Gogo Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Gogo provides in-flight connectivity and entertainment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $126.4 | $104.0 | $363.1 | $299.3 |
| Operating loss | $(11.6) | $(15.3) | $(29.9) | $(35.5) |
| Net loss | $(28.9) | $(24.9) | $(73.7) | $(60.4) |
| Net loss per diluted share | $(0.37) | $(0.29) | $(0.92) | $(0.71) |
| Adjusted EBITDA (non-GAAP) | $9.7 | $1.2 | $28.7 | $9.6 |
- Q3 service revenue rose 31.4% to $107.2 million; equipment revenue fell 14.6% to $19.2 million. Nine-month service revenue increased 30.5%, while equipment revenue declined 10.8%.
- Q3 operating margin improved to approximately negative 9.1% from negative 14.7%; net margin was approximately negative 22.8% versus negative 23.9%. Direct-cost gross margin, calculated as revenue less service and equipment costs, was approximately 56.3% versus 47.5%.
- Interest expense increased to $16.7 million for Q3 and $42.6 million for the first nine months, mainly reflecting higher debt and convertible-note accretion.
- Operating cash flow was $87.3 million for the first nine months, versus $18.9 million in 2014. Investing cash use was $117.7 million, including $117.8 million of capital expenditures; financing provided $206.5 million. Management attributed much of the operating cash flow improvement to working-capital movements, including deferred revenue, rent and airline lease incentives.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $388.0 million; current assets were $471.3 million and current liabilities $171.2 million. Total debt was $573.7 million, including $361.9 million principal on 3.75% convertible notes due 2020 and $303.2 million under the senior term facility. Cash less reported total debt was approximately $185.7 million.
- The senior term facility matures in March 2018, with reported rates of 11.25% and 7.50% on its two loan tranches. The company reported compliance with covenants and no default. It anticipated a mandatory excess-cash-flow prepayment in 2016 based on 2015 results; the amount was not determinable.
- Management believed cash and other sources should cover working capital and capital needs for at least 12 months, while noting longer-term funding could require additional equity or permitted debt. Convertible-note proceeds were partly offset by $140 million paid for forward share repurchases covering approximately 7.2 million shares.
Material changes and operating trends
- Total revenue grew 21.5% in Q3 and 21.3% year to date. CA-NA revenue rose 24.2% in both periods, driven by more aircraft online and higher service monetization. CA-NA aircraft online increased to 2,312 from 2,044; ARPS increased to $13.00 from $11.43, while connectivity take rate declined to 5.6% from 6.2%.
- BA revenue increased 9.9% in Q3 and 11.4% year to date as service growth more than offset lower equipment sales. BA ATG aircraft online rose to 3,314 from 2,637.
- CA-ROW remained in start-up, with 160 aircraft online versus 35 a year earlier. Its Q3 segment loss widened to $19.9 million from $19.4 million; nine-month loss was $56.2 million versus $55.1 million.
- Consolidated operating expenses rose 15.6% in Q3, including higher engineering, sales and marketing, general and administrative, and depreciation and amortization costs. Operating loss narrowed, but net loss increased, reflecting higher interest expense.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management estimated 2015 capital expenditures of $165–$205 million, or $100–$120 million net of deferred airborne and landlord incentives; 2016 capital expenditures were expected to exceed 2015. The estimates exclude potential spectrum-auction costs.
- Management expected engineering and development, sales and marketing, general and administrative, depreciation and amortization, and interest expenses to increase in future periods. It expected CA-NA service costs to decline as a share of revenue over time as the business scales, but anticipated increased costs with international expansion.
- As of November 2, five airlines had selected 2Ku for long-term installation and three for pilots, covering approximately 550 aircraft. Japan Transocean Air selected 2Ku for new aircraft, with a definitive agreement still under negotiation. Effective November 16, CA planned to stop reselling Inmarsat Global Xpress and focus global commercial airline sales on 2Ku; management did not expect a material adverse effect.
- Key risks include executing the technology roadmap and 2Ku deployment, network capacity constraints, reliance on airline and technology partners and suppliers, international regulatory and rollout challenges, substantial capital requirements, debt-service and covenant limitations, and competition. Two airline partners represented approximately 45% of consolidated revenue in Q3 2015.
- The Berkson consumer case reached a proposed October 2015 settlement involving complimentary connectivity, administration costs and plaintiffs’ legal fees. Estimated cost was not material; court approval remained pending. A separate airline contract carried a potential credit/refund of up to approximately $6 million, but Gogo expected to meet the installation schedule and did not consider a material loss reasonably possible.
Important facts for investors to verify
- Whether service-revenue growth and improving CA-NA/BA segment performance translate into lower GAAP losses, particularly as interest and operating costs rise.
- Whether operating cash flow is sustainable apart from working-capital timing, and whether actual capital spending remains within management’s ranges.
- Progress, costs, aircraft installations and customer adoption for 2Ku and international operations; monitor CA-ROW losses and network capacity.
- Debt maturities, floating-rate exposure, covenant headroom, and the size and timing of any 2016 mandatory prepayment.
- Approval and final terms of the Berkson settlement, and developments in airline installation commitments and potential credits.