics challenging aircraft online in 2023 and the delay of Gogo 5G will constrain our 2024 performance as we stated previously. Gogo expects 2024 revenue to be in the range of $410 million to $425 million.
This implies 5% overall growth with equipment revenue expected to grow faster than service revenue. Service revenue growth will be slower than the growth rate in 2023 as we project a significant number of upgrades from Classic to ADVANCE driven by the FCC program and while strategically important will dampen aircraft online growth. We anticipate 2024 adjusted EBITDA in the range of $110 million to $125 million. This guidance reflects operating expenses of approximately $40 million strategic and operational initiatives, including approximately $8 million in expected Gogo 5G spend, approximately $20 million of Gogo Galileo development spend, approximately $9 million in LTE spend that is not reimbursable by the FCC and approximately $3 million in additional operational initiatives.
Our adjusted EBITDA guidance also includes approximately $4 million related to legal expenses tied to the SmartSky patent litigation. We expect 2024 CapEx to be approximately $45 million, which includes approximately $25 million for the following strategic initiatives. Approximately $12 million for Gogo 5G $5 million for Galileo and approximately $8 million for the LTE network build out related to the SEC's reimbursement program. We also expect free cash flow of $20 million to $40 million which includes approximately $56 million of expected FCC spend, including non-reimbursable development spend and approximately $45 million in FCC reimbursement. Now turning to our long-term targets, we recently updated our long-term model, which reflects the launch of Gogo 5G and Galileo in the fourth quarter of 2024 and the build out of the LTE network and associated customer conversion related to the FCC reimbursement program by 2026.
Our long-term targets are as follows. We expect revenue growth at a compound annual growth rate of approximately 15% to 17% from 2023 through 2028, with Galileo contributing to revenue beginning in 2025. We continue to expect free cash flow in the range of $150 million to $200 million in 2025. This does not take into account the effect of the FCC program. The projected significant increase of free cash flow in 2025 is due to increased EBITDA driven by revenue growth, the launch of Gogo 5G and Galileo, reduced engineering design and development OpEx and lower CapEx as investment in these strategic programs are completed, and positive net working capital driven by inventory purchases and prepayments planned in 2024 or 2025 equipment shipments.
We expect annual adjusted EBITDA margin to be reaching 40% by 2028. While still projecting healthy margin, it is lower than our prior expectations of mid-40% driven by the delay in 5G launch and increased share of Galileo revenue with lower incremental margins compared to ATG. These updates reflect our expectations to perform strongly and drive further value creation for our customers and shareholders as we execute our strategy. Gogo's business continues to perform well. Our outlook underscores the value creation potential for our customers and shareholders that we expect to unlock as we execute our strategy and invest in the strategic initiatives that are anticipated to extend and enhance our long-term growth. Before we open the call up for questions, I would like to join Oak in thanking the entire Gogo team for their hard work and dedication to our business and for providing unparalleled service to our customers.
Operator, this concludes our prepared remarks. We're now ready for our first question.
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