Gogo Inc. quarterly report, Q2 FY2015

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Gogo Inc. — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015. Dollar amounts are in millions unless noted. Financial statements are unaudited.

Business context and reporting period

Gogo provides in-flight connectivity, entertainment and communications services, and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). CA-ROW remained in its start-up phase after launching international service in March 2014.

During the quarter, Gogo signed agreements to provide 2Ku connectivity on 250 existing Delta domestic aircraft and at least 25 new international aircraft, and signed an agreement with GOL to provide 2Ku, wireless entertainment and Gogo TV across GOL’s fleet.

Financial and operating results

  • Revenue: Q2 revenue was $121.2 million, up 21.8% year over year; first-half revenue was $236.7 million, up 21.2%. Q2 service revenue rose 28.1% to $101.4 million, while equipment revenue declined 2.8% to $19.8 million.
  • Profit and loss: Q2 operating loss narrowed to $8.6 million from $10.9 million, but net loss widened to $24.8 million from $18.7 million; diluted loss per share was $0.32 versus $0.22. For the first half, operating loss was $18.4 million versus $20.2 million, while net loss was $44.9 million versus $35.5 million.
  • Adjusted EBITDA: Non-GAAP adjusted EBITDA increased to $10.8 million in Q2 from $3.1 million and to $19.0 million for the first half from $8.4 million. The company cautions that this measure excludes items including interest, taxes, depreciation and amortization.
  • Segments: Q2 CA-NA revenue grew 21.6% to $75.6 million and segment profit rose to $11.2 million. BA revenue grew 16.6% to $43.3 million and segment profit rose to $17.5 million. CA-ROW revenue was $2.3 million, while its segment loss was $18.0 million, modestly improved from $18.8 million.
  • Operating indicators: CA-NA aircraft online increased to 2,249 from 2,058; average monthly service revenue per aircraft rose to $11,324 from $9,994. Connectivity take rate fell to 5.9% from 6.7%, which management attributed partly to price increases, network capacity constraints and a higher mix of regional jets.
  • Cash flow and investment: First-half operating cash flow was $66.0 million, versus $3.2 million a year earlier. Investing used $94.2 million, including $85.7 million of property and equipment purchases and $8.6 million of capitalized software. Management attributed much of the operating cash-flow improvement to changes in operating assets and liabilities, including deferred rent, deferred revenue, lease incentives, accrued liabilities and accrued interest.
  • Liquidity and debt: Cash and cash equivalents were $392.1 million at June 30, 2015, up from $211.2 million at year-end. Reported debt was $571.4 million, including $361.9 million principal amount of 3.75% convertible notes due 2020 and approximately $305.0 million under the senior term facility. The senior facility matures in March 2018; its stated interest rates were 11.25% and 7.50% for the two tranches. The company reported compliance with its covenants and no default at quarter-end.
  • Margins and costs: Consolidated operating expenses rose to $129.8 million in Q2 from $110.4 million. Depreciation and amortization rose 39.9% to $20.8 million, and interest expense rose 114.1% to $15.8 million. The filing does not provide a clear consolidated gross-margin figure.

Changes versus the prior comparable period

  • Growth was led by service revenue: CA-NA benefited from higher pricing and product mix, while BA benefited from more Gogo Biz subscribers and price increases. Equipment revenue declined, particularly in BA over the first half, reflecting product mix and shipments.
  • Operating loss improved despite higher operating costs, but net loss increased as interest expense rose following the 2014 senior-facility amendment and March 2015 convertible-note issuance.
  • First-half capital expenditures increased to $94.2 million from $69.0 million, partly due to office construction and airborne equipment purchases for CA-NA and CA-ROW.
  • CA-ROW had 148 aircraft online at quarter-end, versus 19 a year earlier; the segment continued to generate a substantial operating loss.

Outlook, risks, contingencies and unusual items

  • Management outlook: Management expected cash on hand and other sources to cover working capital and capital expenditure needs for at least 12 months, while noting that longer-term liquidity depends on revenue growth, operating cash generation and access to financing. It estimated 2015 capital expenditures of $165–$205 million, or $100–$120 million net of deferred airborne lease incentives and landlord incentives. These estimates exclude possible spectrum-acquisition costs.
  • Management expected 2015 cash flow to benefit from $65–$85 million of deferred airborne lease incentives and landlord incentives. It also expected higher 2015 interest expense and continued spending growth for technology development, international expansion, sales and marketing, and depreciation and amortization.
  • Financing and dilution: The company issued $361.9 million principal amount of convertible notes and paid approximately $140 million for prepaid forward stock repurchase transactions covering about 7.2 million shares. The notes’ effective interest rate, including discount accretion and issuance-cost amortization, was approximately 11.5% for the first half. Their liability carrying value was $266.5 million at June 30, below principal because of the unamortized discount.
  • Commitments and legal matters: Remaining commitments included $14.0 million for satellite-based systems and development services, plus satellite-service purchase commitments of $17.7 million for the second half of 2015 and further commitments in later years. A potential airline credit/refund had a maximum of approximately $7 million; management did not believe a material loss was reasonably possible based on its installation forecasts. A consumer class-action settlement was under negotiation; its estimated cost was described as not material and remained subject to a definitive agreement and court approval.
  • Key risks: Execution of the 2Ku and other technology roadmaps, network capacity and capital needs, airline-partner relationships and deployment schedules, international regulatory approvals, satellite-provider dependence, competition, debt covenants and the ability to obtain future financing. Management cited no material changes to the risk factors in its 2014 Form 10-K.

Important facts for investors to verify

  • Whether service-revenue growth and higher ARPA can continue while CA-NA’s connectivity take rate is declining and capacity constraints persist.
  • Whether CA-ROW aircraft deployment and revenue growth can reduce its substantial segment losses.
  • How much of first-half operating cash flow reflects repeatable operating performance versus timing and working-capital changes, and whether the projected incentives are received as expected.
  • Whether the 2015 capital-expenditure range, including technology and international expansion spending, is achieved without additional financing or material pressure on liquidity.
  • The effect of debt service, convertible-note discount accretion and potential conversion or repurchase obligations on future earnings, cash needs and share count.
  • Progress on Delta and GOL deployments, the potential airline credit/refund exposure, and final terms and approval of the contemplated class-action settlement.