Gogo Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Gogo provides broadband connectivity and related equipment and services for business aviation. The former commercial aviation business was sold in 2020 and is presented as discontinued operations.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $92.8 million | $73.9 million | +25.6% |
| Service revenue | $70.7 million | $59.4 million | +19.1% |
| Equipment revenue | $22.1 million | $14.5 million | +52.1% |
| Operating income | $34.9 million | $27.8 million | +25.8% |
| Net income (loss) | $22.2 million | $(7.7) million | Improved |
| Diluted EPS | $0.18 | $(0.09) | Improved |
| Adjusted EBITDA | $42.8 million | $33.9 million | +26.2% |
| Operating cash flow | $17.9 million | $24.6 million | Lower |
| Free cash flow | $8.8 million | $23.9 million | Lower |
- Calculated gross margin was approximately 68.8%, versus 69.7% in Q1 2021; operating margin was approximately 37.7%, versus 37.6%.
- Service growth primarily reflected more ATG aircraft online and higher average monthly revenue per ATG aircraft. ATG aircraft online rose to 6,526 from 5,892; average monthly ATG connectivity revenue per aircraft increased to $3,321 from $3,085. ATG equipment units sold increased to 246 from 135.
- Lower interest expense ($10.9 million versus $29.3 million) and the absence of the prior-year $4.4 million convertible-note settlement loss helped drive the swing to net income. The filing attributes lower interest expense primarily to the 2021 refinancing.
- Cash and cash equivalents were $152.8 million at quarter-end, up from $145.9 million at year-end 2021. Total debt was $819.1 million, including $102.8 million of convertible notes due May 15, 2022; reported current debt was $109.9 million. Cash less total debt was approximately $666.3 million net debt.
- Current assets were $271.1 million and current liabilities $188.3 million (working capital of $82.8 million). The $100 million revolving facility was undrawn.
- Operating cash flow declined despite improved earnings, with working-capital movements using $15.4 million. Capital expenditures rose to $9.1 million from $0.7 million, principally for network and technology investment. Cash flow from investing activities was $(9.1) million.
Material changes and management commentary
- Revenue growth was broad-based, with service revenue supported by ATG fleet growth and equipment revenue primarily by higher ATG unit sales. No customer accounted for more than 10% of revenue.
- Management expects service revenue to grow as more ATG aircraft come online and average revenue per aircraft rises; it also expects equipment revenue to benefit from additional ATG sales.
- Gogo said it intended to launch its nationwide Gogo 5G network in the second half of 2022. Management expects near-term capital expenditures to increase during the build-out and decline substantially after completion. Service-network costs and depreciation are also expected to rise with 5G deployment; R&D expense as a percentage of service revenue may increase near term.
- Remaining performance obligations were approximately $93 million, primarily connectivity and entertainment services recognized over contract terms; contracts with original durations of one year or less were excluded.
- Management stated that cash, operating cash flows, and capital-market access should cover business needs, capital expenditures, and debt maturities for at least the next 12 months and thereafter for the foreseeable future. It expected to pay any convertible-note principal remaining at maturity with cash on hand and was evaluating potential shareholder returns, including repurchases; no repurchase was assured.
Risks, contingencies, and unusual items
- 5G execution and supply chain: Component shortages, manufacturing and testing delays, reliance on single-source suppliers, COVID-related restrictions in China, spectrum, integration, and regulatory approvals could affect the planned launch or performance.
- SmartSky patent litigation: SmartSky sued in February 2022 alleging infringement of four patents and sought an injunction that could prevent Gogo from making, using, offering, or selling Gogo 5G. The outcome and potential losses were uncertain; no loss accrual was recorded.
- Convertible-note maturity: $102.8 million principal was due May 15, 2022. The filing said conversion could be settled in shares and that remaining principal at maturity was expected to be paid in cash.
- Interest-rate exposure: Term-loan borrowings bear floating interest. Interest-rate caps covered $650 million of notional debt at quarter-end; management estimated a one-percentage-point LIBOR increase would add about $0.7 million to annual interest expense with caps, versus about $7.2 million without them. Cap protection decreases over time as notional amounts fall and strike rates rise.
- Litigation settlement: A securities class action had a tentative $17.3 million settlement, accrued with a matching insurance receivable. The court preliminarily approved it in May 2022, with a final hearing scheduled for August 30, 2022; insurers had indicated they intended to fund the amount into escrow. Approval and settlement remained subject to stated conditions.
- Other risks: The company cited substantial indebtedness and restrictive covenants, competition, customer and supplier dependence, service disruption and cybersecurity risks, and uncertainty around use of deferred tax assets. It recorded a $16.1 million after-tax unrealized gain on cash-flow hedges in other comprehensive income; this was not operating income.
Most important facts for investors to verify
- Whether Gogo 5G launched on schedule, met performance expectations, and required additional spending beyond the near-term build-out plan.
- Disposition and potential business impact of SmartSky’s preliminary-injunction request and patent claims.
- How the May 2022 convertible notes were ultimately settled and the resulting effect on cash, debt, and share count.
- Whether operating cash flow and free cash flow recover as 5G capital spending rises and working-capital needs change.
- Final approval and insurance funding of the $17.3 million securities settlement, and any material developments in other litigation.
- Debt-service capacity and interest expense as floating rates change and interest-rate-cap protection declines.