Gogo Inc. — Q2 2016 Form 10-Q
Business and period: Gogo provides in-flight connectivity and digital entertainment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $147.5 | $121.2 | $289.3 | $236.7 |
| Operating loss | $(7.1) | $(8.6) | $(15.7) | $(18.4) |
| Net loss | $(40.2) | $(24.8) | $(64.3) | $(44.9) |
| Net loss per share | $(0.51) | $(0.32) | $(0.82) | $(0.56) |
| Adjusted EBITDA (non-GAAP) | $14.4 | $10.8 | $28.8 | $19.0 |
- Q2 revenue grew 21.7%, mainly on service revenue growth; first-half revenue grew 22.2%. Q2 gross margin, calculated from reported revenue and direct service and equipment costs, was approximately 55.4%, compared with 54.2% a year earlier. Operating margin improved to approximately (4.8)% from (7.1)%, while net margin declined to approximately (27.2)% from (20.4)%, reflecting higher interest and debt-extinguishment charges.
- For the first half, cash provided by operating activities was $24.4 million versus $66.0 million; investing cash use was $85.1 million versus $94.2 million. Capital expenditures were $85.0 million versus $94.2 million. Financing provided $202.7 million. Cash increased to $508.6 million from $366.8 million at year-end 2015.
- At June 30, current assets were $622.2 million and current liabilities $177.7 million. Balance-sheet debt carrying value was $808.0 million, before capital leases and net of financing costs and the convertible-note discount. Face principal was $886.9 million: $525.0 million of 12.5% secured notes and $361.9 million of 3.75% convertible notes. The report states total consolidated indebtedness of approximately $886.9 million.
Changes versus prior period and business performance
- Service revenue rose 25.8% in Q2 and 25.2% in the first half. Equipment revenue was nearly flat in Q2 (+0.8%) and increased 7.7% for the first half.
- Q2 segment revenue was CA-NA $92.7 million (+22.6%), BA $49.1 million (+13.4%), and CA-ROW $5.7 million (+149.4%). CA-NA and BA segment profits increased, to $18.6 million and $19.0 million, respectively; CA-ROW segment loss widened to $23.3 million.
- CA-NA growth reflected more aircraft online, higher passenger connectivity revenue and, in Q2, a higher take rate. BA service growth was driven by Gogo Biz subscribers, partly offset by lower equipment revenue. CA-ROW revenue grew with aircraft additions, but expansion costs kept the segment loss-making.
- Operating loss narrowed despite higher operating expenses, including engineering and development costs, sales and marketing, and depreciation and amortization. Net loss widened primarily because Q2 included $15.4 million in debt-extinguishment loss and higher interest expense.
Financing, outlook, risks and unusual items
- In June, Gogo issued $525 million of 12.5% senior secured notes due 2022 and used part of the proceeds to repay and terminate its senior term facility. The refinancing generated $15.4 million of extinguishment loss, including an $8.6 million prepayment premium and write-off of deferred financing costs. Remaining proceeds were intended for working capital and general corporate purposes, including next-generation technology rollout.
- Management said cash on hand was expected to cover working capital and capital expenditure needs for at least 12 months, while noting uncertainty around operating cash generation, expansion costs, financing availability and debt restrictions. It reported no revolving credit facility.
- Capital expenditure outlook: $150–$185 million for 2016, with $110–$135 million estimated net of airborne lease incentives; and $220–$265 million for 2017, with $140–$165 million estimated net. These estimates exclude possible spectrum-auction and related technology costs. Management expected 2016 interest expense to rise versus 2015 and service costs to grow with usage and network expansion, while expecting some operating costs to decline as a share of revenue over time.
- American Airlines agreement amendments provide continued service on about 560 contracted domestic aircraft and transition of nearly 140 mainline aircraft to 2Ku. About 550 Gogo-equipped mainline aircraft were subject to deinstallation at American’s option. Delta Private Jets announced plans to equip more than 70 aircraft with Gogo Biz 4G and related services.
- Key risks include substantial debt and high interest burden, restrictive debt covenants and collateral liens, ability to refinance or fund capital needs, execution and timing of 2Ku and international expansion, reliance on airline partners and suppliers, and competition. Revenue from Delta and American combined represented approximately 50% of consolidated revenue in the first half.
- The Salameno putative class action alleges consumer-protection, fraud, contract and data-security claims. The court granted Gogo’s motion to compel arbitration in July 2016; plaintiffs sought reconsideration on August 1, and Gogo said it would oppose. The company had not accrued a liability and stated the outcome could materially affect results. The Berkson class settlement was approved in April 2016 and its estimated cost was not material.
- Other notable items: a $1.8 million airline rebate was paid in June; operating cash flow was affected by working-capital timing and lower deferred-rent cash-flow benefit than in the prior-year period. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether service growth, aircraft additions, passenger adoption and ARPA can offset higher network, development, depreciation and financing costs.
- Reconciliation of $886.9 million face principal with $808.0 million balance-sheet debt carrying value, and the cash cost and terms of the secured notes and convertible notes.
- Whether stated liquidity and 2016–2017 capital expenditure plans remain achievable as 2Ku rollout and international expansion proceed.
- American Airlines’ deinstallation rights and the commercial impact of its aircraft transition, as well as the concentration of revenue with Delta and American.
- Developments in the Salameno litigation, including reconsideration or appeal, and any resulting liability or operational effects.