Gogo Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 7, 2019. 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). Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Service revenue | $158.4 | $160.4 | $497.1 | $470.1 |
| Equipment revenue | $42.8 | $56.9 | $117.3 | $206.4 |
| Total revenue | $201.2 | $217.3 | $614.4 | $676.5 |
| Operating income (loss) | $7.2 | $(7.6) | $28.3 | $(17.2) |
| Net loss | $(22.9) | $(37.7) | $(123.7) | $(102.3) |
| Adjusted EBITDA (non-GAAP) | $35.4 | $21.1 | $111.2 | $51.8 |
| Operating margin | 3.6% | (3.5)% | 4.6% | (2.5)% |
Gross margin, calculated as revenue less service and equipment costs, was approximately 48.9% in Q3 2019 versus 43.2% a year earlier, and 49.9% for 9M 2019 versus 42.6%. Net loss per share was $0.28 in Q3 and $1.54 for 9M, compared with $0.47 and $1.28, respectively, in 2018.
- Q3 revenue fell 7.4%; 9M revenue fell 9.2%. The principal pressure was equipment revenue, down 24.8% for Q3 and 43.2% for 9M. Service revenue grew 5.8% for 9M.
- For 9M, segment revenue was CA-NA $285.9 (down 23.1%), CA-ROW $105.4 (up 19.7%) and BA $223.1 (up 3.0%). CA-NA’s decline reflected fewer installations, American Airlines aircraft deinstallations and the airline-directed model transition. The 2018 comparison also included $45.4 of one-time equipment revenue from an airline model transition.
- Q3 segment revenue was CA-NA $84.1 (down 22.4%), CA-ROW $35.7 (up 1.4%) and BA $81.3 (up 10.5%). CA-ROW and BA service growth was offset by CA-NA weakness and lower equipment sales.
- Interest expense was $99.4 for 9M, up from $91.9. Total other expense rose to $151.3, primarily because of a $58.0 debt-extinguishment loss associated with refinancing and higher average debt.
Cash flow, debt and liquidity
- For 9M 2019, operating cash flow was $75.3, versus cash used of $91.9 in 2018. Investing cash outflow was $36.4 and financing cash outflow was $4.1. Cash, cash equivalents and restricted cash ended at $225.6; unrestricted cash and equivalents were $217.7.
- Capital expenditures, including property and equipment and capitalized software, were $78.2, down from $124.4. The company reported non-GAAP free cash flow of negative $2.9 and unlevered free cash flow of positive $80.2; unlevered free cash flow adds back cash interest and is not a GAAP measure.
- At September 30, gross debt was $1,122.3 and long-term debt carrying value was $1,096.2. Cash and short-term investments totaled $217.7; working capital was approximately $195.1. Stockholders’ deficit was $382.8.
- In April and May, Gogo issued $925 principal amount of 9.875% senior secured notes due 2024, redeemed $690 principal of 12.5% notes due 2022, and repurchased approximately $159.5 principal of 2020 convertible notes. The 2024 notes generated $920.7 of proceeds; the refinancing and repurchases contributed to the $58.0 extinguishment loss.
- The company had $237.8 principal of 6.0% convertible notes due 2022 and $2.5 of 2020 convertible notes remaining. A new asset-based revolver provides up to $30, subject to borrowing-base availability; no loans were outstanding at quarter-end. Gogo said its cash, operating cash flows and ABL access should cover near- and long-term needs, while noting capital-market access and refinancing risks.
Outlook, risks and notable items
- Management expected CA-NA service revenue to be fairly flat in the near term, with longer-term growth dependent on higher connectivity take rates and revenue per aircraft. Equipment revenue depends on installation schedules and contract execution.
- Management expected increased near-term engineering and development spending for the BA 5G network, with network-related capital expenditures rising over time. It also expected full-year interest expense to exceed 2018 levels.
- Gogo reported continuing U.S. ATG network capacity constraints and warned that rising passenger usage, including potential free-to-passenger airline connectivity, could increase capacity requirements. Execution of technology deployments, satellite capacity availability and cost, airline adoption, competition, supplier dependence and debt servicing/refinancing are key risks.
- Delta represented approximately 28% of consolidated revenue in both Q3 and 9M 2019, up from 25% and 23%, respectively, in the comparable 2018 periods.
- Adoption of ASC 842 in 2019 added operating lease right-of-use assets and liabilities to the balance sheet; management said it had no material effect on operations or cash flows.
- The Linksmart patent litigation remains unresolved, with no loss accrued because the outcome and potential loss could not be reasonably estimated. A securities class action was dismissed without prejudice in October 2019, with plaintiffs permitted to replead by December 20, 2019; related derivative cases remained stayed. Gogo reported no defaults under senior securities and effective disclosure controls.
Important facts for investors to verify
- Whether service growth can offset declining equipment revenue and CA-NA aircraft deinstallations, and whether connectivity take rates and revenue per aircraft improve as expected.
- Progress, cost and capacity implications of the 5G ATG and satellite network plans, including the ability to secure adequate capacity on acceptable terms.
- Debt maturities, the high coupon on the 2024 notes, ABL availability and covenants, and the company’s ability to refinance future obligations.
- Drivers and repeatability of positive operating cash flow and non-GAAP cash-flow measures, including working-capital movements and capital spending needs.
- Delta customer concentration and the outcome of Linksmart, securities and derivative litigation, including any new claims or financial exposure.