Gogo Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. 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).
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $213.7 | $227.5 | $413.2 | $459.3 |
| Service revenue | $173.7 | $159.1 | $338.7 | $309.7 |
| Equipment revenue | $40.0 | $68.4 | $74.5 | $149.5 |
| Operating income (loss) | $9.7 | $(7.4) | $21.1 | $(9.6) |
| Net loss | $(84.0) | $(37.2) | $(100.8) | $(64.6) |
| Adjusted EBITDA (non-GAAP) | $37.8 | $18.9 | $75.8 | $30.8 |
| Net cash from operating activities | Not clearly stated for quarter | Not clearly stated for quarter | $5.5 | $(29.0) |
Q2 operating margin was approximately 4.5%, compared with a loss margin of approximately 3.3% a year earlier. The filing does not provide a clear consolidated gross-margin figure; revenue less reported service and equipment costs was approximately 49.9% of revenue in Q2 2019 versus 39.3% in Q2 2018.
- Cash and liquidity: Cash and cash equivalents were $181.9 million at June 30, 2019, down from $184.2 million at year-end 2018. Including restricted cash, period-end cash was $190.9 million. Short-term investments were nil, versus $39.3 million at year-end. Current assets were $477.8 million and current liabilities $270.1 million.
- Debt: Long-term debt carrying value was $1.092 billion, compared with $1.025 billion at December 31, 2018. Gross debt before deferred financing costs was $1.120 billion. The new 2024 secured notes carry a 9.875% coupon; reported interest expense was $36.2 million for Q2 and $68.7 million for the first half.
- Cash flow and investment: First-half capital expenditures and capitalized software purchases totaled $42.2 million. Free cash flow, as defined by the company (non-GAAP), was negative $36.7 million; unlevered free cash flow was positive $47.3 million. Cash interest paid was $86.4 million for the half-year.
Material changes versus comparable periods
- Q2 revenue declined 6.1%; service revenue rose 9.2%, but equipment revenue fell 41.6%. First-half revenue declined 10.0%, with service revenue up 9.4% and equipment revenue down 50.2%.
- Equipment revenue comparisons were affected by fewer installations and a shift in CA-NA installation mix. First-half 2018 also included $45.4 million of equipment revenue from an airline’s transition to the airline-directed model, with no comparable 2019 item.
- Operating results improved, with operating income of $9.7 million in Q2 versus an operating loss of $7.4 million. Net loss nevertheless widened, primarily because of a $58.0 million debt-extinguishment loss and higher interest expense.
- CA-NA service revenue was broadly steady in Q2; segment profit improved to $24.2 million from $7.0 million. CA-ROW revenue grew, while its segment loss narrowed to $17.3 million from $24.5 million. BA service revenue increased, but lower equipment revenue reduced total segment revenue and profit.
- First-half operating cash flow improved to $5.5 million from negative $29.0 million, while capital expenditures fell to $42.2 million from $115.2 million.
Outlook, commentary and risks
- No formal numerical company-wide revenue or earnings guidance is provided. Management expects CA-NA service revenue to decrease in the near term, primarily because of equipment deinstallations from certain American Airlines aircraft. Equipment revenue depends on installation schedules and execution of airline contracts.
- Management expects 2019 interest expense to increase year over year due to higher average debt and related accretion and financing-cost amortization, partly offset by redemption of the 2022 senior secured notes and repurchase of 2020 convertible notes. It believes existing cash and operating cash flows should cover near- and long-term operating obligations and capital expenditure needs, while noting financing access could be constrained.
- In April and May 2019, Gogo issued $925 million principal amount of 9.875% senior secured notes due 2024. Proceeds funded redemption of all $690 million principal amount of 2022 senior secured notes, including a $51.4 million make-whole premium, and repurchase of $159 million principal amount of 2020 convertible notes. These transactions contributed to the $58.0 million extinguishment loss. The new notes are secured by substantially all issuer and guarantor assets and impose restrictive covenants.
- Key business risks include execution and reliability of 2Ku and other technology, airline contract renewals and changing airline-directed/free-service models, equipment installation and deinstallation schedules, supplier and satellite-capacity reliance, competition, substantial debt and refinancing needs, and regulatory or certification delays.
- Delta Air Lines and its passengers represented approximately 28% of consolidated revenue in Q2 and the first half. Pending Linksmart patent, securities class-action and derivative litigation had no recorded loss accrual because outcomes and potential losses could not be reasonably estimated. Gogo stated it intended to defend the claims.
- Adoption of lease accounting standard ASC 842 added operating lease right-of-use assets and liabilities; reported June 30 operating lease liabilities were $109.2 million. One airline’s transition to the turnkey model also led to a $46.8 million inventory-to-property-and-equipment reclassification at the start of 2019.
Important facts for investors to verify
- Whether service-revenue growth and higher CA-NA ARPA can offset aircraft deinstallations and weaker equipment sales; Q2 CA-NA aircraft online were 2,443 versus 2,809 a year earlier.
- The timing and economics of airline-directed versus turnkey contracts, including free-to-passenger offerings, revenue shares and any further model transitions.
- Debt-service capacity and refinancing options, including the 9.875% 2024 notes, convertible-note obligations, covenant restrictions and the company’s stated liquidity assumptions.
- Underlying cash generation after recurring capital expenditures; distinguish GAAP operating cash flow and cash interest from non-GAAP free-cash-flow measures.
- Exposure to major customers, 2Ku warranty or reliability costs, and developments in the pending litigation and related indemnification obligations.