Gogo Inc. — 2018 Form 10-K Summary
Business context and reporting period
Gogo provides in-flight connectivity, entertainment and related services to commercial airlines and business aviation customers. This summary covers the fiscal year ended December 31, 2018; quarterly figures below identify the three months ended December 31, 2018.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $893.8 million | $699.1 million |
| Service revenue | $630.1 million | $617.9 million |
| Equipment revenue | $263.6 million | $81.2 million |
| Operating loss; operating margin | $26.9 million; (3.0%) | $64.3 million; (9.2%) |
| Net loss; loss per share | $162.0 million; $2.02 | $172.0 million; $2.17 |
| Adjusted EBITDA (non-GAAP) | $71.2 million | $58.5 million |
| Operating cash flow | $(82.3) million | $60.3 million |
| Capital expenditures; Cash CAPEX (non-GAAP) | $131.7 million; $107.6 million | $280.2 million; $220.5 million |
| Cash, cash equivalents and short-term investments | $223.5 million | $409.1 million |
| Long-term debt, net of financing costs | $1,024.9 million | $1,000.9 million |
For Q4 2018, revenue was $217.2 million, operating loss was $9.7 million and net loss was $59.7 million ($0.74 per share). Working capital was $285.8 million, while stockholders’ deficit was $268.8 million at year-end. The filing reports total debt principal of approximately $1.09 billion, including $690 million of 12.5% senior secured notes due 2022, $162 million of 3.75% convertible notes due 2020 and $237.8 million of 6.0% convertible notes due 2022.
Material changes versus the prior comparable period
- Revenue rose 27.8%, but the increase was heavily affected by adoption of ASC 606 and an airline’s transition to the airline-directed model. Equipment revenue included $45.4 million recognized upon that transition; ASC 606 also changed the timing and presentation of equipment revenue.
- Service revenue increased 2.0% overall. BA service revenue grew 14.9% and CA-ROW grew 24.0%, while CA-NA declined 6.6%. CA-NA connectivity revenue fell 7.9%; take rate rose to 11.6% from 8.3%, but average revenue per session declined to $6.97 from $10.33.
- Operating loss narrowed and net loss improved year over year, but operating cash flow swung to an outflow, principally reflecting working-capital movements, including increased inventory and contract assets. Adjusted EBITDA increased, while remaining a non-GAAP measure.
- Cash and short-term investments fell by $185.7 million. Capital expenditures declined from 2017, partly because airborne equipment purchases were increasingly classified as inventory rather than capital expenditures.
- Gogo issued $237.8 million of 2022 convertible notes and repurchased $199.9 million principal of 2020 notes. The repurchase contributed to a $19.7 million loss on extinguishment of debt.
Outlook, management commentary, risks and unusual items
- Management said year-end cash, cash equivalents and short-term investments were expected to cover obligations, working capital and capital expenditures for at least one year after issuance of the financial statements. Repayment or refinancing of longer-term debt, particularly the $162 million 2020 notes due March 1, 2020, depended on additional financing or other transactions.
- Management expected 2019 capital expenditures to decrease from 2018, largely due to fewer turnkey-model installations. It also expected near-term CA-NA service revenue to decline because of American Airlines aircraft deinstallations, and near-term CA-ROW equipment revenue to decrease after a 2018 upgrade program.
- The July 2018 Integrated Business Plan aimed to reduce costs, improve quality, drive revenue and strengthen the balance sheet. The filing gives no numerical earnings or revenue guidance and cautions that execution and benefits are uncertain.
- 2Ku was installed on more than 1,000 aircraft, with approximately 1,000 additional aircraft in backlog. Gogo reported prior moisture/deicing-related antenna problems; deicing modifications covered approximately 95% of the North American 2Ku fleet by year-end, with no degradation reported on modified aircraft. Further performance or remediation issues remain possible.
- Key business risks include U.S. network capacity constraints; competition and airline contract termination or renewal risk; reliance on satellite capacity and suppliers, including ZTE; installation delays and service-level penalties; and concentration in major airline customers. Delta and American represented approximately 23% and 22% of 2018 consolidated revenue, respectively.
- Gogo disclosed patent litigation and securities and derivative lawsuits related in part to 2Ku reliability and installation/remediation costs. The company said outcomes were uncertain, intended to defend the claims and had not accrued losses because they could not be reasonably estimated. It also reported potential airline liquidated damages and uncapped intellectual-property indemnification exposure.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2018.
Important facts for investors to verify
- How much of 2018’s revenue growth reflects ASC 606 timing and the airline-directed transition rather than recurring service demand.
- Cash generation, working-capital needs and the company’s financing plan for the 2020 convertible-note maturity, including restrictions under the senior secured note indenture.
- Progress on 2Ku reliability, installation schedules, backlog conversion and any remaining remediation costs or airline claims.
- Expected revenue and aircraft impacts from American Airlines deinstallations, and the renewal and termination terms of major airline contracts.
- Whether the Integrated Business Plan delivers cost savings and quality improvements, and whether the 2019 capex and near-term revenue expectations are realized.