Gogo Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone Q4 report; selected Q4 results are included below. Gogo provides in-flight connectivity, entertainment and related services to commercial and business aircraft through CA-NA, CA-ROW and Business Aviation (BA).
Financial and operating performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $596.6 million | $500.9 million |
| Operating loss | $(26.6) million | $(44.8) million |
| Net loss | $(124.5) million | $(107.6) million |
| Net loss per share, diluted | $(1.58) | $(1.35) |
| Cash from operations | $65.0 million | $104.9 million |
| Cash, cash equivalents and short-term investments, year-end | $455.8 million | $366.8 million |
| Working capital, year-end | $353.7 million | $270.4 million |
| Capital expenditures (GAAP) | $176.9 million | $153.1 million |
| Adjusted EBITDA (non-GAAP) | $67.2 million | $36.8 million |
Revenue grew 19.1%, led by service revenue, up 22.5%; equipment revenue rose 1.7%. Approximate calculated margins: gross margin was 53.9% versus 54.4%, operating margin was (4.5)% versus (9.0)%, and net margin was (20.9)% versus (21.5)%. Adjusted EBITDA margin was approximately 11.3% versus 7.3%; this company-defined non-GAAP measure should not be treated as a substitute for GAAP results.
- Segments: CA-NA revenue was $371.5 million, up 19.6%, with segment profit of $71.9 million. BA revenue was $199.6 million, up 11.7%, with segment profit of $82.9 million. CA-ROW revenue was $25.4 million, up 119.5%, but its segment loss widened to $87.6 million.
- Debt and liquidity: Year-end principal debt was approximately $886.9 million: $525.0 million of 12.5% senior secured notes due 2022 and $361.9 million of 3.75% convertible notes due 2020. Interest expense increased to $83.6 million from $58.9 million. The senior secured notes are secured by liens on substantially all issuer and guarantor assets and impose restrictive covenants.
- Q4 2016: Revenue was $160.0 million; operating loss was $2.2 million; net loss was $26.9 million.
Changes, outlook and material items
- FY2016 revenue increased from $500.9 million to $596.6 million. Operating loss narrowed, but net loss increased, largely reflecting higher interest expense and a $15.4 million loss on extinguishment of debt related to repayment of the prior term facility.
- Operating cash flow fell to $65.0 million from $104.9 million, while investing activities used $295.6 million. The company reported GAAP capital expenditures of $176.9 million and non-GAAP Cash CapEx of $133.1 million.
- Management expected 2017 capital expenditures of $290–$330 million, or $230–$260 million net of estimated deferred airborne lease incentives. For 2018, it projected $110–$170 million of capital expenditures, or $70–$120 million net of estimated incentives. These are management estimates, not guarantees.
- Management expected approximately $9 million of expense in Q1 2017 for completion of the first phase of next-generation ATG development. 2Ku rollout and next-generation ATG development are central investments; CA-ROW margin improvement was expected by the end of 2018, with no CA-ROW margin improvement expected in 2017.
- On January 3, 2017, the company issued an additional $65 million of 12.5% senior secured notes for gross proceeds of $70.2 million. This increased senior secured note principal to $590 million after year-end.
- American Airlines and Gogo entered a unified agreement on February 24, 2017. American had the option to deinstall service from approximately 550 mainline aircraft over time. Delta and American together accounted for approximately 50% of FY2016 revenue, making airline contract retention and service performance important.
- The company disclosed continuing network-capacity constraints in the United States, execution and certification risks for 2Ku and next-generation ATG, reliance on single-source suppliers, competition, and significant debt and financing constraints. Gogo had incurred operating losses in every quarter since launching service in 2008.
- The Salameno putative class action was concluded after plaintiffs withdrew their appeal; individuals retained the right to pursue claims in arbitration. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2Ku installations, network performance and next-generation ATG development meet planned schedules and ease capacity constraints.
- Whether growth in service revenue and passenger usage can offset ongoing losses, cash investment needs and rising interest costs.
- Liquidity after the post-year-end note issuance, including the 2017 capital-spending plan, debt covenants and ability to fund growth without further financing.
- Exposure to Delta and American contract terms, including American’s potential deinstallation of approximately 550 aircraft and applicable termination provisions.
- The assumptions and exclusions in Adjusted EBITDA and Cash CapEx, and the timing and financial impact of deferred airline equipment incentives and revenue recognition.