Business Context and Reporting Period
Company: Gogo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2013
Business Overview: Gogo is a leading provider of in-flight connectivity and wireless digital entertainment solutions. The company operates through three segments: Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA).
Key Event: The company completed its Initial Public Offering (IPO) on June 20, 2013, selling 11 million shares at $17.00 per share, resulting in net proceeds of approximately $170.3 million. All outstanding convertible preferred stock converted to common stock upon the IPO.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Total Revenue | $79,437 | $150,191 |
| Operating Loss | $(9,062) | $(19,362) |
| Net Loss | $(55,989) | $(70,466) |
| Net Loss Attributable to Common Stock | $(72,578) | $(105,028) |
| Diluted EPS (Common) | $(4.98) | $(9.82) |
| Cash and Cash Equivalents (End of Period) | $312,154 | $312,154 |
| Long-Term Debt | $238,979 | $238,979 |
| Adjusted EBITDA | $3,789 | $6,639 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 37.2% for the three months and 33.9% for the six months ended June 30, 2013, compared to the prior year periods. Service revenue grew 54.0% (QTD) and 52.5% (YTD), driven by increased aircraft online in the CA-NA segment and growth in the BA segment.
- Loss Expansion: Net loss attributable to common stock widened significantly due to a $36.3 million non-cash fair value derivative adjustment related to the liquidation preference of preferred stock upon the IPO, and increased interest expense from the Amended Senior Term Facility.
- Debt Increase: Long-term debt increased from $131.5 million (Dec 31, 2012) to $239.0 million (June 30, 2013) following a $113 million "New Borrowing" under the Senior Term Facility in April 2013.
- Acquisition: The company acquired LiveTV Airfone, LLC for $9.3 million in April 2013, adding spectrum licenses and subscribers to the BA segment.
- Capital Structure: The IPO resulted in the conversion of all preferred stock to common stock, eliminating preferred stock dividends and accretion charges in future periods.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates full-year 2013 capital expenditures will range from $140 million to $170 million. Cash CAPEX (net of airline reimbursements) is expected to range from $115 million to $135 million.
- Liquidity: The company believes cash on hand ($312 million) and access to its credit facility are sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
- Segment Outlook:
- CA-NA: Continued growth in aircraft online (1,982 as of June 30, 2013) and revenue per passenger opportunity.
- CA-ROW: Remains in the start-up phase with minimal revenue; losses are expected to increase as international expansion costs rise.
- BA: Profitable segment with growth in service revenue and equipment sales.
- Risks and Contingencies:
- Airfone Liability: Potential liability of approximately $3.0 million related to under-remitted Federal Universal Service Fund fees by the acquired Airfone entity. An indemnity provision and $1 million escrow exist to cover this.
- Litigation: Pending antitrust lawsuit (Stewart) and patent infringement claims (Innovatio IP Ventures) remain unresolved, though an AMN patent suit was settled for an immaterial amount.
- American Airlines: Approximately 15% of consolidated revenue is derived from American Airlines, which is undergoing Chapter 11 reorganization.
Investor Verification Checklist
- Derivative Adjustment Impact: Verify the $36.3 million non-cash charge related to the preferred stock liquidation preference and confirm its non-recurring nature post-IPO.
- Debt Covenants: Review the Amended Senior Term Facility covenants, specifically the mandatory prepayment triggers based on the ABAS debt leverage ratio.
- Airfone Integration: Monitor the finalization of the purchase price allocation and any additional liabilities arising from the Airfone acquisition regarding FCC fees.
- Capital Expenditure Execution: Track actual CAPEX against the $140M-$170M guidance to ensure liquidity remains sufficient for network upgrades (ATG-4) and international expansion.
- Customer Concentration: Assess the impact of American Airlines' bankruptcy proceedings on the 15% of revenue derived from that partner.