Gogo Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014 (with quarterly results also reported). Gogo provides in-flight connectivity, entertainment and communications services, equipment and related support through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). International commercial service began in March 2014; CA-ROW remained in its start-up phase.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $408.5 million | $328.1 million |
| Service revenue | $322.7 million | $250.4 million |
| Equipment revenue | $85.7 million | $77.7 million |
| Operating loss | $(50.7) million | $(44.7) million |
| Net loss | $(84.5) million | $(111.3) million |
| Net loss attributable to common stock | $(84.5) million | $(145.9) million |
| Net loss per share, basic and diluted | $(0.99) | $(3.05) |
| Net cash from operating activities | $29.0 million | $17.8 million |
| Capital expenditures | $149.6 million | $121.4 million |
| Adjusted EBITDA (non-GAAP) | $10.8 million | $8.4 million |
Revenue grew 24.5%, led by CA-NA service revenue and BA growth. Operating expenses increased 23.2% to $459.2 million, and operating loss widened despite higher revenue. Gross margin, calculated from reported revenue less service and equipment costs, was approximately 48.7%, compared with 48.8% in 2013. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
- Segments: CA-NA revenue was $250.8 million and segment profit was $26.0 million, versus a $1.3 million segment loss in 2013. BA revenue was $155.6 million and segment profit was $63.0 million, up from $127.5 million and $50.7 million. CA-ROW revenue was $2.1 million and segment loss was $78.1 million, compared with $1.6 million revenue and a $41.0 million loss.
- CA-NA operating indicators: Aircraft online increased to 2,098 from 2,032; connectivity take rate rose to 6.7% from 6.2%; monthly service revenue per aircraft (ARPA) increased to $10,064 from $8,375.
- Cash and liquidity: Cash and cash equivalents were $211.2 million at year-end, down from $266.3 million. Working capital was $143.4 million. Operating cash flow was positive, but investing activities used $152.0 million, principally reflecting significant network, aircraft equipment, software and facility investment.
- Debt: Senior term facility borrowings were $309.2 million at year-end, up from $240.8 million. The facility has a March 2018 maturity, variable rates and substantial collateral; reported year-end rates were 11.25% on Tranche B-1 and 7.50% on Tranche B-2. Interest expense was $32.7 million. The company reported compliance with facility covenants at year-end.
- Fourth quarter: Revenue was $109.2 million; operating loss was $15.2 million; net loss was $24.1 million, or $0.28 per share.
Material changes versus the prior year
- Total revenue increased 24.5%; service revenue grew faster than equipment revenue. CA-NA connectivity sessions rose to 21.1 million from 18.2 million, with higher take rate and ARPS supporting revenue growth.
- Operating loss increased to $50.7 million from $44.7 million as engineering, development, sales and marketing, general and administrative, and depreciation expenses rose. R&D and engineering, design and development expenses were $65.1 million, up from $49.7 million.
- Net loss improved from 2013, but the prior-year common-stock loss included $29.3 million of preferred-stock returns and a $36.3 million fair-value derivative charge associated with the IPO. These items make the common-stock loss comparison less representative of underlying operating performance.
- Cash declined while capital investment and debt increased. In July 2014, Gogo borrowed an additional $75 million under its amended senior term facility.
- CA-ROW expanded from pre-launch activity to commercial service, but its losses increased substantially as the company incurred satellite, certification and market-entry costs.
Outlook, risks and contingencies
- Management estimated 2015 capital expenditures of $165–$205 million, or $100–$120 million net of anticipated airborne lease and landlord incentives. The estimate excludes potential spending on additional spectrum and related technology. Management expected cash on hand and other sources to cover at least the next 12 months, while noting the need for higher investment and the possibility of future financing.
- Management expected 2Ku satellite service to become commercially available by the end of 2015 and projected continued ATG-4 rollout. These plans depended on development, supplier performance, airline installation schedules, FAA approvals and satellite capacity. The filing also describes a potential next-generation air-to-ground system, for which additional spectrum would be required.
- Key risks include U.S. network capacity constraints; reliance on airline agreements and concentrated airline relationships; technology execution and certification delays; satellite capacity and supplier concentration; competition; international regulatory uncertainty; and continuing operating losses and high capital needs. Delta and American represented approximately 26% and 14% of consolidated 2014 revenue, respectively.
- The FCC adopted an order on February 26, 2015—after the fiscal year-end—to reclassify broadband internet access under Title II and implement net-neutrality rules. The filing states that the full order was not yet available and its impact could not be assessed.
- Contingencies include a consumer class action alleging misleading recurring-charge disclosures; the company had not accrued a liability because the possible loss could not be determined. A patent case filed by Carucel Investments was dismissed with prejudice in October 2014. Certain airline agreements also provide for potentially significant credits or penalties tied to installation timing and regulatory milestones, including stated maximum exposures of up to $25 million and $6 million under particular agreements.
- The filing identifies a $1.8 million airline rebate due in June 2015 under an aircraft-availability provision. Contractual obligations totaled approximately $1.04 billion, including operating leases, satellite and network commitments, debt principal and interest, and other obligations.
The financial statements received an unqualified audit opinion, and management and Deloitte reported effective internal control over financial reporting as of December 31, 2014.
Important facts for investors to verify
- Whether 2Ku and ATG-4 deployments met the announced schedules, obtained required approvals and delivered the expected capacity and economics.
- Actual 2015 capital spending, incentive receipts, operating cash generation and funding requirements relative to management’s estimates.
- Debt servicing costs, covenant restrictions, repayment obligations and availability of additional financing.
- Progress in reducing CA-ROW losses and whether international airline contracts generate sufficient service revenue to support committed satellite capacity and investment.
- Airline concentration, contract renewal and termination provisions, installation obligations, revenue-share arrangements and any credits or penalties incurred.
- Developments in the Berkson litigation, the stated contractual contingencies and the financial effect, if any, of the FCC’s 2015 broadband order.