Gogo Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing was signed March 14, 2014. Unless stated otherwise, amounts are U.S. dollars; financial statement amounts below are in millions.
Business context
Gogo provides in-flight connectivity, entertainment and related services to commercial and business aviation customers. Its segments are Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). CA-ROW remained in start-up mode. Gogo completed its initial public offering in June 2013, raising approximately $170 million net, and all outstanding preferred stock converted to common stock.
Financial and operating performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $328.1 | $233.5 |
| Service revenue | $250.4 | $167.1 |
| Equipment revenue | $77.7 | $66.4 |
| Operating loss | $(44.7) | $(27.4) |
| Net loss attributable to common stock | $(145.9) | $(95.6) |
| Adjusted EBITDA (non-GAAP) | $8.4 | $9.3 |
| Cash from operating activities | $17.8 | $30.1 |
| Capital expenditures | $121.4 | $79.5 |
- Revenue grew 40.5%, led by service revenue growth of 49.9%. CA-NA revenue rose 48.1% to $199.1 million; BA revenue rose 29.6% to $127.5 million; CA-ROW revenue was $1.6 million.
- CA-NA had 2,032 aircraft online at year-end, versus 1,811 a year earlier. Connectivity take rate increased to 6.2% from 5.3%; average monthly service revenue per aircraft rose to $8,375 from $6,981.
- BA segment profit increased to $50.7 million from $35.8 million. CA-NA segment loss narrowed to $1.3 million from $12.2 million, while CA-ROW segment loss widened to $41.0 million from $14.3 million. Segment profit/loss is a company-defined measure, not GAAP net income.
- Operating loss was 13.6% of revenue, compared with 11.8% in 2012. Service and equipment costs increased, along with engineering, development, depreciation and administrative expenses.
- Year-end cash and cash equivalents were $266.3 million, versus $112.6 million; working capital was $212.0 million. The cash increase largely reflected IPO and borrowing proceeds, while investing activities used $135.1 million.
- Debt under the amended senior term facility was $240.8 million at year-end, plus $1.5 million outstanding under the Alaska facility. The senior facility had a stated 11.25% interest rate at year-end, is variable-rate, and matures June 21, 2017.
- For the fourth quarter, revenue was $92.6 million, operating loss $14.4 million and net loss $22.1 million. Q4 2012 revenue was $63.5 million, operating loss $9.6 million and net loss $19.1 million.
Material changes and unusual items
- Revenue growth reflected more connected aircraft and passenger sessions, higher take rates and pricing, and increased BA connectivity equipment sales. CA-NA connectivity sessions rose to 18.2 million from 13.3 million.
- Interest expense increased to $29.3 million from $8.9 million, reflecting a larger debt balance and a full year of borrowing costs. The company recorded a $36.3 million noncash fair-value charge associated with the preferred-stock liquidation preference triggered by the IPO. Preferred-stock returns and accretion also contributed to the GAAP common-stock loss; the preferred shares converted at the IPO.
- Capital spending increased substantially to support aircraft installations, ATG-4 upgrades, network expansion and international service. Depreciation and amortization rose 50.4% to $55.5 million, including $4.6 million of accelerated depreciation related to planned ATG-4 retrofits.
- Delta and American together represented approximately 41% of consolidated revenue in 2013 (about 26% and 15%, respectively). The filing also cites reliance on airline agreements and notes the American Airlines–US Airways merger.
Outlook, management commentary and risks
- Management forecast 2014 capital expenditures of $170–$210 million, or $105–$125 million net of expected deferred airborne lease and landlord incentives. It said cash on hand and other sources were expected to cover anticipated needs for at least 12 months, while noting that longer-term funding needs and execution remain uncertain.
- Planned initiatives included expanding ATG-4, launching Gogo GTO in the second half of 2014, expanding Gogo Vision, and growing international service. Management targeted approximately 800 ATG-4-equipped aircraft by year-end 2014 and expected 2014 commercial service over Canada’s ATG network. Global Xpress Ka-band service was expected to begin in 2015, subject to satellite deployment and approvals.
- Management expected service costs, engineering and development expenses, depreciation, and interest expense to rise as the business expands. It estimated that upcoming airline revenue-share step-ups could add about 2% of CA-NA service revenue to revenue-share costs.
- Key risks include U.S. network capacity constraints; execution, certification and timing risks for new technologies; reliance on a small number of airline partners and suppliers; competition; international regulatory and satellite-capacity risks; and the possibility that significant upfront satellite commitments outpace demand.
- The filing describes potential airline credits or penalties, including up to $25 million of credits/refunds tied to the pace of international fleet installations, and other possible regulatory or installation-related damages. It also reports multiple pending lawsuits, including antitrust, patent, trademark and consumer claims; no liability was accrued because loss could not be reasonably determined.
- The audited financial statements received an unqualified opinion. Management concluded disclosure controls were effective at December 31, 2013; the filing did not include an audit opinion on internal control over financial reporting because of the newly public company transition period.
Important facts for investors to verify
- Whether passenger take rates, service revenue growth and monetization of Vision and other new services continue to improve.
- Actual 2014 capital spending and incentive receipts compared with management’s ranges, and the resulting cash and financing needs.
- ATG-4, GTO, satellite service and international installation progress, including required FAA and foreign approvals and any related contract penalties.
- Debt terms, variable-rate exposure, covenant restrictions and the 2017 maturity, alongside the effect of operating cash flow and capital investment on liquidity.
- Airline concentration and contract developments following the American–US Airways merger, including renewal, installation and revenue-share terms.
- Developments in pending litigation and Airfone-related customer refunds, Universal Service Fund payments and potential regulatory exposure.