Gogo Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Gogo provides in-flight connectivity, entertainment and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $184.5 | $199.5 | Down 7.6% |
| Service revenue | $150.8 | $165.0 | Down 8.6% |
| Equipment revenue | $33.7 | $34.5 | Down 2.4% |
| Operating income (loss) | $(51.1) | $11.4 | Turned to loss |
| Net loss | $(84.8) | $(16.8) | Loss widened |
| Net loss per share, diluted | $(1.04) | $(0.21) | Loss widened |
| Cash from operating activities | $38.0 | $(6.2) | Improved |
| Capital expenditures | $15.3 | $27.7 | Down |
| Adjusted EBITDA (non-GAAP) | $25.7 | $38.0 | Down |
| Unlevered free cash flow (non-GAAP) | $22.2 | $11.1 | Up |
Gross profit, calculated as revenue less cost of service and equipment revenue, was approximately $87.7 million, or 47.5% of revenue, versus $97.9 million, or 49.0%, in Q1 2019. Operating margin was approximately negative 27.7%, compared with positive 5.7%. These calculated margins are not presented as company-defined measures.
Revenue by segment was $80.1 million for CA-NA, down 16.6%; $33.4 million for CA-ROW, up 1.5%; and $70.9 million for BA, up 0.5%. Segment profit was $15.9 million for CA-NA and $35.9 million for BA; CA-ROW recorded a $17.4 million segment loss. CA-NA service revenue fell 19.8%, with lower connectivity, entertainment and connected-aircraft revenue. BA service revenue rose 8.5%, partly offset by lower equipment sales. CA-ROW service revenue declined 2.8%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $214.2 million at March 31, up from $170.0 million at December 31, 2019; cash, cash equivalents and restricted cash totaled $219.4 million. Current assets were $466.5 million and current liabilities $271.4 million.
- Operating cash flow of $38.0 million was affected by working-capital movements, including a $26.4 million increase in accrued interest and payment timing. Cash interest paid was only $0.066 million versus $46.2 million a year earlier; this timing difference makes the quarter’s cash flow less indicative of ongoing cash generation.
- Gogo drew $22.0 million under its $30 million asset-based revolving credit facility in March. At quarter-end, reported long-term debt carrying value was $1,124.7 million. Gross debt principal was approximately $1,184.8 million: $925.0 million of 9.875% senior secured notes due 2024, $237.8 million of 6.00% convertible notes due 2022, and $22.0 million under the ABL facility. The remaining $2.5 million of 2020 convertible notes was repaid at maturity in March.
- The company said it believed cash and operating cash flows, under its current plans, would cover operating obligations and capital spending for at least the next 12 months. It also warned that prolonged travel weakness or inability to secure financing could materially harm liquidity. The 2022 convertible-note maturity and refinancing needs remain important obligations.
Material developments, outlook and risks
- COVID-19: The filing says the pandemic materially harmed air travel. Approximately 60% of revenue came from commercial aviation and 40% from business aviation. Passenger traffic declined sharply in April versus March, and management expected a significant April service-revenue reduction compared with Q1 monthly levels. The filing provides no numerical full-year revenue or earnings guidance.
- Management expected significant Q2 declines in commercial service revenue and equipment revenue, as flights and passenger opportunity fell and airline installations were delayed. BA also faced fewer flights, subscription suspensions and fewer new activations; management expected a less severe impact there than in commercial aviation, but anticipated Q2 declines in both service and equipment revenue.
- Cost actions included a hiring freeze, suspended 2020 merit increases, deferred CEO bonus payment, reduced discretionary spending and efforts to renegotiate supplier and airline terms. Effective May 4, 2020, approximately 54% of the workforce was furloughed and compensation was reduced for most other employees.
- Gogo applied for an $81 million CARES Act grant and a $150 million loan; neither was reported as received. Any assistance could carry employment, compensation, warrant, collateral and debt-agreement consent requirements.
- COVID-19 prompted a $46.4 million impairment of airborne and right-of-use assets tied to three commercial airline agreements. Gogo also recorded $6.8 million of expected credit-loss provision, primarily related to one international airline partner, whose financial condition worsened after quarter-end; additional Q2 credit losses were expected. Further impairments or credit losses were possible.
- Debt service, refinancing access, airline and supplier concentration, fixed satellite costs, technology deployment and aircraft-installation delays are material risks. The filing also describes pending patent, securities class-action and derivative litigation; outcomes and potential losses were not estimable, and no related loss accruals were recorded. No debt default had occurred at March 31.
- Management expected full-year 2020 interest expense to be slightly lower than 2019, subject to offsets from the 2024 notes, the ABL draw and related financing costs. This was the filing’s limited stated annual expectation, not quantified earnings guidance.
Most important facts for investors to verify
- Subsequent-quarter revenue, flight activity, aircraft utilization and the pace of recovery across commercial and business aviation.
- Cash burn and liquidity after adjusting for Q1’s working-capital and interest-payment timing effects; status and terms of CARES Act applications.
- Further credit losses from the international airline partner and any additional asset impairments.
- Progress on cost reductions, satellite-provider and airline negotiations, and delayed equipment installations.
- Refinancing plans and covenant capacity for the $237.8 million 2022 convertible notes and the broader debt burden.
- Developments in Delta’s transition to free service and potential supplier diversification, plus the status and exposure of disclosed litigation.