Gogo Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. 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).
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $231.8 million | $165.4 million; up 40.2% |
| Service revenue | $150.7 million | $146.5 million; up 2.9% |
| Equipment revenue | $81.1 million | $18.9 million; up 329.1% |
| Operating loss | $2.2 million | $14.7 million loss; operating margin improved to approximately (0.9%) from (8.9%) |
| Net loss / diluted loss per share | $27.4 million / $0.34 | $41.4 million / $0.52 |
| Adjusted EBITDA | $11.9 million | $10.7 million |
| Operating cash flow | $(46.2) million | $(14.0) million |
| Capital expenditures | $62.7 million | $71.6 million |
| Cash, equivalents and short-term investments | $299.7 million | $409.1 million at December 31, 2017 |
| Debt | $1,021.6 million principal; $1,006.4 million carrying value | $1,017.1 million principal at December 31, 2017 |
Interest expense was $30.6 million, up from $26.9 million. Stockholders’ deficit was $191.3 million at quarter-end. Adjusted EBITDA and Cash CAPEX are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flows.
Material changes and business drivers
- Revenue growth was substantially affected by a January 2018 airline contract transition from Gogo’s turnkey model to an airline-directed model. The transition generated $45.4 million of equipment revenue and $26.1 million of associated equipment cost; it also produced a $19.3 million accounting gain excluded from adjusted EBITDA.
- Gogo adopted ASC 606 in 2018. For certain commercial contracts, equipment revenue and related costs are now recognized when equipment is accepted rather than over the contract term. This change, along with the contract transition, limits comparability with Q1 2017.
- CA-NA revenue rose 45.5% to $143.8 million, largely because of the transition-related equipment revenue. CA-NA service revenue fell 8.6% to $88.8 million; management cited lower passenger connectivity revenue and the changed airline business terms.
- BA revenue increased 22.3% to $68.8 million, with service revenue up 19.2%, primarily on growth in Gogo Biz subscribers. CA-ROW revenue increased 86.4% to $19.2 million, but the segment recorded a $22.6 million loss.
- CA-NA segment profit declined to $1.7 million from $11.2 million; BA segment profit increased to $32.3 million from $26.1 million. CA-ROW’s segment loss narrowed to $22.6 million from $26.6 million.
Outlook, risks and unusual items
- Management said cash and short-term investments on hand were expected to cover working capital and capital expenditure needs for at least the next 12 months, while cautioning that financing access and future cash flows are uncertain. The company had not generated positive consolidated cash flow from operations historically, apart from specified financing events.
- Management expects CA-NA service revenue to decline in the near term because of the airline-directed model transition and planned American Airlines aircraft decommissionings. It expects 2018 capital expenditures, net of airborne lease incentives, and total airborne equipment expenditures to decrease versus 2017. It also expects depreciation and amortization to decrease slightly in 2018 and interest expense to rise.
- Significant risks include high indebtedness and interest costs, airline partner concentration and contract renewals, technology deployment and certification, and reliance on third-party suppliers. Gogo highlighted the U.S. Commerce Department denial order affecting ZTE, a supplier involved in its existing ATG network and planned ATG-NG system; alternative sourcing or delays could materially affect operations and prior development spending.
- An April 20, 2018 patent-infringement suit named Gogo and eight airline partners. Gogo is contractually required to indemnify those airlines; the company said the case was at an early stage and its outcome could not be assessed.
- Gogo disclosed a $1.8 million airline cash rebate due in June 2018 and substantial future satellite-capacity purchase commitments. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
Investor facts to verify
- How much of reported revenue and operating performance reflects the $45.4 million contract-transition recognition and ASC 606, versus recurring underlying growth?
- Whether CA-NA service revenue, passenger monetization and aircraft decommissioning trends develop as management anticipates.
- Liquidity and cash burn against debt service, capital spending, satellite commitments and restrictions under the senior secured notes.
- Whether ZTE-related supply and ATG-NG development can be maintained or replaced on schedule and at acceptable cost.
- Potential exposure, defense costs and indemnification obligations arising from the patent suit.