Gogo Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Gogo provides in-flight connectivity, entertainment and related services through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
- Revenue: Q3 revenue was $172.9, up 17.4%; nine-month revenue was $511.1, up 17.1%. Q3 service revenue rose 18.8% to $153.3, while equipment revenue rose 7.5% to $19.5. Nine-month service revenue increased 20.9% to $453.9; equipment revenue decreased 6.5% to $57.2.
- Profitability: Q3 operating loss was $17.8 versus $8.8; net loss was $45.3 versus $33.3, or $(0.57) per share versus $(0.42). Nine-month operating loss was $49.8 versus $24.5; net loss was $130.9 versus $97.6, or $(1.65) per share versus $(1.24). Approximate net margin was negative 26.2% in Q3 and negative 25.6% for the nine months, compared with negative 22.6% and 22.3%, respectively, in 2016.
- Non-GAAP results: Adjusted EBITDA was $13.0 in Q3 versus $15.2 and $33.6 for the nine months versus $44.1. The filing cautions that this measure is not a substitute for GAAP results.
- Cash flow and investment: Nine-month operating cash flow was a use of $4.2, compared with $45.1 provided in 2016. Investing activities used $66.7; financing activities provided $175.5. Capital expenditures were $214.2, versus $128.7 in the prior-year period. Cash and cash equivalents were $222.4 at September 30.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $410.9, down from $455.8 at year-end 2016. Debt principal was $1,012.7 (carrying value $995.5, net of financing costs and discounts); total liabilities were $1,518.4 and stockholders’ deficit was $155.5. Senior secured notes bear 12.5% interest and mature in 2022; convertible notes mature in 2020. Management said available cash and investments were expected to cover working capital and capital needs for at least 12 months, while noting financing and covenant constraints.
Material changes and operating trends
- Growth was led by service revenue across the segments: Q3 CA-NA revenue increased 5.5% to $95.7, BA increased 23.6% to $60.5, and CA-ROW increased 119.1% to $16.6. CA-ROW’s segment loss widened to $24.1 from $19.9; its nine-month loss widened to $82.1 from $62.9.
- CA-NA connectivity take rate rose to 7.5% from 6.5% in Q3, but average revenue per session declined to $10.49 from $11.46. BA service growth reflected more Gogo Biz subscribers and higher average monthly service revenue; ATG aircraft online increased to 4,567 from 3,974. CA-ROW growth included higher airline-paid usage and an airline contract’s change from Turnkey to Airline Directed accounting.
- Operating expenses rose to $190.7 in Q3 from $156.0. Engineering, design and development increased to $31.3 from $25.8, and depreciation and amortization increased to $35.8 from $26.8. Higher debt levels and rates contributed to Q3 interest expense of $27.6, up from $24.8.
- Gogo issued $100 of additional senior secured notes in September at 113% of face value, receiving $113 gross proceeds. A supplemental indenture expanded permitted secured borrowing and vendor financing capacity and allowed specified distributions for interest payments.
Outlook, risks and unusual items
- Management forecast 2017 capital expenditures of $290–$330, or $230–$260 net of estimated airborne lease incentives; 2018 capital expenditures were forecast at $110–$170, or $70–$120 net. It expected continued investment in 2Ku, international expansion and a next-generation ATG network.
- Management expected service costs and depreciation to rise with network expansion and additional aircraft installations; it expected engineering, sales and marketing, and general and administrative expenses to decline as a percentage of revenue over time. These are forward-looking expectations, not guarantees.
- Changes in estimated equipment useful lives for upgrades and aircraft decommissioning increased depreciation expense by $8.6 in Q3 and $14.9 for the nine months, partly offset by lower service costs from incentive amortization. The filing says these changes increased loss per share by $0.09 and $0.14, respectively.
- Risks highlighted include substantial indebtedness and interest costs, debt covenant limits and possible difficulty obtaining financing; execution and cost of technology deployments and international growth; airline-partner retention and installation schedules; competition, supplier dependence, spectrum and regulatory approvals; and service, equipment, cybersecurity and litigation risks. Delta and American Airlines together represented approximately 47% of consolidated revenue in 2017’s three- and nine-month periods.
- Satellite service purchase commitments were approximately $21.4 for the remainder of 2017, $75.6 in 2018, and $303.0 thereafter. The filing also identifies variable airline penalties and indemnities whose maximum exposure is uncertain, and a $1.8 airline rebate due in June 2018. No event of default under the senior secured notes was reported; the filing states there were no material changes to previously disclosed risk factors since the March 2017 Form 10-Q.
- Gogo planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. It expected, among other effects, earlier recognition of equipment revenue and related costs upon installation for certain Airline Directed contracts; the impact remained under evaluation.
Important facts for investors to verify
- Whether revenue growth and improved passenger take rates can translate into stronger segment profitability and positive operating cash flow.
- Actual cash spending on 2Ku, next-generation ATG and international expansion versus the stated capital expenditure outlook.
- Debt interest burden, covenant headroom, refinancing needs and the availability of additional financing.
- Progress and economics of airline contract transitions, particularly the effect on revenue recognition, costs and deferred airborne lease incentives.
- Execution of aircraft installations and technology deployments, and exposure to airline concentration, supplier, regulatory and service-performance risks.