Gogo Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Gogo provides connectivity services and equipment to business aviation customers, using air-to-ground and satellite networks. Following its December 1, 2020 sale of the commercial aviation business to Intelsat, results for that business are presented as discontinued operations. Comparisons with Q1 2020 therefore reflect continuing operations unless stated otherwise.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $73.9 | $70.9 |
| Operating income | $27.8 | $21.3 |
| Operating margin | 37.6% | 30.0% |
| Net loss from continuing operations | $5.9 | $9.4 |
| Net loss, including discontinued operations | $7.7 | $84.8 |
| Adjusted EBITDA (non-GAAP) | $33.9 | $27.2 |
| Cash from continuing operating activities | $24.6 | $23.9 |
| Free cash flow (non-GAAP) | $23.9 | $23.0 |
Service revenue was $59.4 million, up 2.8%, and equipment revenue was $14.5 million, up 9.9%. Operating expenses declined to $46.1 million from $49.6 million. Interest expense was $29.3 million; a $4.4 million loss on convertible-note exchanges contributed to total other expense of $33.6 million.
Cash and cash equivalents were $455.2 million at March 31, 2021, versus $435.3 million at year-end 2020. Current assets were $529.6 million and current liabilities $109.2 million. Debt carrying value was $1.164 billion at quarter-end, comprising $975 million principal of 2024 secured notes and $208.5 million principal of 2022 convertible notes. Stockholders’ deficit was $631.5 million.
Material changes versus the prior comparable period
- Revenue increased 4.1%, supported by more ATG aircraft online, Intelsat network-sharing revenue, and higher ATG equipment unit sales.
- Operating income rose to $27.8 million. Lower engineering, sales and marketing, and general and administrative expenses more than offset higher service costs. Cost of service revenue increased 28.1%, primarily because ATG network costs were no longer shared with the divested commercial aviation business.
- Net loss narrowed substantially from Q1 2020, when discontinued operations recorded a $75.4 million loss, including a $46.4 million long-lived-asset impairment. Q1 2021 discontinued-operation loss was $1.8 million, mainly residual costs after the sale.
- ATG aircraft online increased to 5,892 from 5,713; satellite aircraft online decreased to 4,614 from 4,939. Average monthly ATG connectivity revenue per aircraft was $3,085 versus $3,143.
- Gogo early adopted ASU 2020-06 on January 1, 2021, changing convertible-debt accounting and increasing reported debt while reducing additional paid-in capital.
Outlook, commentary, risks and unusual items
- Management expected service and equipment revenue to grow as additional ATG aircraft come online. It expected service costs to rise over time, including from Gogo 5G, and depreciation and amortization to increase as the network is launched.
- Gogo planned a nationwide Gogo 5G deployment in 2022. A supplier identified a manufacturing issue with a component, requiring process revisions and additional testing scheduled for May 2021. Management believed the schedule could be met, but warned that timing flexibility was reduced.
- COVID-19 continued to affect business aviation activity, and management could not predict the duration or severity of the impact. The filing also identifies electronic-component shortages and longer lead times as potential sources of product or installation delays.
- After quarter-end, Gogo entered into a $725 million term loan and a $100 million revolving facility on April 30, 2021, and used the term-loan proceeds plus cash to redeem the $975 million 2024 notes at a 104.938% redemption price and terminate its ABL facility. As of May 1, the company reported approximately $828 million of total debt, including $725 million of term loans and $103 million of convertible notes. The new facilities carry floating rates and financial and other covenants.
- After quarter-end, GTCR exchanged $105.7 million of convertible notes for approximately 19.1 million common shares. Gogo said it expected interest expense to decline following the refinancing and note exchanges. The exchanges also create potential shareholder dilution.
- Intelsat’s draft sale closing statement sought a $9.4 million working-capital adjustment. Gogo recorded that amount as a deferred gain in accrued liabilities while the post-closing adjustment remained unresolved.
- The securities class-action court denied Gogo’s motion to dismiss in April 2021; related derivative litigation could resume. Gogo disputes the claims and had not accrued potential losses, which it said could not be reasonably predicted.
Important facts for investors to verify
- Final disposition of the $9.4 million commercial-aviation sale price adjustment.
- Progress, cost, supplier readiness and timing for the planned 2022 Gogo 5G launch.
- Post-refinancing interest costs, debt repayment capacity, covenant headroom and availability under the revolving facility.
- Effects of the remaining convertible notes and related exchanges on cash requirements and share dilution.
- Business aviation demand recovery, Intelsat revenue sharing, component availability and the status of disclosed litigation.