Gogo Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Unless otherwise stated, financial amounts below are in U.S. dollars. The company 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 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $99.5m | $79.4m | $195.2m | $150.2m |
| Operating loss | $10.9m | $9.1m | $20.2m | $19.4m |
| Net loss | $18.7m | $56.0m | $35.5m | $70.5m |
| Net loss per share, basic and diluted | $0.22 | $4.98 | $0.42 | $9.82 |
| Adjusted EBITDA (non-GAAP) | $3.1m | $3.8m | $8.4m | $6.6m |
- Q2 service revenue was $79.2m and equipment revenue $20.4m. First-half amounts were $151.5m and $43.8m, respectively.
- Operating loss was 10.9% of revenue in Q2 2014, compared with 11.4% in Q2 2013. First-half operating loss was 10.3% of revenue, versus 12.9% in 2013.
- At June 30, cash and cash equivalents were $196.2m, down $70.2m from year-end 2013. Current assets were $256.1m and current liabilities $111.1m. Total liabilities were $427.2m; stockholders’ equity was $240.6m.
- First-half operating cash flow was positive $3.2m, compared with cash use of $2.7m in 2013. Investing cash use was $71.5m, including $69.0m of capital expenditures; financing cash use was $2.0m. First-half cash interest paid was $13.6m.
- At June 30, the company reported $237.7m outstanding under its senior term facility and $1.3m under the Alaska facility. Senior debt carried a variable rate; the reported rate at June 30 was 11.25%. The senior facility’s fair value was estimated at $253m.
Material changes versus prior comparable periods
- Revenue grew 25.3% in Q2 and 30.0% in the first half. CA-NA revenue increased 24.9% and 28.0%, respectively; BA revenue rose 26.1% and 36.1%. CA-ROW remained a start-up operation.
- CA-NA growth reflected higher connectivity take rates and pricing, plus more aircraft online. Q2 take rate was 6.7% versus 5.9%; average monthly service revenue per aircraft was $9,994 versus $8,441. CA-NA aircraft online increased to 2,058 from 1,982.
- BA growth reflected higher service and equipment revenue. ATG aircraft online increased to 2,415 from 1,684. Satellite aircraft online were 5,241 versus 5,105.
- CA-ROW launched commercial international connectivity in March 2014 and had 19 aircraft online by June 30. Its first-half segment loss increased to $35.7m from $15.6m, principally reflecting start-up investment and satellite-service costs.
- Operating expenses rose faster than Q2 revenue: total operating expenses increased 24.8% to $110.4m. Service costs, research and development, sales and marketing, and general and administrative expenses all increased. First-half operating loss was slightly higher in dollars, despite substantially higher revenue.
- Net loss improved substantially year over year, but comparison is affected by 2013 IPO-related items: the prior-year periods included a $36.3m fair-value derivative charge and preferred-stock return/accretion. Those items did not recur in 2014. Share counts also differ materially following the 2013 IPO and preferred-stock conversion, so reported per-share comparisons are not directly comparable.
Outlook, financing, risks and unusual items
- Capital spending: Management estimated 2014 capital expenditures of $170m–$210m, or $105m–$125m net of deferred airborne lease and landlord incentives. It estimated 2014 cash-flow benefit from those incentives of $65m–$85m. These are estimates, not guarantees.
- Liquidity: Management said cash on hand, including the subsequent borrowing, was expected to cover working-capital and capital-expenditure needs for at least 12 months. It cautioned that the company had not generated positive consolidated cash flows historically and may need additional equity or permitted debt financing for longer-term needs.
- Subsequent borrowing: On July 30, 2014, the company borrowed an additional $75m under an amended and restated senior term facility, receiving $72.6m net of $2.4m in fees. The facility maturity was extended to March 21, 2018. Existing Tranche B-1 pricing remained LIBOR plus 9.75% or base rate plus 8.75%; the new Tranche B-2 pricing was LIBOR plus 6.50% or base rate plus 5.50%, subject to stated floors. The credit agreement contains restrictive covenants, including limits on investment in international business.
- Costs and operating outlook: Management expected continued investment in technology, network capacity, international expansion and new products, with higher research and development, depreciation and amortization, and certain operating costs. It expected CA-NA service costs to decline as a percentage of revenue over time as the network scales, while noting airline revenue-share rates may rise by an estimated approximately 2% of CA-NA service revenue after contractual triggers.
- Commitments and contingencies: Satellite equipment and development purchase commitments were $7.8m. Satellite-service commitments included $15.2m for July–December 2014 and $32.9m for 2015. One airline contract could require up to $25m in credits or refunds tied to international installation milestones; other agreements provide for regulatory or installation-related penalties. A $1.8m airline rebate due in June 2014 had not been paid as of June 30.
- Legal matters: Carucel patent litigation and a putative consumer class action sought unspecified damages; the company had accrued no liability because potential losses could not be determined. Gogo said it intended to defend both cases, while warning that adverse outcomes could materially affect results, financial position or cash flows. Airfone-related universal-service fees and customer refunds had been paid, with reimbursement and indemnification from the seller; possible FCC enforcement remained a risk.
- Other: No material changes to the previously disclosed risk factors were reported. Management said disclosure controls were effective as of June 30, 2014. Gogo planned to adopt the new revenue-recognition standard on January 1, 2017 and was evaluating its impact.
Important facts for investors to verify
- Whether revenue growth and improving CA-NA passenger adoption translate into sustained operating leverage and positive consolidated cash flow.
- Actual 2014 capital spending, incentive receipts and cash balances, and whether the July debt proceeds adequately support expansion plans.
- Debt-service costs, covenant headroom and any restrictions on financing or international investment under the amended credit agreement.
- Progress and costs of CA-ROW installations, regulatory approvals and satellite-service deployment, including exposure to airline milestone credits or penalties.
- Outcomes and potential financial exposure from Carucel, the consumer class action, and any FCC action related to Airfone.