Gogo Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Gogo provides in-flight connectivity and digital entertainment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Amounts below are in millions of dollars except per-share and operating data.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $147.3 | $126.4 | $436.6 | $363.1 |
| Operating loss | $(8.8) | $(11.6) | $(24.5) | $(29.9) |
| Net loss | $(33.3) | $(28.9) | $(97.6) | $(73.7) |
| Net loss per share | $(0.42) | $(0.37) | $(1.24) | $(0.92) |
| Interest expense | $24.8 | $16.7 | $58.7 | $42.6 |
| Adjusted EBITDA, non-GAAP | $15.2 | $9.7 | $44.1 | $28.7 |
- Q3 revenue rose 16.5%, led by service revenue growth of 20.4%; equipment revenue declined 5.2%. Approximate gross margin was 54.6%, versus 55.5% in Q3 2015. Operating loss narrowed, but higher financing costs contributed to a larger net loss.
- For the nine months, revenue increased 20.2%, while net loss widened. The period included a $15.4 million loss on extinguishment of debt, associated with refinancing the former term facility.
- Nine-month operating cash flow was $45.1 million, down from $87.3 million. Investing cash outflow was $247.7 million and financing cash inflow was $202.4 million. Capital expenditures were $128.7 million; reported Cash CAPEX, a company-defined non-GAAP measure, was $99.6 million.
- At September 30, cash and cash equivalents were $146.8 million and short-term investments were $338.7 million, totaling $485.6 million. Current assets were $612.8 million and current liabilities $214.3 million.
- Debt principal totaled $812.5 million: $525.0 million of 12.5% senior secured notes due 2022 and $361.9 million principal of 3.75% convertible notes due 2020. The term facility was repaid in June. Long-term debt carrying value, net of financing costs and discounts, was $796.2 million. Stockholders’ equity was a deficit of $18.0 million.
Material changes and operating trends
- Q3 segment revenue was $90.7 million in CA-NA, $48.9 million in BA, and $7.6 million in CA-ROW. Segment profit was $14.5 million, $20.7 million, and a $19.9 million loss, respectively. CA-ROW remained loss-making as it expanded.
- CA-NA service revenue benefited from more aircraft online and higher connectivity take rates; take rate rose to 6.5% from 5.6%. Average revenue per session fell to $11.46 from $13.00, partly due to product mix and third-party-paid promotions.
- BA service revenue growth reflected increased Gogo Biz subscriptions and ATG aircraft online; BA equipment revenue declined amid softer market trends. Some Gogo Biz 4G equipment revenue was deferred until shipment criteria are met.
- CA-ROW aircraft online increased to 256 from 160. Air France-KLM selected 2Ku for its existing long-haul fleet, with an option for more aircraft; European airline awards were nearly 300 aircraft in total.
- Gogo announced development of a next-generation North American ATG network using licensed ATG and unlicensed 2.4 GHz spectrum, with a stated objective of peak speeds up to 100 Mbps by 2018.
Outlook, risks, and unusual items
- Management said available cash, cash equivalents, and short-term investments were expected to cover working capital and capital needs for at least the next 12 months, while cautioning that this was not assured. Longer-term funding may depend on operating cash flow and potential additional financing; debt covenants and market access could constrain options.
- Management estimated 2016 capital expenditures of $150–$185 million, net of anticipated $40–$50 million in deferred airborne lease incentives, implying net capital expenditures of $110–$135 million. Estimates for 2017 were $220–$265 million gross and $140–$165 million net; for 2018, $315–$400 million gross and $170–$205 million net. These ranges exclude approximately $50 million for the 2.4 GHz ATG network buildout; the company was also evaluating accelerating 2Ku installations.
- Management expected approximately $9 million of expense in Q1 2017 for completion of the first phase of 2.4 GHz solution development. Engineering, depreciation and amortization, and certain service costs were expected to rise with technology development, installations, and network expansion.
- The June refinancing issued $525 million of 12.5% secured notes and repaid the prior term facility, including an 8.6 million prepayment premium and write-off of financing costs; these items contributed to the $15.4 million extinguishment loss. Management expected 2016 interest expense to increase compared with 2015.
- A putative consumer class action alleges misleading marketing and data-security issues. The court compelled arbitration and denied reconsideration; plaintiffs appealed on October 14, 2016. The company had not accrued a loss because the outcome and possible loss range could not be determined, and said an adverse outcome could materially affect results.
- Key risks include execution and cost of 2Ku and next-generation ATG rollouts, international expansion, airline-partner relationships and concentration, competition, supplier and satellite-capacity dependence, regulatory approvals, cybersecurity, and the company’s substantial debt. Delta and American Airlines together generated approximately 50% of revenue in the first nine months of 2016.
- The company revised the presentation of U.S. Treasury bills from cash equivalents to short-term investments and recast comparative balance-sheet and cash-flow presentation; total cash plus short-term investments and operating results were unaffected. A separate immaterial reclassification of 2015 compensation expenses among operating expense lines did not change total expenses or net loss.
Important facts for investors to verify
- Whether revenue and take-rate growth can translate into sustained operating improvement, given lower Q3 revenue per session and continuing consolidated losses.
- Whether the 2016–2018 capital-spending plans, including the separately stated 2.4 GHz investment, can be funded without additional financing and within debt-covenant limits.
- The economics and execution timetable of 2Ku and next-generation ATG deployments, including aircraft installation pace, costs, and expected customer adoption.
- Debt service burden and refinancing flexibility, particularly the 12.5% secured notes and the convertible notes’ maturity and settlement terms.
- Developments in the consumer litigation appeal, airline-partner concentration and contracts, and any material changes in liquidity or operating cash flow.