Gogo Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Gogo provides in-flight connectivity, entertainment, and related services through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $141.7 | $115.5 |
| Operating loss | $(8.6) | $(9.8) |
| Net loss | $(24.1) | $(20.1) |
| Net loss per share, basic and diluted | $(0.31) | $(0.24) |
| Net cash from (used in) operating activities | $(2.4) | $33.6 |
| Capital expenditures | $37.4 | $56.8 |
- Revenue rose 22.7% to $141.7 million: service revenue increased 24.4% to $118.7 million and equipment revenue rose 14.5% to $23.0 million. CA-NA revenue was $87.0 million (+20.0%), BA $50.1 million (+20.5%), and CA-ROW $4.6 million (+226.6%).
- Direct costs of service and equipment revenue totaled $68.6 million, implying gross profit of approximately $73.1 million and a 51.6% gross margin, broadly unchanged from Q1 2015. Operating margin improved to approximately negative 6.1% from negative 8.5%; net margin was approximately negative 17.0% versus negative 17.4%.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $14.5 million, versus $8.2 million. It excludes, among other items, stock-based compensation and deferred airborne lease incentive amortization; it is not a substitute for GAAP results.
- Cash and cash equivalents were $312.7 million at March 31, down from $366.8 million at year-end. Current assets were $426.3 million and current liabilities $179.5 million.
- Total debt before deferred financing costs was $566.4 million, including $287.7 million under the senior term facility and $361.9 million principal on convertible notes. The balance sheet reported $546.3 million of long-term debt and $9.1 million of current debt and capital leases. Cash was therefore below gross debt by approximately $253.7 million.
- Investing activities used $37.4 million; financing activities used $14.1 million, primarily for debt and lease payments, including a $12.2 million mandatory prepayment. The operating cash-flow comparison worsened substantially, with working-capital movements a major factor.
Material changes and operating drivers
- CA-NA service growth reflected more aircraft online, higher connectivity revenue, and higher average revenue per session (ARPS: $13.05 versus $11.73). The connectivity take rate declined to 6.5% from 7.2%, while aircraft online increased to 2,500 from 2,200.
- BA service revenue benefited from growth in Gogo Biz subscriptions; ATG aircraft online increased to 3,681 from 2,983. CA-ROW remained in start-up mode and reported a segment loss of $19.7 million, compared with $18.3 million.
- Operating expenses increased 20.0% to $150.3 million. Depreciation and amortization rose 29.7% to $24.4 million, while engineering and sales and marketing expenses also increased as the company developed new technology and expanded its business.
- Interest expense increased 61.4% to $16.3 million, largely reflecting the convertible notes, including non-cash accretion and financing-cost amortization. Total debt principal declined from year-end, largely following scheduled and mandatory repayments.
Outlook, commentary, risks, and contingencies
- Management said cash on hand was expected to fund working-capital and capital-expenditure needs for at least the next 12 months, while noting that longer-term liquidity could depend on operating cash flow and, if needed, additional financing. The filing notes restrictions on additional borrowing.
- For 2016, management estimated capital expenditures of $150 million to $185 million, or $110 million to $135 million net of deferred airborne lease incentives. It expected deferred airborne lease incentives to increase cash flow by $40 million to $50 million during 2016. These estimates exclude potential costs of acquiring additional spectrum.
- Management expected higher spending on technology development, international expansion, network capacity, and aircraft installations, including 2Ku; it also expected interest expense to increase in 2016. No specific revenue or earnings guidance is provided in the filing text.
- Gogo announced significant prospective 2Ku selections and awards, including Delta awards covering more than 600 aircraft, IAG aircraft, Air Canada’s wide-body international fleet, and approximately 50 aircraft through Shareco Technologies. Definitive agreements were still being negotiated for these selections. The company expected first British Airways 2Ku service in early 2017.
- A key customer risk is American Airlines’ February 2016 notice that it viewed a competitor’s service as a material improvement over Gogo’s ATG/ATG-4 on approximately 200 of the 1,037 American aircraft Gogo served. Gogo proposed installing 2Ku and awaited the airline’s decision. Airline contracts, renewals, installation schedules, service performance, and competition remain material risks.
- The Salameno putative class action alleges consumer-protection, marketing, and data-security claims; damages sought are unspecified. Gogo had not accrued a liability because the possible loss could not be determined, and stated that an adverse outcome could materially affect results. The separate Berkson settlement was approved April 5, 2016 and its estimated cost was described as immaterial.
- Other commitments include substantial future satellite-capacity purchases and operating leases. Gogo also expected to pay a $1.8 million airline rebate in June 2016. The company reported compliance with senior-facility covenants and no event of default at March 31, 2016.
Important facts for investors to verify
- Whether announced 2Ku selections become definitive contracts, and whether installations and service launches meet expected timing and economics.
- American Airlines’ decision on the proposed 2Ku installation and any resulting effects on Gogo’s fleet access and revenue.
- Whether service-revenue growth translates into sustainable operating cash flow, given Q1 operating cash use and planned 2016 capital spending.
- Debt-service capacity and refinancing or repayment needs, particularly the senior term facility maturity in March 2018 and convertible notes due in 2020.
- The outcome and potential exposure from the Salameno litigation, as well as customer concentration and airline contract-renewal risks.