Gogo Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 13, 2020. The filing reports full-year results and quarterly data, including Q4 2019, rather than a standalone quarterly 10-Q. Gogo provides in-flight connectivity, entertainment and related services across Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA).
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $835.7 million | $893.8 million |
| Service revenue | $664.4 million | $630.1 million |
| Equipment revenue | $171.4 million | $263.6 million |
| Operating income (loss) | $36.7 million | $(26.9) million |
| Net loss | $(146.0) million | $(162.0) million |
| Net loss per share | $(1.81) | $(2.02) |
| Cash from operating activities | $64.1 million | $(82.3) million |
| Capital expenditures | $115.5 million | $131.7 million |
| Adjusted EBITDA (non-GAAP) | $145.6 million | $71.2 million |
| Cash, cash equivalents and short-term investments at year-end | $170.0 million | $223.5 million |
| Working capital at year-end | $172.2 million | $285.8 million |
FY2019 operating margin was approximately 4.4%, versus an operating loss margin of approximately 3.0% in 2018. Free cash flow, defined by the company as operating cash flow less capital expenditures and intangible-asset purchases, was negative $51.4 million; unlevered free cash flow was positive $85.2 million, reflecting adjustments for cash interest and interest income. These are non-GAAP measures.
At December 31, 2019, debt carrying value was $1.10 billion, with approximately $1.17 billion of principal outstanding: $925 million of 9.875% secured notes due 2024, $237.8 million of 6.00% convertible notes due 2022 and $2.5 million of 2020 convertible notes. The $30 million asset-based revolving facility was undrawn at year-end and subject to borrowing-base availability. Stockholders’ deficit was $398.9 million. Cash and short-term investments declined by $53.5 million year over year.
Q4 2019 revenue was $221.3 million, operating income $8.4 million and net loss $22.4 million. The quarter’s net loss included the effects of financing and other items reflected in annual results.
Material changes versus prior period
- Total revenue declined 6.5%, as equipment revenue fell 35.0%; service revenue grew 5.4%.
- Operating results improved to income of $36.7 million from a $26.9 million loss, while net loss narrowed by $16.0 million. Interest expense rose to $130.6 million from $122.8 million, and debt-extinguishment losses increased to $58.0 million from $19.7 million.
- Operating cash flow improved by $146.4 million, from $82.3 million used to $64.1 million provided. The filing attributes the improvement to operating performance and changes in working-capital items, including receivables and inventory.
- Segment revenue shifted: CA-NA fell 19.4% to $378.0 million, BA rose 6.5% to $309.0 million, and CA-ROW rose 10.7% to $148.7 million. CA-NA service revenue declined 3.5%, while BA service revenue grew 13.0% and CA-ROW service revenue grew 32.6%.
- CA-NA reportable segment profit increased to $97.9 million from $62.3 million; BA segment profit rose to $144.0 million from $140.2 million; CA-ROW’s segment loss narrowed to $62.3 million from $90.8 million. Segment profit is a company-defined measure, not GAAP net income.
- Gogo issued $925 million of 2024 secured notes and used proceeds in part to redeem $690 million of 2022 secured notes and repurchase most of the 2020 convertible notes. The refinancing contributed to the 2019 debt-extinguishment loss.
Outlook, commentary, risks and unusual items
- Management expected CA-NA and CA-ROW service revenue to decline near term due to aircraft deinstallations, contract-model changes and, most significantly, COVID-19. Before the outbreak’s effects, management expected longer-term CA service growth from higher passenger adoption and aircraft equivalents; BA service revenue was expected to grow with additional ATG-connected aircraft.
- As of the March 13, 2020 filing, Gogo reported sharply reduced air-travel demand and airline capacity cuts associated with COVID-19, expected a significant negative effect on commercial aviation revenue, and could not predict its duration. Management warned that a prolonged downturn could materially affect 2020 results, liquidity and financial condition; CA-ROW faced added exposure to largely fixed satellite-capacity costs. Gogo had not yet seen an impact on BA.
- Gogo planned to make its Gogo 5G network available in 2021. The company cited execution, supplier, spectrum, certification and capacity risks, as well as existing capacity constraints on its North American ATG network.
- Delta generated approximately 28% of 2019 consolidated revenue. Gogo said Delta was likely to pursue supplier diversification for its domestic mainline fleet as it moved toward free passenger connectivity; Delta had not issued a termination notice or finalized awards. Delta contracts generally ran to 2027, with one ATG fleet contract expiring in 2022.
- Liquidity risks include substantial debt service, limited additional borrowing capacity, and the need to refinance or repay $237.8 million of 2022 convertible notes at maturity. Management stated that available cash, operating cash flow and ABL access were expected to cover obligations based on then-current plans, but also warned that COVID-19 could materially weaken liquidity.
- Other significant exposures include satellite availability and cost, airline contract termination or renewal, competition, dependence on key suppliers, regulatory approvals, cybersecurity and privacy, and product reliability. Pending matters included patent litigation and securities and derivative lawsuits; the company reported no accruals because potential losses could not be reasonably estimated. It stated that the first amended securities complaint had been dismissed without prejudice, while a motion to dismiss a second amended complaint was pending.
- Unusual accounting and financing factors include ASC 606 adoption in 2018, which changed the timing of some equipment revenue recognition, and ASC 842 adoption in 2019, which added lease assets and liabilities to the balance sheet. The 2019 debt refinancing and related extinguishment losses materially affected reported results.
Investor verification priorities
- Track COVID-19’s effects on airline schedules, passenger usage, installations, revenue and cash needs, particularly in CA-ROW.
- Verify Delta’s free-connectivity plans, supplier-diversification decisions and any resulting fleet awards, deinstallations or contract changes.
- Assess the company’s liquidity, cash burn and access to financing against the 2022 convertible-note maturity and 2024 secured debt obligations.
- Monitor Gogo 5G timing, ATG capacity constraints, 2Ku installation and reliability, and the cost and availability of satellite capacity.
- Reconcile reported GAAP losses and cash flow with Adjusted EBITDA and free-cash-flow measures, including the effect of financing charges and equipment-revenue accounting.
- Review developments in the disclosed patent, securities and derivative litigation and potential indemnification obligations.
The auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2019.