Gogo Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Unless otherwise noted, amounts are U.S. dollars. Gogo provides in-flight connectivity, entertainment and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA).
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $95.7 million | $70.8 million |
| Operating loss | $9.3 million | $10.3 million |
| Net loss | $16.9 million | $14.5 million |
| Net loss attributable to common stock | $16.9 million ($0.20 per share) | $32.5 million ($4.77 per share) |
| Adjusted EBITDA, non-GAAP | $5.3 million | $2.9 million |
| Cash used in operating activities | $6.8 million | $0.3 million |
| Capital expenditures | $36.1 million | $33.5 million |
Revenue increased 35.2%. Service revenue rose 31.6% to $72.3 million and equipment revenue rose 47.9% to $23.4 million. Operating loss narrowed, but net loss increased as interest expense rose to $7.2 million from $3.9 million. The much larger 2013 common-stock loss reflects $18.0 million of preferred-stock return and accretion recorded before the IPO; those charges did not recur in 2014. Non-GAAP measures are supplemental and are not substitutes for GAAP results.
- CA-NA: Revenue was $57.1 million, up 31.6%; segment profit was $5.8 million versus a $0.4 million loss. Aircraft online rose to 2,056 from 1,878; connectivity take rate increased to 6.9% from 6.2%.
- BA: Revenue was $38.6 million, up 47.4%; segment profit grew to $16.5 million from $9.5 million. ATG aircraft online increased to 2,250 from 1,555.
- CA-ROW: Revenue was $0.1 million and segment loss was $16.9 million, compared with revenue of $1.2 million and a $6.2 million loss. Commercial international connectivity service launched in March 2014, with five aircraft online at quarter-end.
At March 31, cash and cash equivalents were $219.6 million, down from $266.3 million at December 31, 2013. Total current assets were $279.2 million and current liabilities were $99.8 million. Total assets were $669.4 million; total liabilities were $414.1 million. Long-term debt on the balance sheet was $234.0 million, plus $8.3 million of current debt and capital leases. The company reported $239.3 million outstanding under its senior term facility and $1.4 million under the Alaska facility. The senior facility carried an 11.25% rate and matures June 21, 2017.
Material changes and management outlook
- Service and equipment revenue growth was led by CA-NA passenger adoption and BA service subscriptions, equipment shipments and pricing. CA-NA passenger sessions increased to 5.1 million from 4.0 million.
- Operating expenses rose to $105.0 million from $81.1 million, including higher service costs, development spending, selling expenses, general and administrative costs, and depreciation and amortization.
- Management estimated 2014 capital expenditures of $170–$210 million, or $105–$125 million net of anticipated airborne and landlord lease incentives. It estimated those incentives and related operating cash-flow impacts at $65–$85 million for 2014.
- Management said cash on hand should meet working-capital and capital-expenditure needs for at least the next 12 months, while noting that Gogo had not generated positive consolidated cash flow and that longer-term liquidity depends on revenue growth, spending, and access to permitted financing.
- Management expected future increases in development, service, sales and marketing, administrative, depreciation and interest costs. It also expected some operating costs to decline as a percentage of revenue with scale, while CA-ROW expansion would add costs.
Subsequent to quarter-end, Gogo announced an Air Canada term sheet covering its North American fleet of 130 aircraft, with possible testing of satellite solutions on international aircraft; its 2Ku satellite technology, with stated peak aircraft speeds above 70 Mbps; and a Boeing technical services agreement to pursue line-fit installation of ATG-4 and satellite solutions.
Risks, commitments and unusual items
- Airline and execution exposure: Revenue from passengers on aircraft of two CA-NA airline partners represented approximately 39% of consolidated revenue, versus 42% a year earlier. Management cited risks involving partner relationships, competition, technology rollout, network capacity, regulatory approvals, suppliers, and international expansion.
- Contractual penalties and commitments: An international airline agreement could require up to $25 million in credits or refunds depending on installation timing and competitive activity; the amount may be reduced or eliminated under specified conditions. Other agreements contain potential liquidated damages of $1–$5 million and penalties and costs of up to $6 million related to approvals or installation deadlines. The filing also discloses a $31.6 million satellite antenna and radome purchase commitment, including $12.4 million yet to be shipped, and multiyear satellite service commitments.
- Airline rebate: One contract requires a $1.8 million cash rebate in June 2014 and provides for conditional annual rebates from 2015 through 2023.
- Litigation: The filing describes patent, antitrust, trademark and consumer-protection lawsuits. The company had not accrued liabilities for these cases because potential losses could not be determined; it cautioned that outcomes could materially affect results or financial condition. The court denied Gogo’s motion to dismiss the Stewart antitrust case in February 2014.
- Airfone fees: Gogo reported approximately $1.1 million in past-due universal service fees remitted to USAC, expected to pay a further $0.1 million, and estimated customer refunds of approximately $2.5 million. It recorded an accrual and a related receivable from LiveTV under the acquisition indemnity.
- Interest-rate and financing risk: The senior term facility has a variable rate; the filing notes that higher rates would increase debt-service costs. The facility also restricts additional borrowing and other actions. The company reported compliance with its stated facility requirements and no event of default at quarter-end.
Important facts for investors to verify
- Whether CA-NA passenger adoption and revenue growth persist as airline revenue shares and network costs rise.
- Whether CA-ROW installations, approvals and commercial service scale on schedule, and whether potential airline credits or penalties are avoided.
- Whether projected capital spending and incentives remain within management’s ranges, and how quickly operating cash flow improves.
- Debt-service capacity and refinancing needs before the senior term facility’s June 2017 maturity, including exposure to variable interest rates and covenant limits.
- Developments and potential financial exposure in the disclosed lawsuits and Airfone regulatory/customer refund matters.
The filing states that disclosure controls and procedures were effective as of March 31, 2014 and that there were no material changes to risk factors from the 2013 Form 10-K.