Gogo Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Gogo provides in-flight connectivity, entertainment and related equipment and services through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $199.5 | $231.8 |
| Service revenue | $165.0 | $150.7 |
| Equipment revenue | $34.5 | $81.1 |
| Operating income (loss) | $11.4 | $(2.2) |
| Net loss | $(16.8) | $(27.4) |
| Net loss per share | $(0.21) | $(0.34) |
| Cash used in operating activities | $(6.2) | $(46.2) |
| Capital expenditures | $27.7 | $62.7 |
| Free cash flow (non-GAAP) | $(33.9) | $(108.9) |
| Adjusted EBITDA (non-GAAP) | $38.0 | $11.9 |
- Operating margin was approximately 5.7%, versus a negative 0.9% in Q1 2018; net margin was approximately negative 8.4%, versus negative 11.8%.
- Cash and cash equivalents were $188.7 at March 31, 2019, with no short-term investments; restricted cash was $7.0. Current assets were $492.0 and current liabilities $271.3, or working capital of $220.7.
- Long-term debt carrying value was $1,030.4, excluding operating lease liabilities. Total liabilities were $1,580.8 and stockholders’ deficit was $284.0. Interest expense was $32.6; cash interest paid was $46.2.
Changes versus the prior comparable period
- Revenue fell 13.9% as equipment revenue dropped 57.4%; service revenue rose 9.5%. The comparison is significantly affected by a $45.4 equipment-revenue accounting recognition in Q1 2018 when an airline moved to the airline-directed model.
- Operating results improved to income from a loss, and net loss narrowed by $10.6. Lower operating expenses and lower depreciation and amortization contributed; other income included $3.2 of litigation settlement proceeds.
- Operating cash use improved by $40.0, while capital expenditures decreased $34.9. Free cash flow remained negative.
- Segment revenue: CA-NA declined 33.2% to $96.1; BA rose 2.5% to $70.5; CA-ROW rose 71.8% to $32.9. CA-ROW remained loss-making, with a segment loss of $19.1.
- CA-NA service revenue increased 3.7%, despite fewer aircraft equivalents following American Airlines equipment deinstallations; net annualized revenue per aircraft equivalent increased to $126,000 from $103,000. CA-ROW aircraft online grew to 641 from 414, while its net annualized revenue per aircraft equivalent decreased to $136,000 from $159,000.
Outlook, financing, risks and unusual items
- Management expected CA-NA service revenue to decline in the near term, principally because of American Airlines aircraft deinstallations. It expected CA-NA service costs to plateau over time and CA-ROW costs to rise as the business expands. Capital expenditures were expected to vary with turnkey installations.
- Management stated that available cash and expected operating cash flows would be sufficient for near- and long-term obligations, including capital spending, while noting that financing access and financial performance could constrain future funding. Gogo has not historically generated positive consolidated cash flow aside from financing transactions.
- After quarter-end, Gogo issued $905 of 9.875% senior secured notes due 2024 in April and an additional $20 in May. The proceeds funded the redemption of $690 principal of 12.5% secured notes due 2022, with remaining proceeds intended for general corporate purposes, including possible repayment of 2020 convertible notes. A cash tender offer for the remaining $162 principal of 2020 convertible notes was pending as of the filing; participation was not assured. These transactions are subsequent events, not March 31 balance-sheet debt amounts.
- Gogo adopted ASC 842 leases on January 1, recognizing operating lease right-of-use assets and liabilities; adoption reduced opening accumulated equity by $3.1 and did not materially affect reported operations or cash flows.
- Customer concentration is material: Delta-related revenue was approximately 29% of consolidated revenue, versus 20% a year earlier. Satellite capacity commitments totaled approximately $77.3 for April–December 2019, with further multiyear commitments disclosed.
- Pending matters include Linksmart patent litigation, a securities class action alleging disclosures concerning 2Ku reliability and remediation costs, and related derivative litigation. The company reported no accruals because outcomes or potential losses could not be reasonably predicted. It also disclosed potential airline credits or penalties, warranty exposure and broad indemnification obligations.
- Key business risks include execution and reliability of technology deployments, airline contract renewals and model changes, competition, satellite capacity and supplier dependence, high indebtedness and refinancing needs, litigation, and regulatory and international operating risks. Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the 2024 note refinancing and redemption were completed as described, and the final amount and funding of any 2020 convertible-note tender or repayment.
- Whether service-revenue growth, aircraft additions and improved unit economics can offset CA-NA aircraft removals and declining equipment revenue.
- Cash conversion, capital spending and liquidity needs against substantial debt service, lease obligations and satellite-capacity commitments.
- Progress and financial effects of the disclosed litigation, warranty matters and technology deployment risks.
- How much of reported Q1 improvement reflects recurring operations versus the $3.2 litigation settlement and the non-comparable 2018 airline-model transition.