Gogo Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Gogo provides in-flight connectivity services and equipment for business aviation. This unaudited report covers the three and six months ended June 30, 2023; comparisons are with the same periods in 2022. Unless noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $103.2 | $97.8 | $201.8 | $190.6 |
| Operating income | $34.0 | $32.3 | $66.0 | $67.3 |
| Net income | $89.8 | $22.0 | $110.3 | $44.2 |
| Operating cash flow | $15.6 | $26.4 | $34.1 | $44.2 |
| Adjusted EBITDA (non-GAAP) | $44.1 | $41.2 | $83.8 | $84.0 |
| Free cash flow (non-GAAP) | $13.3 | $15.5 | $33.3 | $24.3 |
- Revenue and margins: Q2 service revenue rose 8.2% to $79.1 million; equipment revenue fell 2.5% to $24.2 million. Approximate Q2 total gross margin was 66.7% and operating margin 33.0%, versus approximately 66.7% and 33.1%, respectively, a year earlier.
- Profit and unusual tax item: Q2 net income included a $63.8 million income tax benefit, primarily from a partial release of the deferred-tax-asset valuation allowance. The company released $70.2 million of valuation allowance in Q2 and $71.4 million for the first half. Consequently, reported net income growth substantially exceeded operating-income growth.
- Cash and debt: Cash and cash equivalents were $97.2 million at June 30, down from $150.6 million at year-end 2022; short-term investments were zero, versus $24.8 million at year-end. Term-loan principal was $610.5 million, after a $100 million prepayment in May; the loan’s carrying value was $608.2 million. The $100 million revolving facility was undrawn. Cash less term-loan principal was approximately negative $513 million.
- Cash flow: First-half operating cash flow fell to $34.1 million from $44.2 million. The company cited cash uses related to prepaid expenses, accrued interest and accrued liabilities. First-half capital expenditures were $13.4 million, down from $20.0 million; the filing’s non-GAAP free cash flow includes $12.5 million of interest-rate-cap proceeds.
- Liquidity: Management said cash, operating cash flow and access to capital markets should be sufficient for business needs, capital expenditures and debt maturities for at least the next 12 months and thereafter for the foreseeable future. The term loan matures in April 2028.
Changes versus the prior comparable period
- Service revenue growth was driven primarily by more ATG-connected aircraft and, to a lesser extent, higher monthly service revenue per aircraft. ATG aircraft online increased to 7,064 from 6,654; monthly ATG service revenue per online aircraft rose to $3,371 from $3,328.
- Equipment revenue declined as ATG unit sales fell to 277 from 310 in Q2 and to 500 from 556 in the first half. Higher equipment costs included FCC-program-related costs and increased production costs.
- Q2 operating expenses increased 5.6% to $69.2 million. Higher engineering, sales and marketing, and depreciation costs were partly offset by lower general and administrative expense.
- Q2 interest expense declined to $7.8 million from $9.8 million, partly reflecting interest-rate-cap benefits and the absence of the previously outstanding convertible notes. First-half operating cash flow was lower despite higher net income, in part because of working-capital movements.
Outlook, risks and contingencies
- Technology plans: Gogo expected commercial launch of its 5G ATG network around mid-2024, delayed from the prior estimate of Q4 2023 because of a design error in a non-5G chip component supplied through a third party. Gogo Galileo, a global LEO satellite broadband service, was targeted for launch in the second half of 2024. These are targets, not guaranteed outcomes.
- Costs and investment: Management expected service revenue to grow with additional aircraft online and the planned technology launches. It also expected higher near-term engineering and development expense through 2024 and increased capital spending related to 5G and the FCC reimbursement program. Management expected interest expense to decline following the term-loan prepayment, subject to variable-rate changes.
- FCC reimbursement program: Although up to approximately $334 million was approved, only about $132 million was currently allocated because of a federal funding shortfall. Gogo elected to participate and submitted its first claim in July 2023. The company said it planned to seek extensions beyond the July 2024 completion deadline. Funding shortfalls or reimbursement delays could pressure cash flow; failure to complete required equipment replacement could result in sanctions or service disruptions.
- Commercial commitments: Gogo’s Hughes supply agreement includes estimated purchases of about $170 million over seven years, with the period expected to begin after a milestone in the second half of 2024. A 2023 amendment added estimated purchases of about $102 million over seven years, expected to begin after a milestone in mid-2025.
- Litigation: SmartSky alleges infringement of six patents relating to Gogo 5G and seeks unspecified damages, including possible treble damages. A preliminary injunction was denied; the appeal was argued in June 2023, and trial was scheduled for April 2025. Gogo disputes the claims; no loss accrual was recorded because the outcome could not be reasonably predicted.
- Other items: The company recorded a $2.2 million debt-extinguishment loss from the May prepayment. It also recorded a $1.3 million inventory write-down and $1.7 million of additional depreciation related to the FCC program. Gogo said the interest-rate caps limited, but did not eliminate, floating-rate exposure; a one-percentage-point rate change was estimated to affect annual interest expense by about $0.8 million after caps, versus $6.1 million without them.
Important facts for investors to verify
- Whether the large deferred-tax valuation-allowance release is supportable through future taxable income, and how much of the remaining tax assets can be realized.
- Progress, costs, reimbursement timing and extension approvals for the FCC equipment-replacement program, including whether the current $132 million allocation is adequate.
- Execution and customer adoption of Gogo 5G and Galileo, given the 5G delay, supplier dependencies and possible overlap in launch timing.
- Operating cash conversion, near-term capital spending and ability to service substantial floating-rate debt as interest-rate-cap coverage declines over time.
- Developments in the SmartSky patent litigation and potential implications for Gogo 5G operations, costs or launch plans.