Gogo Inc. — FY2015 Form 10-K
Business context and reporting period. Gogo provides in-flight connectivity, entertainment and communications equipment and services through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA). This annual report covers the fiscal year ended December 31, 2015; it is not a standalone Q4 filing. Unless noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $500.9 million | $408.5 million |
| Service revenue | $420.0 million | $322.7 million |
| Equipment revenue | $80.9 million | $85.7 million |
| Operating loss | $44.8 million | $50.7 million |
| Net loss | $107.6 million | $84.5 million |
| Adjusted EBITDA (non-GAAP) | $36.8 million | $10.8 million |
| Cash from operations | $104.9 million | $29.0 million |
| Capital expenditures | $153.1 million | $149.6 million |
| Cash and cash equivalents at year-end | $366.8 million | $211.2 million |
| Working capital at year-end | $270.4 million | $143.4 million |
- Revenue grew 22.6%, led by service revenue growth of 30.1%; equipment revenue declined 5.6%. The operating loss narrowed, while net loss widened, principally as interest expense rose to $58.9 million from $32.7 million.
- Operating cash flow improved substantially, but investing cash outflow was $153.3 million. Management attributed much of the operating cash flow increase to higher service revenue and changes in operating assets and liabilities, including deferred airborne lease incentives.
- FY2015 segment revenue and segment profit (loss): CA-NA $310.7 million and $41.9 million; BA $178.7 million and $71.9 million; CA-ROW $11.6 million and a $76.4 million loss. Segment profit is a company-defined, non-GAAP measure.
- CA-NA monthly service revenue per aircraft rose to $11,387 from $10,064, while connectivity take rate declined to 6.2% from 6.7%. BA ATG aircraft online increased to 3,477 from 2,797. CA-ROW remained in start-up.
- At year-end, principal debt was approximately $663.4 million: $301.5 million under the senior term facility and $361.9 million of 3.75% convertible notes due 2020. The balance-sheet carrying value of total debt was $576.0 million before separating current maturities and other presentation details. Term-loan rates were variable and stood at 11.25% and 7.50% for the two tranches. The company reported covenant compliance and no event of default.
Changes, outlook and material matters
- Revenue growth was driven by more connected aircraft, higher CA-NA average revenue per session and BA service subscriptions. CA-NA aircraft online increased to 2,387 from 2,098. Higher passenger pricing and product mix lifted average revenue per session to $12.74 from $11.08, despite lower take rate.
- Operating expenses increased, including engineering, design and development to $87.4 million from $69.5 million and depreciation and amortization to $87.0 million from $64.5 million. Research and development expense was $50.1 million. Management expected continued investment and higher engineering and depreciation costs as deployments expand.
- Management expected 2016 capital expenditures of $150–$185 million, or $110–$135 million net of deferred airborne lease incentives. It said year-end cash should cover working capital and capital needs for at least the next 12 months; longer-term requirements may require additional financing.
- 2Ku was expected to enter passenger revenue service in the first half of 2016. As of February 2016, seven airlines had awarded approximately 800 aircraft for 2Ku, but about 240 lacked definitive contracts or amendments; most installations were expected by the end of 2018. Management also announced a multi-gigahertz SES capacity agreement, with the relevant satellites expected to launch in 2017. Numeric revenue or earnings guidance was not provided.
- On February 4, 2016, American Airlines notified Gogo that a competitor’s service represented a material improvement for about 200 aircraft Gogo served. Gogo planned to propose 2Ku for those aircraft. Delta and American passenger-service revenue represented approximately 28% and 22% of consolidated revenue, respectively, making airline retention and contract terms significant exposure.
- Key risks include U.S. network capacity constraints, execution and certification risks for 2Ku and other upgrades, dependence on airline partners and single-source suppliers, satellite capacity costs, competition, and regulatory and spectrum matters. Gogo’s principal ATG licenses had initial terms expiring in October 2016 and required renewal applications.
- Contingencies include a consumer class-action settlement preliminarily approved in December 2015, with estimated cost described as not material and final approval pending, and a separate January 2016 class action involving marketing and alleged data-security issues. Gogo had not accrued a liability for the latter because potential loss could not be determined.
- The company reported an immaterial reclassification of prior-year compensation expenses among operating expense lines, with no effect on total expenses, net loss or cash flows. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Investor verification priorities
- Track the American Airlines dispute and whether Gogo retains or converts the affected aircraft to 2Ku service; confirm contract termination rights and revenue exposure.
- Verify 2Ku certification, commercial launch, definitive airline contracts, installation pace, performance and total deployment costs.
- Reconcile the rise in operating cash flow with working-capital movements and deferred airline incentives; compare recurring cash generation with capital spending and the stated 2016 capex range.
- Review debt service, variable-rate exposure, the $12.2 million term-loan mandatory prepayment, 2018 term-facility maturity and 2020 convertible-note maturity, including financing and conversion terms.
- Assess renewal of the October 2016 ATG spectrum licenses, FCC requirements and Gogo’s ability to address capacity constraints while maintaining service quality.