Gogo Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Unless noted, financial results are continuing operations; Gogo sold its commercial aviation business to Intelsat on December 1, 2020, and reports that business as discontinued operations.
Business context
Gogo provides in-flight connectivity, equipment and related services primarily to business aviation customers. At year-end, approximately 6,400 business aircraft used its ATG services, including about 2,500 on its AVANCE platform. Gogo also provides narrowband satellite services and commercial ATG network access to Intelsat under a network-sharing agreement.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $335.7 million | $269.7 million |
| Service revenue | $259.6 million | $212.0 million |
| Equipment revenue | $76.1 million | $57.7 million |
| Operating income | $120.6 million | $76.4 million |
| Net income (loss), continuing operations | $156.6 million | ($48.6 million) |
| Net income (loss), total | $152.7 million | ($250.0 million) |
| Adjusted EBITDA (non-GAAP) | $151.0 million | $98.3 million |
| Cash from continuing operating activities | $66.7 million | $4.5 million |
| Free cash flow (non-GAAP) | $58.0 million | ($4.5 million) |
Revenue rose 24.5%; service revenue increased 22.5% and equipment revenue 31.9%. Management attributed service growth mainly to more ATG aircraft online and higher average monthly revenue per ATG aircraft, which increased to $3,238 from $2,951. Operating margin was approximately 35.9%. Net income included a $187.2 million income tax benefit, principally reflecting a $195.8 million partial release of the deferred-tax valuation allowance; Gogo reported a $30.6 million pretax loss from continuing operations. Thus, reported net income substantially reflects a tax-accounting benefit rather than pretax profitability.
Cash and cash equivalents were $145.9 million at year-end, down from $435.3 million. Total debt principal was approximately $824.2 million: $721.4 million under the term loan and $102.8 million of convertible notes due May 15, 2022. The $100 million revolving facility was undrawn. Current assets were $249.9 million and current liabilities $188.5 million. The term loan matures in 2028, bears floating-rate interest, and is secured by substantially all assets; Gogo purchased interest-rate caps covering $650 million of notional debt. Cash interest paid in 2021 was $71.1 million.
Material changes versus the prior year
- Operating income increased to $120.6 million from $76.4 million; adjusted EBITDA increased to $151.0 million from $98.3 million.
- Operating cash flow improved to $66.7 million from $4.5 million, while free cash flow turned positive.
- Interest expense declined to $67.5 million from $125.8 million, following the refinancing. However, Gogo recorded an $84.0 million loss on extinguishment of debt and settlement of convertible notes, including costs associated with redeeming its 2024 senior secured notes.
- Gogo issued shares in exchange for approximately $134.0 million principal amount of 2022 convertible notes; the exchanges and other conversions contributed to a significant increase in shares outstanding.
- The company’s total 2021 net income improved sharply, but comparisons are affected by the 2020 sale of the commercial aviation business and the 2021 valuation-allowance release.
Outlook, risks and unusual items
- Management expected nationwide commercial launch of Gogo 5G in the second half of 2022. It expected revenue to grow with additional ATG aircraft and higher service revenue per aircraft; near-term capital expenditures were expected to rise for the network buildout, then decline substantially after it was largely completed.
- Management said cash and operating cash flows were expected to cover requirements for at least the next 12 months, including any 2022 convertible-note principal remaining at maturity. It was evaluating potential shareholder returns, including stock repurchases, but gave no assurance that repurchases or distributions would occur.
- Key risks include execution and supplier delays for Gogo 5G, electronic-component shortages and logistics constraints, new ATG and satellite competition, reliance on OEMs and dealers, customer retention, COVID-19 and economic conditions, spectrum and regulatory approvals, cybersecurity, and substantial floating-rate secured debt.
- On February 28, 2022, SmartSky sued Gogo alleging that Gogo 5G infringes four patents and sought damages and injunctive relief. Gogo said it believes the claims are without merit; the outcome was uncertain and no loss was accrued.
- A securities class action had a tentative settlement of $17.3 million, expected to be funded by directors’ and officers’ insurance, subject to definitive agreement and court approval. The amount was accrued with a corresponding insurance receivable.
- The valuation-allowance release involved significant judgment and was identified as a critical audit matter. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Gogo 5G launched on schedule, met performance and cost targets, and generated customer demand.
- Repayment or conversion of the $102.8 million of convertible notes due May 2022, and the resulting cash use and share dilution.
- Cash generation, debt-service capacity, floating-rate exposure, and compliance with credit-agreement covenants.
- Realization of deferred tax assets, including the assumptions behind the valuation-allowance release and potential further releases or reversals.
- Developments in the SmartSky patent litigation and final approval and insurance funding of the securities-litigation settlement.
- Whether supply constraints, competitive entry, customer churn, or changes in aviation activity affect revenue and margins.