Gogo Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results are for continuing operations unless noted. Gogo provides broadband connectivity, equipment, and related services in business aviation; its commercial aviation business was sold in December 2020 and is reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $105.3 | $87.2 | $295.9 | $243.4 |
| Operating income | $36.3 | $30.9 | $103.6 | $88.3 |
| Net income (loss) | $20.2 | $11.0 | $64.4 | $(66.0) |
| Diluted EPS | $0.15 | $0.16 | $0.50 | $(0.65) |
| Adjusted EBITDA | $43.7 | $40.8 | $127.6 | $111.4 |
- Q3 revenue grew 20.8% year over year: service revenue rose 13.7% to $75.3 million and equipment revenue rose 43.4% to $30.1 million. For the first nine months, revenue increased 21.6%.
- Calculated gross margin was approximately 65.3% in Q3 versus 70.9% a year earlier, and 66.9% for the nine months versus 69.7%. Higher service and equipment costs outpaced revenue growth. Operating margin was approximately 34.5% in Q3 and 35.0% for the nine months.
- Q3 net income increased, but diluted EPS declined to $0.15 from $0.16. Nine-month results turned positive from a loss, largely reflecting lower interest expense and the absence of the prior-year debt-extinguishment loss of $84.0 million and discontinued-operation losses.
- Operating cash flow was $71.9 million for the nine months, compared with $36.4 million. Capital expenditures were $39.9 million versus $4.0 million; reported free cash flow, a non-GAAP measure, was $32.8 million versus $23.7 million.
- Cash and cash equivalents were $152.2 million at September 30, 2022. Current assets were $290.4 million and current liabilities $77.9 million, including $7.3 million of current debt; working capital was approximately $212.5 million.
- Debt principal outstanding was $715.9 million under the term loan, compared with $721.4 million at year-end 2021. The loan matures in 2028 and has a floating rate; the $100 million revolving facility was undrawn. The remaining $102.8 million of convertible notes converted into shares in May 2022. Management said available cash, operating cash flow, and capital-market access should cover requirements for at least 12 months and the foreseeable future.
Material changes and operating trends
- Service growth was supported by more ATG aircraft online (6,777 versus 6,154) and higher average monthly ATG connectivity revenue per aircraft ($3,376 versus $3,264). ATG equipment units sold rose to 388 in Q3 from 266.
- Costs increased with higher network and personnel costs, equipment volumes, and development of Global Broadband. Nine-month capital spending rose substantially, primarily for the Gogo 5G buildout.
- In September, Gogo repurchased 1.5 million shares privately for $18.3 million, or $12.23 per share. The remaining convertible-note conversion also increased shares outstanding.
- Interest-rate cap fair-value gains contributed $31.9 million of other comprehensive income for the nine months; these gains are not operating revenue. Cash paid for interest was $28.8 million.
Outlook, risks, and contingencies
- Management expects service and equipment revenue to grow with additional aircraft and unit sales, including Gogo 5G, and anticipates further growth from Global Broadband. The filing provides no numerical revenue, profit, or cash-flow guidance.
- Gogo 5G’s planned nationwide commercial launch shifted to Q4 2023, after manufacturing and late-stage testing issues with a key chip. Management cited risks involving suppliers, component availability, integration, spectrum, performance, and regulatory approvals.
- Global Broadband is planned for a Hughes-designed electronically steered antenna using OneWeb’s low-earth-orbit network. A June 2022 supply agreement commits Gogo to estimated antenna purchases of approximately $170 million over seven years, beginning after a project milestone currently expected at the end of 2024.
- Key risks include competition, supply-chain delays and inflation, customer and aircraft adoption, reliance on key suppliers and OEMs, spectrum and regulatory matters, service or equipment failures, cybersecurity, and substantial floating-rate debt. A one-percentage-point change in three-month LIBOR was estimated to affect annual interest expense by approximately $0.8 million after caps, versus $7.2 million without them.
- The SmartSky patent suit alleges infringement by Gogo 5G and seeks unspecified damages, including treble damages. A preliminary injunction was denied; SmartSky appealed. Gogo disputes the claims, and no loss accrual was recorded because the outcome and potential loss could not be reasonably predicted.
- A securities class action settlement was approved in August 2022; the $17.3 million liability and matching insurance receivable were released. Related derivative matters remained subject to a tentative resolution involving governance measures and insurer-funded attorneys’ fees, contingent on court approval.
- The Section 382 rights plan generally addresses holders reaching 4.9% ownership. BlackRock divested below that threshold and was granted exempt status subject to ownership conditions.
Most important facts for investors to verify
- Progress toward the Q4 2023 Gogo 5G launch, including chip supply, testing, installation, and required approvals.
- Global Broadband development timeline, OneWeb/Hughes execution, and the scale and timing of the approximately $170 million antenna commitment.
- Revenue mix and unit economics: service growth, ATG aircraft additions, equipment sales, and whether margins recover as costs rise.
- Debt terms, floating-rate exposure, hedge coverage as cap notionals decline and strike rates rise, and liquidity relative to investment needs.
- Developments in the SmartSky appeal and patent litigation, and final approval or implementation of the derivative settlement.
- Non-GAAP Adjusted EBITDA and free cash flow reconciliations; these measures exclude items and should be assessed alongside GAAP results and capital spending.