Gogo Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are U.S. dollars; financial statement figures below are in millions unless stated otherwise. Gogo provides broadband connectivity services and equipment for business aviation. Its Commercial Aviation business was sold to Intelsat in December 2020 and is reported as discontinued operations; comparisons are presented on that basis.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $82.4 | $54.6 | $156.2 | $125.6 |
| Operating income | $29.6 | $17.1 | $57.4 | $38.4 |
| Net loss, continuing operations | $(66.4) | $(14.2) | $(72.3) | $(23.6) |
| Net loss, including discontinued operations | $(69.2) | $(86.0) | $(76.9) | $(170.8) |
| Adjusted EBITDA (non-GAAP) | $36.7 | $21.6 | $70.6 | $48.8 |
| Operating cash flow, continuing operations | $(15.0) | $(25.1) | $9.6 | $(1.2) |
| Free cash flow (non-GAAP) | $(16.1) | $(29.3) | $7.8 | $(6.3) |
- Q2 revenue increased 50.8% year over year: service revenue rose 47.1% to $64.8 million and equipment revenue rose 66.1% to $17.6 million. For the first half, revenue increased 24.4%.
- Q2 operating margin was approximately 35.9%, compared with 31.3% a year earlier. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- At June 30, cash and cash equivalents were $109.2 million, versus $435.3 million at year-end 2020. Total debt carrying value was $824.2 million, including $109.1 million current debt; gross debt less cash was approximately $715.1 million. The revolving facility was undrawn.
- Working capital was approximately $0.3 million: current assets of $188.4 million compared with current liabilities of $188.1 million. Stockholders’ deficit was $577.3 million.
- Q2 cash usage included $15.0 million of operating cash flow and $1.1 million of continuing-operations capital expenditures; the reported free cash flow figure also reflects the company’s stated non-GAAP definition.
Material changes and unusual items
- On April 30, Gogo refinanced its 9.875% 2024 senior secured notes with a $725 million term loan and a $100 million revolving facility. The term loan matures in 2028, has floating-rate pricing, and requires nominal quarterly amortization. The refinancing used term-loan proceeds and cash on hand; the old notes were redeemed May 1.
- Q2 included a $79.6 million loss on extinguishment of debt and settlement of convertible notes. The redemption included a $48.1 million make-whole premium; the company also wrote off unamortized financing costs and debt discount. The charge drove the large continuing-operations GAAP loss despite higher operating income.
- Gogo exchanged convertible notes for shares during the first half, including a $105.7 million principal exchange in April. The exchanges and other settlements resulted in issuance of approximately 24.4 million shares; shares outstanding increased from 86.0 million at December 31, 2020 to 109.7 million at June 30, 2021.
- The remaining $102.8 million principal amount of 6% convertible notes is due May 15, 2022 unless earlier converted or repurchased. Gogo expects to settle conversions in shares, but may elect to use cash; it expects any principal remaining at maturity to be paid from cash or revolving borrowings.
- Cash declined by $326.7 million in the first half, principally reflecting the $1,023.1 million notes redemption, partly offset by $721.4 million of term-loan proceeds. The company also paid $20.3 million of financing fees.
Outlook, commentary and risks
- Management said it expects service revenue to grow as additional ATG aircraft come online, and equipment revenue to increase with additional ATG unit sales. It expects service costs to rise with revenue and as Gogo 5G network costs increase.
- Gogo expects interest expense to decline following the refinancing and convertible-note exchanges. It expects near-term investment in Gogo 5G to increase engineering costs and slightly increase sales and marketing costs; capital expenditures are expected to vary with the timing of network buildout and software investment.
- Management stated that cash, cash flows from operations and available resources should meet operating obligations and committed capital expenditures for at least the next 12 months, including potential cash settlement of convertible notes. This is a forward-looking assessment, not a guarantee.
- COVID-19 recovery remains uncertain. The filing cites electronic-component shortages, longer lead times and potential price increases, which could delay product availability and installations. Other risks include customer demand, competition, Gogo 5G execution, spectrum access, supplier reliance, leverage and debt covenants.
- Gogo purchased $650 million notional of interest-rate caps for $8.6 million. The company estimated that a 1 percentage-point increase in three-month LIBOR would raise annual interest expense by about $0.3 million with the caps, versus about $2.9 million without them; hedge coverage declines over time as notional amounts fall and strike rates rise.
- Litigation includes patent claims and securities and derivative actions relating to the former Commercial Aviation business. The company contests the claims; no loss accrual was recorded for the cited matters because outcomes or potential losses could not be reasonably predicted. Insurance carriers have reserved rights on certain claims.
- The final purchase-price adjustment for the Commercial Aviation sale remained disputed. Gogo recorded a $9.4 million deferred gain pending resolution of Intelsat’s proposed adjustment.
- Management reported effective disclosure controls as of June 30, 2021, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Current operating trends in service revenue, ATG aircraft online, unit sales and the recovery in business aviation activity.
- Liquidity and cash generation after the refinancing, including the cash required to address the convertible notes due in May 2022.
- Floating-rate debt exposure, the effectiveness and declining coverage of the interest-rate caps, and compliance with credit-agreement covenants.
- Gogo 5G development, deployment timing, related costs, component availability and expected capital requirements.
- Resolution of the $9.4 million sale-price adjustment and the outcomes, insurance coverage and potential costs of disclosed litigation.
- Share dilution from convertible-note exchanges and any further conversion-related issuance.