Gogo Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Unless otherwise stated, financial figures below are in U.S. dollars.
Business context
Gogo provides inflight connectivity, entertainment and connected-aircraft services, and related equipment, through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). At year-end, it had service on approximately 3,200 commercial aircraft and 4,700 business aircraft. Its strategy centers on expanding aircraft installations and service usage, deploying 2Ku and next-generation air-to-ground technology, and growing international operations.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $699.1 million | $596.6 million |
| Service revenue | $617.9 million | $514.3 million |
| Equipment revenue | $81.2 million | $82.3 million |
| Operating loss | $64.3 million | $26.6 million |
| Net loss | $172.0 million | $124.5 million |
| Net loss per share | $2.17 | $1.58 |
| Adjusted EBITDA (non-GAAP) | $58.5 million | $67.2 million |
| Cash from operating activities | $60.3 million | $65.0 million |
| Capital expenditures | $280.2 million | $176.9 million |
Revenue rose 17.2%, led by service growth across all three segments; equipment revenue declined 1.3%. Operating expenses increased to $763.4 million, including $133.3 million in engineering, design and development and $145.5 million in depreciation and amortization. Interest expense rose to $111.9 million from $83.6 million. Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP results.
Segment revenue and profit (loss) were: CA-NA, $400.6 million and $66.8 million; CA-ROW, $57.9 million and a $107.0 million loss; BA, $240.6 million and $99.4 million. Versus 2016, revenue increased 7.8% at CA-NA, 128.0% at CA-ROW and 20.5% at BA. CA-NA segment profit fell from $71.9 million, BA profit rose from $82.9 million, and CA-ROW’s loss widened from $87.6 million.
Fourth-quarter 2017 revenue was $188.0 million, compared with $160.0 million in fourth-quarter 2016. Fourth-quarter operating loss was $14.4 million versus $2.2 million; net loss was $41.1 million versus $26.9 million, and loss per share was $0.52 versus $0.34.
At December 31, cash, cash equivalents and short-term investments totaled $409.1 million, down from $455.8 million a year earlier; working capital was $276.6 million versus $353.7 million. Operating cash flow was $60.3 million. Cash CAPEX, a non-GAAP measure defined by Gogo, was $220.5 million. The company said available funds were expected to cover working capital and capital expenditure needs for at least the next 12 months, while noting that longer-term funding needs depend on operating performance, technology investment and access to financing.
Year-end debt included $690.0 million principal of 12.5% senior secured notes due 2022 and $361.9 million principal of 3.75% convertible notes due 2020. The notes’ reported carrying values differ from principal because of premiums, discounts and financing costs. Senior secured notes are secured by substantially all of the issuers’ and guarantors’ assets; covenants restrict, among other things, additional debt and distributions.
Material changes and business developments
- CA-NA service revenue increased 10.1%, supported by more aircraft equivalents and a higher connectivity take rate (8.3% versus 6.6%). Average revenue per session fell to $10.33 from $12.31, partly reflecting growth in airline- and third-party-paid offerings.
- BA service revenue increased 28.6%, with ATG aircraft online rising to 4,678 from 4,172. CA-ROW revenue more than doubled, but the segment remained loss-making as network and operating costs increased.
- 2Ku was installed on more than 550 aircraft by year-end, with more than 1,400 additional aircraft awarded but not yet installed. ATG-NG, which achieved speeds above 100 Mbps in testing, was expected to become commercially available in 2018.
- Capital expenditures increased substantially, mainly for airborne equipment and 2Ku rollout. Depreciation and amortization also increased, including $29.2 million of additional depreciation from shortened useful lives of certain equipment; management said this increased 2017 loss per share by $0.27.
- Gogo issued additional senior secured notes in 2017, increasing their principal from $525 million to $690 million. Interest expense increased substantially year over year.
Outlook, risks and unusual items
Management expected 2018 capital expenditures, net of deferred airborne lease incentives, to decrease from 2017 as some installations shift to the airline-directed model and previously purchased equipment is used. Network spending was expected to rise as ATG-NG deployment begins. Management also expected depreciation and amortization to decline in 2018 as certain accelerated depreciation programs conclude, partly offset by network investment. No numerical revenue, earnings or cash-flow guidance is provided in the supplied filing text.
- Airline concentration and contract exposure: Revenue from service on Delta-operated aircraft represented approximately 26% of consolidated revenue, and service on American-operated aircraft approximately 21%. Gogo expected American to exercise an option to remove service from about 550 mainline aircraft, with more than 400 expected to be deinstalled in 2018 and early 2019. Loss or termination of major airline agreements could materially affect results.
- Execution and capacity: Gogo reported U.S. network capacity constraints and disclosed 2Ku installation delays and quality issues under remediation. Delayed or unsuccessful 2Ku or ATG-NG deployment could impair service, growth and contractual performance.
- Funding and leverage: Gogo had substantial debt, high interest expense, significant investment requirements and restrictions under debt agreements. Management’s liquidity assessment depends on future operating cash flow and potentially additional financing.
- Other risks: Competition, reliance on third-party satellite capacity and single-source suppliers, regulatory and certification requirements, cybersecurity and privacy exposure, and airline-industry conditions could adversely affect operations. The company also cited potential costs or consequences from service-level penalties, indemnification obligations, and foreign regulatory compliance.
- Accounting and tax changes: Adoption of ASC 606 in 2018 was expected to accelerate recognition of certain airline-directed equipment revenue and related costs and to change the treatment of certification costs and penalties; management estimated a roughly $53 million opening retained-earnings revenue adjustment and $47 million of related costs. U.S. tax reform lowered the federal corporate rate, but management said other effects remained under review.
- Contingencies and unusual commitments: Contractual obligations included $626.0 million for satellite transponder and teleport services and $280.3 million in purchase obligations. Gogo also disclosed a $1.8 million airline rebate payable in June 2018 and potentially uncapped intellectual-property indemnification obligations. It reported no specific material litigation outcome in the supplied text.
Important facts for investors to verify
- Progress, installation pace, performance and costs for 2Ku and ATG-NG, and whether they ease capacity constraints as planned.
- The timing and financial effect of American Airlines aircraft deinstallations, and the status and renewal terms of major Delta and American agreements.
- Cash burn, capital expenditure levels, available liquidity, debt covenants, interest burden and ability to address the 2020 convertible-note maturity and 2022 secured-note maturity.
- Whether CA-ROW can improve utilization and narrow its losses, and whether BA growth and service revenue translate into sustained cash generation.
- The actual effect of ASC 606 and airline-directed arrangements on reported revenue, margins, cash flows and contract costs.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2017.