Gogo Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Gogo provides in-flight connectivity, entertainment, and communications services and equipment to commercial and business aviation customers. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Revenue | $85.4m | $57.8m | $235.6m | $170.0m |
| Operating loss | $(10.9)m | $(8.6)m | $(30.3)m | $(17.8)m |
| Net loss | $(18.7)m | $(13.0)m | $(89.2)m | $(13.6)m |
| Net loss attributable to common stock | $(18.7)m | $(29.0)m | $(123.7)m | $(59.7)m |
| Adjusted EBITDA (non-GAAP) | $2.0m | $0.6m | $8.7m | $8.8m |
| Cash from operating activities | Not presented for the quarter | $2.6m | $23.6m |
- Q3 revenue grew 47.6%; service revenue rose 52.1% and equipment revenue 35.7%. First-nine-month revenue grew 38.6%.
- Approximate gross margin, calculated as revenue less cost of service and equipment revenue, was 47.5% in Q3 versus 49.3% a year earlier, and 50.0% for the first nine months versus 52.3%. Operating margin was approximately (12.8)% in Q3 versus (14.9)%, and (12.8)% for nine months versus (10.5)%.
- Q3 common-stock loss improved against the prior year largely because 2012 included preferred-stock return and accretion; Q3 2013 had no such charges after the IPO conversion. The nine-month 2013 loss also included a $36.3m noncash fair-value derivative expense and preferred-stock return and accretion. Adjusted EBITDA is a company-defined non-GAAP measure and should not replace GAAP results.
- At September 30, cash and cash equivalents were $284.7m, current assets $337.9m, and current liabilities $93.1m. Total assets were $689.1m and stockholders’ equity $289.4m, versus a $445.8m stockholders’ deficit at December 31, 2012.
- Long-term debt under the amended term facility was $242.4m, with another $1.6m outstanding under the Alaska facility. The term facility carried an 11.25% interest rate at quarter end and matures in June 2017; $222.2m of scheduled principal is due in 2017. The debt is secured by substantial assets and has restrictive covenants, though no maintenance covenants. Gogo reported compliance at September 30.
- Nine-month investing cash outflow was $102.8m, including $94.0m of capital expenditures and $9.3m for Airfone. Financing cash inflow was $272.4m, principally from the IPO and additional term borrowing. Cash increased $172.1m to $284.7m.
Changes, operating drivers, and outlook
- CA-NA revenue rose 52.6% in Q3 to $50.6m. Aircraft online increased to 2,011 from 1,620; connectivity take rate increased to 5.8% from 4.8%, and average monthly service revenue per aircraft to $8,338 from $6,867. Management attributed growth to fleet expansion, higher take rates, pricing and product mix.
- Business Aviation revenue rose 41.8% in Q3 to $34.8m; segment profit increased to $14.6m from $8.6m. CA-ROW remained in start-up, with Q3 revenue of $0.1m and a segment loss of $11.0m, versus a $3.8m loss a year earlier.
- Management expects 2013 capital expenditures of $110m–$140m, or $95m–$115m net of deferred airborne lease incentives, and expects 2014 capital spending to exceed 2013, mainly due to international expansion. It believes available cash and other sources should meet working-capital and capital needs for at least 12 months, while noting longer-term financing is not assured. No specific revenue or earnings guidance is provided.
- Management expects ongoing technology, network, and international investment; higher R&D, depreciation, and interest costs; and rising airline revenue-share costs. It expects service costs to decline as a percentage of service revenue over time as the business scales, but also estimates future contractual revenue-share increases of about 2% of CA-NA service revenue.
- Recent developments include a Virgin America contract extension through September 2018, fleet upgrades, and its selection as launch partner for Gogo GTO, targeted for the second half of 2014 with peak aircraft speeds of 70 Mbps. A Japan Airlines agreement covers 77 domestic aircraft, with service expected in summer 2014. Gogo also launched new Business Aviation services in October.
Risks, contingencies, and unusual items
- Airfone acquisition accounting remained preliminary. Gogo estimated about $3.7m of potential historical FCC Universal Service Fund under-remittances and customer refunds; the estimate could change materially, and FCC enforcement could add interest, penalties, or fines. A $1m escrow and purchase-agreement indemnity may offset exposure but may be insufficient or unavailable.
- American Airlines accounted for approximately 14% of consolidated Q3 revenue and 15% for the nine-month period; the filing notes its Chapter 11 reorganization. Passengers on two airline partners together generated approximately 39% of consolidated Q3 revenue and 41% for the nine-month period.
- Potential airline-contract exposure includes a credit or refund of up to $25m tied to international satellite installation timing, plus other regulatory-approval, installation-delay, and penalty provisions. Amounts due under some delay provisions are uncertain.
- Pending matters include Innovatio patent litigation, for which Gogo may have indemnification obligations to airline customers, and a putative antitrust class action. The company recorded no liability for either because the possible loss could not be determined; both could materially affect results. The AMN patent case was settled in July 2013 for an immaterial amount.
- ATG-4 retrofit plans shortened estimated useful lives for certain equipment. Accelerated depreciation increased Q3 and nine-month expense by $0.5m and $4.0m, respectively; another $1.6m was expected through Q3 2014.
- Other risks cited include airline-partner dependence, technology and regulatory execution, network capacity, satellite suppliers, competition, capital needs, debt restrictions, and seasonality. Disclosure controls were reported effective at September 30, 2013.
Most important facts for investors to verify
- Whether CA-NA service growth and improving usage metrics can offset higher revenue shares, operating costs, and substantial capital requirements.
- Whether management’s capital-spending estimates and liquidity expectations remain achievable, given operating cash flow of only $2.6m in the first nine months and variable-rate debt of $242.4m.
- The final Airfone purchase-price allocation and the ultimate FCC/customer liability, including the recoverability of the escrow and indemnity.
- Progress, installation timing, regulatory approvals, and economics for ATG-4, satellite expansion, Gogo GTO, and the JAL deployment.
- Developments in airline concentration and the American Airlines situation, as well as exposure and outcomes in the pending litigation and airline-contract provisions.