Gogo Inc. quarterly report, Q2 FY2022

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Gogo Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Unless noted, amounts are in U.S. dollars; financial figures below are in millions. Gogo provides broadband connectivity and related equipment for business aviation. The former commercial aviation business is reported as discontinued operations.

Financial performance and position

  • Q2 revenue: $97.8 million, up 18.8% year over year. Service revenue was $73.1 million (+12.8%); equipment revenue was $24.8 million (+40.7%). Growth reflected more ATG aircraft online, higher average ATG service revenue per aircraft, and increased ATG unit sales.
  • Q2 earnings: Operating income was $32.3 million, versus $29.6 million; net income was $22.0 million, versus a $69.2 million net loss. Prior-year results included $79.6 million of debt-extinguishment and convertible-note settlement losses and a $2.9 million discontinued-operations loss. Diluted EPS was $0.17 versus a $0.63 loss.
  • Six-month results: Revenue was $190.6 million, up 22.0%; operating income was $67.3 million versus $57.4 million; net income was $44.2 million versus a $76.9 million net loss. Prior-year results included $84.0 million of debt-extinguishment and settlement losses.
  • Margins: Calculated operating margin was 33.1% in Q2 versus 35.9% a year earlier. Direct revenue less service and equipment costs was $65.2 million, or 66.6% of revenue, versus $56.3 million, or 68.3%; this is a calculated measure, not a reported GAAP gross-margin line.
  • Adjusted EBITDA (non-GAAP): $41.2 million in Q2 versus $36.7 million; $84.0 million for six months versus $70.6 million.
  • Cash flow and investment: Six-month operating cash flow was $44.2 million versus $9.6 million. Free cash flow (non-GAAP) was $24.3 million versus negative $0.9 million. Capital expenditures were $20.0 million versus $1.8 million, primarily reflecting the Gogo 5G buildout. Cash and cash equivalents were $164.0 million at June 30, up from $145.9 million at year-end.
  • Debt and liquidity: Term Loan Facility principal was $717.8 million, with a $714.7 million carrying amount before presentation of current maturities and financing costs. The $102.8 million convertible notes were converted into 17.1 million shares in May; the revolving facility was undrawn. Current assets were $300.0 million and current liabilities $91.7 million. Management said expected cash, operating cash flow, and capital-market access should cover requirements for at least 12 months and thereafter for the foreseeable future.
  • Other balance-sheet items: Stockholders’ deficit improved to $145.6 million from $320.2 million at year-end. The company recorded $20.6 million of six-month after-tax unrealized gains on cash-flow hedges in other comprehensive income.

Material changes and operating indicators

  • ATG aircraft online rose to 6,654 from 6,036 year over year; satellite aircraft online declined to 4,462 from 4,587. Q2 average monthly connectivity revenue per ATG aircraft was $3,328 versus $3,296.
  • Q2 ATG units sold increased to 310 from 182; satellite units sold fell to 32 from 67. Equipment cost rose faster than equipment revenue, contributing to lower calculated direct margin.
  • Interest expense declined to $9.8 million in Q2 from $16.3 million, reflecting the prior refinancing and an interest-rate-cap benefit. Debt remains floating-rate and substantial.
  • The company announced plans for Global Broadband using a Hughes-designed electronically steered antenna and OneWeb’s low-earth-orbit network. The Hughes agreement commits Gogo to approximately $170 million of antenna purchases over seven years, beginning after a project milestone then expected at the end of 2024.

Outlook, risks, and contingencies

  • Management expected service revenue to grow with additional ATG aircraft and higher revenue per aircraft, equipment revenue to grow with unit sales, and further growth from Global Broadband. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
  • Component manufacturing issues and supply-chain delays were expected to move the Gogo 5G commercial launch from the prior fourth-quarter 2022 target into 2023. Management expected near-term capital expenditures to rise for the 5G buildout, then decrease substantially after completion.
  • Risks include competition (including potential Starlink entry), execution and supplier dependence for 5G and Global Broadband, regulatory and spectrum access, supply constraints and inflation, aviation demand and COVID-19 effects, and the company’s substantial variable-rate debt. A one-percentage-point LIBOR change was estimated to affect next-12-month interest expense by about $0.7 million after caps, versus about $7.2 million without caps.
  • A securities class action settlement of $17.3 million was accrued, with a corresponding insurance receivable; insurers had deposited the amount into escrow, but final court approval was pending at filing. A separate derivative-litigation resolution was under discussion and subject to court approval.
  • SmartSky alleged infringement of four patents relating to Gogo 5G and sought damages and a preliminary injunction. Gogo disputed the claims; no loss was accrued because the outcome and potential loss could not be reasonably predicted.
  • Management reported effective disclosure controls as of June 30, 2022, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Progress, launch timing, costs, and customer adoption for Gogo 5G and Global Broadband; assess the $170 million antenna commitment against execution and demand risks.
  • ATG customer growth, revenue per aircraft, unit sales, equipment margins, and whether supply-chain delays affect deliveries.
  • Floating-rate debt exposure, interest-rate-cap coverage as cap notionals decline and strike rates rise, and ability to service debt and fund capital spending.
  • Final status and insurance coverage of the securities settlement, and developments in SmartSky and derivative litigation.
  • Reconcile non-GAAP Adjusted EBITDA and free cash flow to GAAP results; these measures exclude specified items and are not substitutes for GAAP income or operating cash flow.