Gogo Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Dollar amounts are in millions unless stated otherwise. 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).
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $115.5 | $95.7 |
| Operating loss | ($9.8) | ($9.3) |
| Net loss | ($20.1) | ($16.9) |
| Net loss per share, basic and diluted | ($0.24) | ($0.20) |
| Adjusted EBITDA (non-GAAP) | $8.2 | $5.3 |
| Cash from operating activities | $33.6 | ($6.8) |
| Capital expenditures | $56.9 | $36.1 |
Revenue increased 20.7%, led by service revenue, up 32.0% to $95.4 million; equipment revenue declined 14.1% to $20.1 million. Operating loss margin was approximately 8.5% negative, versus 9.7% negative a year earlier; net loss margin was approximately 17.4% negative, versus 17.6% negative. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
- CA-NA: Revenue rose 27.1% to $72.5 million. Connectivity revenue benefited from higher pricing and product mix; average revenue per session increased to $11.73 from $10.55. Aircraft online increased to 2,200 from 2,056, while the connectivity take rate remained 7.2%.
- BA: Revenue grew 7.8% to $41.6 million. Service revenue rose 38.1%, including growth in Gogo Biz subscriptions and prior-year price increases, while equipment revenue declined 13.3%.
- CA-ROW: Revenue was $1.4 million versus $0.1 million as international service expanded; the segment reported an $18.3 million loss versus $16.9 million.
Balance sheet, debt and liquidity
At March 31, cash and cash equivalents were $400.1 million, compared with $211.2 million at December 31, 2014. Current assets were $479.0 million and current liabilities $148.3 million. Total debt carrying value was $570.5 million, including $306.7 million under the senior term facility and $262.9 million for the convertible notes; the notes’ principal amount was $361.9 million. Total liabilities were $850.4 million and stockholders’ equity $139.8 million.
Operating cash flow improved by $40.4 million year over year, but was supported by changes in operating assets and liabilities, including deferred rent and deferred revenue. Investing cash outflow was $56.8 million. Financing provided $211.9 million, primarily from the convertible-note issuance, partly offset by $140.0 million spent on prepaid forward share repurchases. Management said cash on hand and other sources should cover working capital and capital needs for at least the next 12 months, while noting that ongoing positive consolidated cash flow has not been achieved.
Material changes, outlook and risks
- On March 3, Gogo issued $361.9 million principal amount of 3.75% convertible senior notes due 2020. The company paid approximately $140 million for forward transactions covering about 7.2 million shares, effectively offsetting some potential dilution. The notes’ reported effective interest rate, including discount accretion and financing-cost amortization, was approximately 11.5% for the quarter. Gogo expected proceeds after the forward transactions to fund working capital and general corporate purposes, including next-generation technology and possible spectrum acquisition.
- Gogo forecast 2015 capital expenditures of $165–$205 million, or $100–$120 million net of deferred airborne lease incentives and landlord incentives. It estimated these incentives at $65–$85 million for 2015. The capex range excluded possible costs of acquiring additional spectrum. Management expected investment and operating costs to rise with technology development, international expansion and new aircraft installations.
- In March, Gogo entered a definitive agreement to install equipment and provide service on an estimated 220 United regional jets. In May, after quarter-end, it announced a Delta agreement for 2Ku service on 250 existing domestic aircraft and at least 25 new international aircraft.
- The senior term facility matures in March 2018 and had interest rates of 11.25% and 7.50% on its two tranches at quarter-end. Gogo reported compliance with its covenants and no event of default. The facility restricts certain borrowing, investment and other activities.
- Contingencies include a possible airline credit or refund of up to $25 million tied to international installation timing, potential penalties and costs of up to $6 million under another airline agreement, and a $1.8 million airline rebate expected in June 2015. The filing says amounts under some service-level and installation commitments are uncertain.
- The Berkson consumer litigation seeks unspecified damages; no liability was accrued. Gogo said the outcome is uncertain and could materially affect its financial position, results or cash flows. Revenue from passengers on aircraft of two airline partners represented approximately 41% of consolidated revenue in the quarter.
- Management identified execution, capacity, competition, airline-partner relationships, satellite-provider dependence, regulatory approvals, international expansion, litigation, debt service and financing access among the risks to its outlook. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Key facts for investors to verify
- Whether service-revenue growth and improved CA-NA and BA performance can continue as costs, capital spending and network demands increase.
- How much of operating cash flow reflects sustainable operations versus timing-related working-capital movements, and whether forecast incentives and cash needs materialize.
- The economics, dilution effects and eventual settlement of the convertible notes and forward share transactions, as well as the impact of rising interest expense.
- Progress on international aircraft installations and technology launches, including exposure to airline credits, penalties and the $1.8 million rebate.
- Developments in the Berkson litigation, covenant compliance, and concentration and renewal risks associated with key airline partners.