Gogo Inc. — Q3 2018 Form 10-Q
Business context and period: Gogo provides in-flight connectivity, entertainment and related equipment to commercial and business aviation customers. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the same 2017 periods. Amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $217.3 million | $172.9 million | $676.5 million | $511.1 million |
| Operating loss | $7.6 million | $17.8 million | $17.2 million | $49.8 million |
| Net loss | $37.7 million | $45.3 million | $102.3 million | $130.9 million |
| Adjusted EBITDA (non-GAAP) | $21.1 million | $13.0 million | $51.8 million | $33.6 million |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $91.9 million | $4.2 million |
- Q3 revenue increased 25.7%; service revenue rose 4.6% and equipment revenue rose 191.3%. Nine-month revenue increased 32.4%, primarily reflecting higher equipment revenue.
- Q3 operating margin was approximately negative 3.5%, compared with negative 10.3% a year earlier. The filing’s revenue and cost mix implies gross margin of approximately 43%, versus 52% in Q3 2017; equipment sales contributed to the mix shift.
- Nine-month operating cash use increased substantially, with working-capital movements—including inventory and contract assets—among the stated factors. Investing cash use was $0.2 million, while reported capital expenditures were $124.4 million. Non-GAAP Cash CAPEX was $105.2 million.
- At September 30, cash and cash equivalents were $102.7 million and short-term investments were $88.6 million, totaling $191.2 million, down from $409.1 million at December 31, 2017. Current assets were $579.6 million and current liabilities $278.7 million.
- Long-term debt, net of financing costs, was $1.018 billion. Principal included $690 million of 12.5% senior secured notes due 2022 and $361.9 million of 3.75% convertible notes due 2020. Nine-month interest expense was $91.9 million.
Material changes and management commentary
- Revenue recognition standard ASC 606 was adopted January 1, 2018, generally moving qualifying commercial-aircraft equipment revenue recognition to customer acceptance rather than over contract terms. Prior-year figures were not restated, limiting comparability.
- An airline partner’s January transition from the turnkey to airline-directed model generated $45.4 million of equipment revenue and $21.6 million of reported gain/adjustment in the first nine months. The transition also changed equipment, deferred incentive and contract-asset balances.
- Business Aviation revenue grew 21.6% in Q3, supported by service and equipment sales. Commercial Aviation Rest of World revenue more than doubled, while its segment remained loss-making. Commercial Aviation North America revenue increased, but its segment profit declined; service revenue was lower in both the quarter and nine-month period.
- Management said it believes available cash and investments will cover working capital and capital expenditure needs for at least the next 12 months, while noting uncertainty around operating cash generation, financing access, debt restrictions and technology and expansion costs. No specific full-year revenue or earnings guidance is stated in the provided filing text.
- Management expects near-term CA-NA service revenue pressure from American Airlines aircraft decommissions in 2018 and 2019. It expects 2018 capital expenditures, net of deferred airborne lease incentives, to decline versus 2017. It also flags potential higher CA-NA service costs, including satellite fees and 2Ku remediation, and continued investment and costs as CA-ROW expands.
Risks, contingencies and unusual items
- Warranty reserves increased to $10.3 million from $2.4 million at year-end 2017; the filing cites additional airline-directed activity and remediation of 2Ku quality issues.
- Gogo disclosed patent-infringement litigation, a securities class action and two derivative actions. The securities and derivative matters relate in part to allegations about 2Ku reliability and installation/remediation costs. Gogo disputes the claims; outcomes and potential costs are uncertain, and no loss accrual was recorded for the identified securities and derivative suits.
- American Airlines represented approximately 18% of Q3 and 25% of nine-month revenue; Delta-related passenger revenue represented approximately 25% and 23%, respectively. Satellite-service purchase commitments total about $539 million across the disclosed periods through “thereafter”; timing and actual payments depend on the contracts.
- Senior secured notes carry a 12.5% coupon and debt covenants restrict additional borrowing and certain distributions. Operating lease commitments and other contractual obligations also remain material.
Investor verification points
- Separate recurring service growth from equipment revenue recognized under ASC 606 and the $45.4 million airline-model transition; assess the resulting comparability with 2017.
- Track operating cash use, working-capital needs, cash and investments, and whether management’s stated 12-month liquidity expectation remains supportable.
- Evaluate debt service and refinancing risk, including the 2020 convertible-note maturity, 2022 secured-note maturity, coupons and covenant limitations.
- Monitor American Airlines aircraft decommissions, CA-NA service trends, CA-ROW losses, and execution and economics of airline-directed contracts.
- Follow 2Ku remediation costs and warranty exposure, and developments in the disclosed litigation.