Gogo Inc. — Q2 2018 Form 10-Q
Business and period: Gogo provides in-flight connectivity, entertainment and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $227.5 | $172.8 | $459.3 | $338.2 |
| Operating loss | $(7.4) | $(17.3) | $(9.6) | $(32.0) |
| Net loss | $(37.2) | $(44.2) | $(64.6) | $(85.6) |
| Net loss per share, diluted | $(0.47) | $(0.56) | $(0.81) | $(1.08) |
| Adjusted EBITDA (non-GAAP) | $18.9 | $9.9 | $30.8 | $20.6 |
- Q2 revenue grew 31.6%; six-month revenue grew 35.8%. Service revenue rose 3.2% in Q2 and 3.0% year to date, while equipment revenue rose sharply. Growth in equipment revenue was substantially affected by adoption of ASC 606 and a January 2018 airline contract transition.
- Q2 operating margin was approximately negative 3.3%, compared with negative 10.0% a year earlier; net margin was approximately negative 16.4% versus negative 25.6%. Losses narrowed, but interest expense remained substantial.
- Six-month operating cash flow was negative $29.0 million, versus positive $2.4 million in 2017. Investing cash flow was negative $25.6 million; capital expenditures were $115.2 million, compared with $145.7 million. Cash, cash equivalents and short-term investments totaled $263.6 million at June 30.
- Long-term debt carrying value was $1,012.2 million, including $704.1 million of senior secured notes and $322.1 million of convertible notes. The notes carry stated coupons of 12.5% and 3.75%, respectively. Stockholders’ deficit was $228.2 million.
Changes and operating trends
- ASC 606, adopted January 1, 2018, generally moved qualifying commercial-airline equipment revenue recognition to customer acceptance instead of deferring it over contract terms. The filing reports that the six-month results included $45.4 million of revenue from one airline’s transition to the airline-directed model, with $23.8 million of related equipment cost. The transition also changed asset, liability and cash-flow classifications. Prior-year figures were not restated.
- BA revenue increased 28.4% in Q2, supported by service growth and equipment sales; ATG aircraft online rose to 4,920 from 4,453. CA-ROW revenue increased 139.1%, including higher equipment revenue, while the segment remained loss-making. CA-NA revenue rose 18.5% overall, but service revenue declined 3.0%; passenger connectivity revenue fell amid lower passenger-paid revenue and changes in airline business terms.
- Segment results were mixed: Q2 segment profit was $36.7 million for BA and $7.0 million for CA-NA; CA-ROW recorded a $24.5 million segment loss. These are company-defined non-GAAP-style segment measures.
- Inventories rose to $178.5 million from $45.5 million, primarily reflecting reclassification of uninstalled equipment for airline-directed contracts. Warranty reserves increased to $9.8 million from $2.4 million, including costs related to 2Ku quality remediation.
Outlook, risks and contingencies
- Management said cash, cash equivalents and short-term investments on hand were expected to cover working capital and capital expenditure needs for at least the next 12 months, while noting that forecasts depend on operating cash flows, spending and access to financing. The company had not historically generated positive consolidated cash flows outside specified financing events.
- Management expected near-term CA-NA service revenue to decline due to changed airline contract economics and decommissioning of certain American Airlines aircraft. It expected higher CA-NA service costs from satellite fees and 2Ku remediation; consolidated capital expenditures net of airline incentives were expected to decline in 2018, while total airborne equipment expenditures were expected to be relatively flat.
- On July 12, 2018, Gogo announced an Integrated Business Plan intended to reduce costs, improve quality, drive revenue, streamline processes, improve airline contract terms and strengthen the balance sheet. The filing cautions that execution, negotiations and any strategic or financial transactions are uncertain; approximately $2 million of severance expense was expected in Q3.
- 2Ku antenna moisture and deicing-fluid issues caused performance problems and ongoing remediation costs. Failure to remediate by winter 2018–2019 could lead to contract breaches, penalties, damages, termination rights and reputational harm.
- Two legal matters were disclosed: a patent-infringement action filed by Linksmart, for which Gogo may indemnify airline partners; and a shareholder class action alleging securities-law misrepresentations concerning 2Ku reliability and installation/remediation costs. No loss was accrued for the shareholder action because the outcome and potential losses could not be reasonably predicted.
- Other exposures include high debt and interest costs, covenant restrictions, reliance on suppliers and satellite capacity, execution of international expansion and technology plans, airline concentration, and commitments for satellite services. American Airlines represented 22% of Q2 revenue and 29% of six-month revenue, including transition-related equipment revenue.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects recurring service demand versus ASC 606 timing and the airline-directed transition.
- Progress, costs and airline acceptance of 2Ku remediation, including warranty claims and any contractual penalties or termination risks.
- Cash burn, capital needs and debt-service capacity relative to $1.0 billion of long-term debt and stated liquidity.
- Whether BA and CA-ROW growth can offset CA-NA service declines, and how customer concentration and airline contract changes affect future results.
- Implementation costs and measurable outcomes of the Integrated Business Plan, as well as developments in the disclosed litigation.