Gogo Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Gogo provides in-flight connectivity services and equipment for business aviation, primarily through ATG and narrowband satellite networks.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Service revenue | $78.5 | $70.7 | +11.1% |
| Equipment revenue | $20.1 | $22.1 | -9.0% |
| Total revenue | $98.6 | $92.8 | +6.3% |
| Operating income | $31.9 | $34.9 | -8.6% |
| Net income | $20.4 | $22.2 | -7.9% |
| Diluted EPS | $0.15 | $0.18 | |
| Adjusted EBITDA (non-GAAP) | $39.7 | $42.8 | -7.1% |
| Operating cash flow | $18.5 | $17.9 | |
| Free cash flow (non-GAAP) | $20.0 | $8.8 |
Service revenue growth reflected more ATG aircraft online and higher average monthly service revenue per aircraft. Equipment revenue fell mainly because fewer ATG units were sold. Operating costs increased, including cost of equipment revenue and engineering and development. Calculated operating margin was approximately 32.4%, versus 37.7% a year earlier.
At March 31, cash and cash equivalents were $163.3 million and short-term investments were $24.7 million, totaling $188.0 million. Current assets were $335.4 million and current liabilities $73.4 million. Term-loan principal was $712.3 million; balance-sheet debt carrying value, including current and long-term portions, was approximately $696.2 million. The $100 million revolving facility was undrawn. On May 3, 2023, after quarter-end, Gogo repaid $100 million of term-loan principal. Management said available cash, operating cash flow and capital-market access should meet requirements for at least the next 12 months and thereafter for the foreseeable future.
Operating cash flow was $18.5 million. Investing activities provided $1.6 million, including $6.1 million of interest-rate-cap proceeds; financing activities used $7.4 million. Capital expenditures were $4.6 million. Free cash flow is a company-defined non-GAAP measure and includes interest-rate-cap proceeds.
Material changes and management outlook
- Aircraft online increased to 7,046 ATG aircraft from 6,526; narrowband satellite aircraft decreased to 4,458 from 4,522. Average monthly connectivity revenue per aircraft rose to $3,389 for ATG and $304 for narrowband satellite, versus $3,321 and $235, respectively.
- Gogo expected to commercially launch its Gogo 5G ATG network in Q4 2023. Global Broadband, using an electronically steered antenna and a low-earth-orbit satellite network, was targeted for launch in the second half of 2024.
- Management expected service revenue to grow with aircraft additions and higher service revenue per aircraft, and equipment revenue to benefit from more unit sales. It anticipated higher development spending through 2024 for 5G and Global Broadband, and expected service costs to rise with growth and new-network costs. No specific full-year revenue or earnings guidance was provided in the filing.
- Gogo committed to purchase additional equipment from Hughes under an amended agreement: approximately $102 million over seven years beginning after a project milestone expected in mid-2025. A prior commitment was approximately $170 million over seven years, expected to begin after a milestone at the end of 2024.
Risks, contingencies and unusual items
- FCC reimbursement program: Gogo decided to participate in the partially funded program to remove and replace covered ZTE equipment. Although approximately $334 million was approved, only approximately $132 million was allocated because of a funding shortfall; no FCC receivable had been recorded at March 31. Gogo said it did not expect to complete the work by July 2024 and intended to seek extensions. Insufficient funding, missed deadlines or customers’ failure to replace aircraft equipment could increase costs, result in sanctions or disrupt service. A $1.3 million inventory write-down related to participation was recorded in equipment costs.
- Patent litigation: SmartSky alleged that Gogo 5G infringes six patents and seeks unspecified damages, including treble damages. The preliminary injunction request was denied, but the plaintiff appealed; trial was scheduled for April 2025. Gogo disputed the claims and recorded no loss accrual because the outcome and potential losses could not be reasonably predicted.
- Interest-rate exposure: Debt bears floating interest. Gogo estimated that a one-percentage-point rate change would affect annual interest expense by approximately $1.5 million over the next 12 months after interest-rate caps, compared with approximately $7.1 million without the caps. Hedge notional amounts decline over time.
- Other items: A $7.1 million after-tax decline in cash-flow hedge value reduced other comprehensive income. The effective tax rate rose to 17.7% from 8.0%; management noted possible further valuation-allowance releases in 2023 if operating performance continues. A derivative settlement was approved by the court in April 2023, with governance changes required; the company said no damages were payable.
- Other principal risks cited include substantial indebtedness, dependence on suppliers and OEMs, technology development and launch execution, competition, supply-chain disruptions, spectrum rights, service or cybersecurity disruptions, and the ability to realize deferred tax assets.
Important facts for investors to verify
- Progress and costs of the FCC equipment replacement, actual reimbursements, funding availability and any deadline extensions.
- Gogo 5G launch timing, adoption and related costs, plus Global Broadband development, supplier commitments and launch schedule.
- Post-May 3 debt balance, cash available after repayment, floating-rate exposure, hedge coverage and compliance with credit-agreement terms.
- Whether service growth and higher revenue per aircraft can offset rising network and development costs and lower equipment sales.
- Developments in the SmartSky litigation and any effect on Gogo 5G deployment or potential liabilities.