Gogo Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; comparisons are with the three and nine months ended September 30, 2013. Gogo provides in-flight connectivity and related services through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). CA-ROW launched commercial connectivity in March 2014 and remained in start-up.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $104.0 | $85.4 | $299.3 | $235.6 |
| Operating loss | $(15.3) | $(10.9) | $(35.5) | $(30.3) |
| Net loss | $(24.9) | $(18.7) | $(60.4) | $(89.2) |
| Adjusted EBITDA (non-GAAP) | $1.2 | $2.0 | $9.6 | $8.7 |
| Operating cash flow | Not separately stated | Not separately stated | $18.9 | $2.6 |
| Capital expenditures (cash flow statement) | Not separately stated | Not separately stated | $109.5 | $94.0 |
- Q3 service revenue rose 27.9% to $81.6 million; equipment revenue rose 4.0% to $22.4 million. Nine-month service and equipment revenue increased 28.9% and 20.7%, respectively.
- Gross margin, calculated as revenue less service and equipment costs, was approximately 47.5% in Q3 2014 versus 47.5% in Q3 2013; for nine months it was approximately 48.4% versus 50.0%. Operating losses widened in both comparisons as expenses increased.
- Q3 net loss worsened despite revenue growth, including higher interest expense and operating costs. Nine-month net loss improved year over year partly because 2013 included $36.3 million of derivative fair-value expense and $34.6 million of preferred-stock return and accretion.
- At September 30, cash and cash equivalents were $243.2 million, down from $266.3 million at year-end 2013. Current assets were $309.3 million and current liabilities $129.9 million. Total assets were $745.0 million; stockholders’ equity was $218.9 million.
- The July 2014 amendment added $75 million of term debt, with $72.4 million net proceeds; term-facility principal outstanding was $311.0 million at quarter-end. The facility matures in March 2018 and had variable rates of 11.25% on Tranche B-1 and 7.50% on Tranche B-2. Gogo reported covenant compliance and no default. The balance sheet also reports debt and capital leases; total obligations should not be equated solely with the facility principal.
- Cash used in investing activities was $112.0 million for the first nine months, largely reflecting capital investment. Financing provided $70.0 million, principally from the additional borrowing. Cash decreased by $23.1 million over the period.
Changes and operating trends
- CA-NA revenue increased 25.1% in Q3 and 27.0% for the nine months, driven mainly by connectivity. Q3 aircraft online rose to 2,044 from 2,011; connectivity take rate increased to 6.2% from 5.8%, and average monthly service revenue per aircraft rose to $10,134 from $8,338.
- BA revenue increased 15.7% in Q3 and 28.3% for the nine months. ATG aircraft online grew to 2,637 from 1,847; BA segment profit was $15.0 million in Q3 and $46.9 million for the nine months.
- CA-ROW generated $0.5 million of Q3 service revenue and $0.9 million for the nine months, while its segment loss increased to $19.4 million and $55.1 million, respectively, reflecting start-up investment and international network costs.
- Consolidated operating expenses rose 23.9% in Q3 and 25.9% for the nine months, including higher engineering and development, sales and marketing, and depreciation and amortization. Interest expense also rose with higher average debt.
Outlook, risks and unusual items
- Management estimated 2014 capital expenditures of $155–$190 million, or $100–$120 million net of expected airborne-equipment and landlord incentives. It anticipated $55–$70 million of those incentives and expected ongoing investment in ATG-4 upgrades, international expansion, satellite technology and facilities.
- Management believed cash on hand and other sources would cover working capital and capital needs for at least 12 months, while noting Gogo had not generated positive consolidated cash flows and longer-term funding could require additional equity or permitted debt financing.
- Management expected continued growth in service costs, international and technology-development spending, sales and marketing, and depreciation. It anticipated some CA-NA cost efficiencies as the business scales, but expected revenue-share percentages under certain contracts to rise by about 2% of CA-NA service revenue.
- Material risks include reliance on airline partners and suppliers, competition, technology execution and capacity, international regulatory approvals, high capital needs and debt restrictions, and litigation. The senior facility restricts additional indebtedness and includes limits on certain investments and capital expenditures.
- A commercial-airline contract could require up to $25 million in credits or refunds depending on satellite installation timing; other contracts also provide for regulatory-delay penalties. A $1.8 million airline rebate payable in June 2014 remained unpaid at quarter-end.
- The Berkson consumer class-action matter remained unresolved; the company had not accrued a liability and stated the outcome could materially affect results. Carucel patent litigation was dismissed with prejudice on October 21, 2014, after quarter-end. Airfone’s prior universal-service-fee remittances were corrected; its seller agreed to indemnify Gogo for specified further amounts and penalties.
- Management reported disclosure controls were effective as of September 30, 2014 and no material change in internal control over financial reporting during the quarter. The filing states no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether service growth and improving CA-NA passenger adoption can offset higher operating costs, sustained losses and rising interest expense.
- Progress and economics of CA-ROW rollout, including aircraft installations, revenue growth, segment losses and contractual installation deadlines.
- Actual 2014 capital spending and incentive receipts versus management’s estimates, and the resulting cash use and funding needs.
- Term-debt repayment capacity, variable interest-rate exposure, covenant headroom and restrictions on financing and investment.
- Outcome of the Berkson litigation, any exposure under airline installation and rebate agreements, and resolution of remaining Airfone-related contingencies.
Adjusted EBITDA is a non-GAAP measure; the filing cautions that it should be considered alongside, not as a substitute for, GAAP results.