Gogo Inc. — Q2 2017 Form 10-Q
Business and period: Gogo provides in-flight connectivity, entertainment and communications services, and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted.
Financial and operating highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $172.8 million | $147.5 million | $338.2 million | $289.3 million |
| Operating loss | $17.3 million | $7.1 million | $32.0 million | $15.7 million |
| Net loss | $44.2 million | $40.2 million | $85.6 million | $64.3 million |
| Adjusted EBITDA | $9.9 million | $14.4 million | $20.6 million | $28.8 million |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $2.4 million | $24.4 million |
- Q2 revenue grew 17.1%; service revenue rose 20.8% to $154.1 million while equipment revenue declined 6.2% to $18.7 million. For the first half, revenue increased 16.9%, with service revenue up 22.0% and equipment revenue down 12.4%.
- Q2 operating margin was approximately negative 10.0%, versus negative 4.8% a year earlier; net margin was approximately negative 25.6%, versus negative 27.2%. For the first half, operating margin was approximately negative 9.5%, versus negative 5.4%.
- Operating expenses increased faster than revenue, particularly engineering, design and development (up 44% in Q2) and depreciation and amortization (up 23%). Interest expense rose 55% in Q2 to $27.2 million. The first-half 2016 comparison included a $15.4 million debt-extinguishment loss; there was no such charge in 2017.
- Segment revenue in Q2: CA-NA $101.0 million, CA-ROW $14.1 million and BA $57.8 million. Segment profit was $16.2 million for CA-NA and $25.2 million for BA; CA-ROW recorded a $31.4 million segment loss.
- CA-NA connectivity take rate increased to 7.7% from 6.3%, but revenue per session declined to $10.86 from $12.94, partly due to promotions and product mix. BA service revenue grew 30%, while equipment revenue declined. CA-ROW revenue more than doubled, alongside a larger segment loss as the business expanded.
Financial position, cash flow and debt
- At June 30, cash and cash equivalents were $96.4 million and short-term investments were $283.2 million, totaling $379.7 million, down from $455.8 million at year-end 2016. Current assets were $539.7 million and current liabilities $268.3 million.
- Long-term debt carrying value was $880.4 million, up from $800.7 million at December 31, 2016; total debt principal was $951.9 million, consisting of $590.0 million of 12.5% senior secured notes and $361.9 million of 3.75% convertible notes. Stockholders’ deficit widened to $116.5 million from $40.4 million.
- First-half investing cash use was $90.0 million, including $128.9 million of property and equipment purchases and $16.9 million of capitalized software, partly offset by net short-term investment redemptions. Financing provided $66.4 million, principally from the January 2017 issuance of additional senior secured notes for $70.2 million gross proceeds. Cash and cash equivalents declined by $20.9 million.
- First-half capital expenditures were $145.7 million, versus $85.0 million in 2016. Management cited increased airborne equipment spending, particularly for 2Ku. The filing reports cash paid for interest of $42.7 million in the first half.
Outlook, commentary and risks
- Management said cash, cash equivalents and short-term investments on hand were expected to cover working capital and capital expenditure needs for at least 12 months, including 2Ku and ATG-4 installations, international expansion and next-generation ATG development. It also cautioned that financing access may be limited and that debt covenants constrain additional borrowing and distributions.
- 2017 capital expenditures were projected at $290–$330 million, or $230–$260 million net of estimated $60–$70 million deferred airborne lease incentives. For 2018, management projected $110–$170 million of capital expenditures, or $70–$120 million net of estimated $40–$50 million in incentives.
- Management expected near-term CA-NA service costs to rise more slowly than historically and, over time, to decline as a share of service revenue through scale efficiencies. International growth was expected to add CA-ROW network, satellite and maintenance costs. Engineering and development spending included $11.8 million of first-half expense for next-generation ATG; management expected such expenses, excluding next-generation ATG development, to remain relatively consistent.
- Key risks include execution and cost of 2Ku and next-generation ATG deployment, aircraft installation and certification schedules, reliance on airline partners and single-source suppliers, satellite capacity and international regulatory approvals, competition, substantial debt and interest burden, and the ability to obtain future financing. Delta and American together accounted for approximately 48% of revenue in the first half. Potential airline credits, penalties and indemnification obligations are disclosed, but maximum future payments are uncertain.
- Gogo stated that disclosure controls were effective as of June 30, 2017, and reported no material changes to internal control over financial reporting during the quarter. It reported no material change to risk factors beyond those disclosed in its prior-quarter 10-Q.
Investor verification priorities
- Track whether service-revenue growth and higher connectivity take rates can offset lower revenue per session, rising service costs and weaker equipment sales.
- Assess the trajectory of CA-ROW losses and whether international deployments produce improved segment economics.
- Compare actual cash flow and capital spending with management’s 2017–2018 projections; monitor cash and short-term investments after the substantial first-half investment program.
- Review debt service capacity, the 12.5% secured-note burden, covenant restrictions and refinancing or financing needs.
- Check progress, costs and timing for 2Ku and next-generation ATG, including aircraft installations, certifications and supplier capacity; also monitor airline concentration and contractual penalties.