GOGO INC. The following discussion and analysis is intended to help the reader understand
our business, financial condition, results of operations, liquidity and capital
resources. You should read this discussion in conjunction with our unaudited
condensed consolidated interim financial statements and the related notes
contained elsewhere in this Quarterly Report on Form 10-Q. Unless the context
otherwise indicates or requires, the terms "we," "our," "us," "Gogo," and the
"Company," as used in this report, refer to
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Risk Factors" in the 2019 10-K and in Item 1A and "Special Note Regarding Forward-Looking Statements" in this report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our fiscal year ends
Company Overview
Gogo ("we," "us," "our") is the global leader in providing broadband
connectivity solutions and wireless in-flight entertainment to the aviation
industry. We operate through the following three segments:
Services provided by our
Impact of COVID-19 Pandemic
In
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In response to the COVID-19 pandemic and resulting developments, we developed, and continue to refine on an ongoing basis, a range of projections based on estimated market conditions, and have implemented measures to protect our employees, ensure the business has adequate liquidity and maintain the value of our business segments, while at the same time continuing to make the interest payments on our outstanding debt. These measures include, but are not limited to, the following:
• Employee and customer safety - Our employees are our most important
resource and we are focused on the safety of our people and our
customers. Every country in which we operate has issued work from home
orders and over 1,000 of our employees are working remotely, with
limited personnel in place for certain location-specific activities.
• Personnel actions - We implemented several cost-cutting measures
related to personnel, including implementing a hiring freeze,
suspending 2020 merit salary increases and deferring the Chief
Executive Officer's 2019 bonus payout.
Additionally, we furloughed approximately 54% of our workforce and reduced
compensation for most other employees, starting
• Expense management - We have identified responsive action plans /
levers that we are implementing, or considering implementing as
needed, to dramatically reduce costs in order to ensure our long-term
viability, including the following:
• Renegotiating terms with suppliers, including satellite capacity providers;
• Deferring purchases of capital equipment;
• Delaying aircraft equipment installations;
• Reducing marketing, travel and other non-essential spend; and
• Renegotiating terms with airline partners.
• Financing - In March 2020 , we drew $22 million under the ABL Credit
Facility.
• Government assistance - We applied for an $81 million grant and a $150
million loan under the recently enacted Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act"). If we receive such
assistance, we will be subject to certain restrictions and will be
required to modify the personnel actions discussed above to comply
with the terms of the government assistance. Additionally, receipt of
funds may require the consent of a majority of the holders of the 2024
Senior Secured Notes or the consent of the lenders under the ABL
Credit Agreement to amend the terms governing such indebtedness.
We expect COVID-19 to continue to have a significant negative impact on our revenue and we are unable to predict how long that impact will continue. The extent of the impact of COVID-19 on our CA and BA businesses and our financial and operational performance will depend on future developments, including the duration, spread and severity of the outbreak, the duration and geographic scope of related travel advisories and restrictions and the extent of the impact of COVID-19 on overall demand for commercial and business aviation travel, all of which are highly uncertain and cannot be predicted. We are unable to predict how long the pandemic and its negative impact will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on air travel, our business partners and our business. Not only is the duration of the pandemic and future combative measures unknown, the overall situation is extremely fluid, and it is impossible to predict the timing of future material changes in the situation and whether the Company's actions in response will be sufficient or successful.
Impairment assessments - We review our long-lived assets and indefinite-lived
intangible assets for potential impairment whenever events indicate that the
carrying amount of such assets may not be recoverable. We conducted a review as
of
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Credit Losses - We regularly evaluate our accounts receivable and contract
assets for expected credit losses and recorded credit losses for the three month
period ended
Factors and Trends Affecting Our Results of Operations
We believe that our operating and business performance is driven by various factors that affect the commercial airline and business aviation industries, including trends affecting the travel industry and trends affecting the customer bases that we target, as well as factors that affect wireless Internet service providers and general macroeconomic factors. Key factors that may affect our future performance include:
• the extent to which the COVID-19 pandemic continues to impact demand for
commercial and business air travel globally, including as a result of
governmental restrictions on travel and social gatherings and overall
economic conditions;
• the effectiveness of our cost reduction plan and other measures taken to
mitigate the impact of COVID-19 on our business and financial stability,
including efforts to renegotiate contractual terms with suppliers, and
the impact such actions have on our operations and long-term success;
• costs associated with the implementation of, and our ability to implement
on a timely basis our technology roadmap, upgrades and installation of
our ATG-4 and 2Ku technologies, Gogo 5G, any technology to which our ATG
or satellite networks evolve and other new technologies (including
technological issues and related remediation efforts and failures or
delays on the part of antenna and other equipment developers and
providers, some of which are single source, or delays in obtaining STCs
including as a result of any government shutdown), the potential
licensing of additional spectrum, and the improvements to our network and
operations as technology changes and we experience increased demand and
network capacity constraints, including as a result of airline partners
deciding to provide free service to passengers;
• costs associated with, and our ability to execute, our continued
international expansion, including our ability to obtain and comply with
foreign telecommunications, aviation and other licenses and approvals
necessary for our international operations;
• our ability to obtain sufficient satellite capacity, including for
heavily-trafficked areas, in the United States and internationally;
• costs of satellite capacity in the United States and internationally, to
which we may have to commit well in advance, including our ability to
renegotiate the terms of such agreements in light of the COVID-19
pandemic;
• the pace and extent of adoption of our service for use on domestic and
international commercial aircraft by our current and new airline partners
and customers;
• the number of aircraft in service in our markets, including consolidation
of the airline industry or changes in fleet size or bankruptcies by one
or more of our commercial airline partners or BA large-fleet customers;
• the extent of passengers' and aviation partners' adoption of our products
and services, which is affected by, among other things, willingness to
pay for the services that we provide, the quality and reliability of our
products and services, changes in technology and competition from current
competitors and new market entrants;
• our ability to enter into and maintain long-term connectivity
arrangements with airline partners and customers, which depends on
numerous factors including the real or perceived availability, quality
and price of our services and product offerings as compared to those
offered by our competitors;
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• the impact of a change in business models and contract terms on the
profitability of our connectivity agreements with airline partners,
including as a result of changes in accounting standards;
• the results of our ongoing discussions with Delta Air Lines ("Delta")
with respect to its transition to free service, which may involve seeking
to pursue supplier diversification for Delta's domestic mainline fleet,
and our ability to offset the impact of any deinstalled aircraft through
increased demand and revenue;
• our ability to engage suppliers of equipment components and network
services on a timely basis and on commercially reasonable terms;
• continued demand for connectivity and proliferation of Wi-Fi enabled
devices, including smartphones, tablets and laptops;
• changes in domestic or foreign laws, regulations or policies that affect
our business or the business of our customers and suppliers;
• changes in laws, regulations and interpretations affecting
telecommunications services, including those affecting our ability to
maintain our licenses for ATG spectrum in the United States , obtain
sufficient rights to use additional ATG spectrum and/or other sources of
broadband connectivity to deliver our services, expand our service
offerings and manage our network; and
• changes in laws, regulations and interpretations affecting aviation,
including, in particular, changes that impact the design of our equipment
and our ability to obtain required certifications for our equipment.
Key Business Metrics
Our management regularly reviews financial and operating metrics, including the
following key operating metrics for the
Commercial Aviation North America
For the Three Months
Ended March 31,
2020 2019
Aircraft online (at period end) 2,480 2,412
Satellite 925 718
ATG 1,555 1,694
Total aircraft equivalents (average during the period) 2,554 2,519
Net annualized average monthly service revenue per
aircraft equivalent (annualized ARPA) (in thousands) $ 99
Commercial Aviation Rest of World
For the Three Months
Ended March 31,
2020 2019
Aircraft online (at period end) 833 641
Total aircraft equivalents (average during the period) 737 550
Net annualized ARPA (in thousands) $ 97 $ 136
• Aircraft online. We define aircraft online as the total number of
commercial aircraft on which our equipment is installed and service has
been made commercially available as of the last day of each period
presented. We assign aircraft to CA-NA or CA-ROW at the time of contract
signing as follows: (i) all aircraft operated by North American airlines
and under contract for ATG or ATG-4 service are assigned to CA-NA ,
(ii) all aircraft operated by North American airlines and under a
contract for satellite service are assigned to CA-NA or CA-ROW based on
whether the routes flown by such aircraft under the contract are
anticipated to be predominantly within or outside of North America at the
time the contract is signed, and (iii) all aircraft operated by non-North
American airlines and under a contract are assigned to CA-ROW.
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All aircraft online for the CA-ROW segment are equipped with our
satellite equipment. We are aware that, beginning March 2020 and
continuing through the date of this filing, our airline partners have
parked a significant number of aircraft due to the impact of COVID-19 on
the aviation industry. We do not know the specific number of such parked
aircraft. The CA-NA and CA-ROW aircraft online disclosed above as of
March 31, 2020 still include such aircraft, which is consistent with our
historical practice of not removing temporarily parked aircraft from the
online count as those have historically been immaterial and temporary.
Should the duration of the aircraft being parked extend deeper into 2020,
we may revisit this methodology for counting aircraft online.
• Aircraft equivalents. We define aircraft equivalents for a segment as the
number of commercial aircraft online (as defined above) multiplied by the
percentage of flights flown by such aircraft within the scope of that
segment, rounded to the nearest whole aircraft and expressed as an
average of the month-endfigures for each month in the period. This
methodology takes into account the fact that during a particular period
certain aircraft may fly routes outside the scope of the segment to which
they are assigned for purposes of the calculation of aircraft online.
• Net annualized average monthly service revenue per aircraft equivalent
("ARPA"). We define net annualized ARPA as the aggregate service revenue
plus monthly service fees, some of which are reported as a reduction to
cost of service revenue for that segment for the period, less revenue
share expense and other transactional expenses which are included in cost
of service revenue for that segment, divided by the number of months in
the period, and further divided by the number of aircraft equivalents (as
defined above) for that segment during the period, which is then
annualized and rounded to the nearest thousand.
Business Aviation
For the Three Months
Ended March 31,
2020 2019
Aircraft online (at period end)
Satellite 4,939 5,135
ATG 5,713 5,348
Average monthly service revenue per aircraft online
Satellite $ 223 $ 237
ATG 3,143 3,071
Units Sold
Satellite 56 130
ATG 125 187
Average equipment revenue per unit sold (in thousands)
Satellite $ 60 $ 40
ATG 77 61
• Satellite aircraft online. We define satellite aircraft online as the
total number of business aircraft for which we provide satellite services
as of the last day of each period presented.
• ATG aircraft online. We define ATG aircraft online as the total number of
business aircraft for which we provide ATG services as of the last day of
each period presented.
• Average monthly service revenue per satellite aircraft online. We define
average monthly service revenue per satellite aircraft online as the
aggregate satellite service revenue for the period divided by the number
of months in the period, divided by the number of satellite aircraft
online during the period (expressed as an average of the month-end
figures for each month in such period).
• Average monthly service revenue per ATG aircraft online. We define
average monthly service revenue per ATG aircraft online as the aggregate
ATG service revenue for the period divided by the number of months in the
period, divided by the number of ATG aircraft online during the period
(expressed as an average of the month-end figures for each month in such
period).
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• Units sold. We define units sold as the number of satellite or ATG units
for which we recognized revenue during the period.
• Average equipment revenue per satellite unit sold. We define average
equipment revenue per satellite unit sold as the aggregate equipment
revenue earned from all satellite units sold during the period, divided
by the number of satellite units sold.
• Average equipment revenue per ATG unit sold. We define average equipment
revenue per ATG unit sold as the aggregate equipment revenue from all ATG
units sold during the period, divided by the number of ATG units sold.
Key Components of Consolidated Statements of Operations
There have been no material changes to our key components of unaudited condensed consolidated statements of operations and segment profit (loss) as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in our 2019 10-K.
Off-Balance Sheet Arrangements
We do not have any obligations that meet the definition of an off-balance sheet arrangement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in
We believe that the assumptions and estimates associated with revenue recognition, long-lived assets, indefinite-lived assets and stock-based compensation have the greatest potential impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition:
We account for revenue in accordance with Accounting Standards Codification
Topic 606, Revenue from Contracts with Customers ("ASC 606"). Our
The contractual consideration used for allocation purposes includes connectivity and entertainment services, which may be based on a fixed monthly fee per aircraft or a variable fee based on the volume of connectivity activity, or a combination of both. Examples of variable consideration within our contracts include megabyte overages and pay-per-use sessions.
We constrain our estimates to reduce the probability of a significant revenue
reversal in future periods, allocate variable consideration to the identified
performance obligations and recognize revenue in the period the services are
provided. Our estimates are based on historical experience, anticipated future
performance, market conditions and our best judgment at the time. For the three
months ended
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A significant change in one or more of these estimates could affect our estimated contract value. For example, estimates of variable revenue within certain contracts require estimation of the number of sessions or megabytes that will be purchased over the contract term and the average revenue per connectivity session, which varies based on the connectivity options available to passengers on each airline. Estimated revenue under these contracts anticipates increases in take rates over time and assumes an average revenue per session consistent with our historical experience. Our estimated contract revenue may differ significantly from our initial estimates to the extent actual take rates and average revenue per session differ from our historical experience.
We regularly review and update our estimates, especially in light of COVID-19, and recognize adjustments under the cumulative catch-up method. Any adjustments under this method are recorded as a cumulative adjustment in the period identified and revenue for future periods is recognized using the new adjusted estimate.
See Note 4, "Revenue Recognition," for additional information.
Long-Lived Assets:
Our long-lived assets (other than goodwill and indefinite-lived assets which are
separately tested for impairment) are reviewed for potential impairment whenever
events indicate that the carrying amount of such assets may not be recoverable.
Within the
When an indication of impairment exists, we review long-lived assets for impairment by comparing the carrying value of the long-lived assets with the estimated future undiscounted cash flows expected to result from the use of the assets. If the future undiscounted cash flows are less than the carrying value, we then calculate an impairment loss equal to the difference between the long-lived asset's carrying value and its estimated fair value following which the long-lived assets are written down to estimated fair value and the adjusted balance becomes the new cost basis and is depreciated (amortized) over the remaining useful life of the assets. We also periodically reassess the useful lives of our long-lived assets due to advances and changes in our technologies.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and long-lived asset fair values, including forecasting useful lives of the long-lived assets and selecting discount rates.
In light of the COVID-19 outbreak and its impact on air travel, including
decreased flights, decreased gross passenger opportunity and our airline
partners' temporary parking of a significant number of their aircraft, we
conducted a review as of
We are continuously monitoring the COVID-19 pandemic and its impact. If the negative impact of the pandemic on the assets related to our airline agreements continues, including as a result of airline partners' decisions to temporarily park certain aircraft to reduce capacity, we could incur additional material impairment charges in future periods.
Indefinite-Lived Intangible Assets:
Our indefinite-lived intangible assets consist of our
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For the Greenfield method we estimate the value of our
Our impairment calculations contain uncertainties, including the impact of
COVID-19, because they require management to make assumptions and to apply
judgment to estimate future projected cash flows and estimated growth rates and
discount rates, as well as new market participant assumptions. Estimates of
future projected cash flows used in connection with the discounted cash flow
analysis were consistent with the plans and estimates that we used to manage the
business, including the impact of COVID-19, although there was inherent
uncertainty in these estimates. The discount rate used in the calculation was
based on our weighted average cost of capital. Our assessment as of
We are continuously monitoring the COVID-19 pandemic and its impact. If the negative impact of the pandemic exceeds management's estimates, we could incur material impairment charges in future periods.
Credit Losses:
We regularly evaluate our accounts receivable and contract assets for expected
credit losses and on
Our expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of each customer's trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of each customer's financial condition and macroeconomic conditions.
We apply a similar methodology towards our current and non-current contract asset balances. However, due to the inherent additional risk associated with a long-term receivable, an additional provision is applied towards contract asset balances that will diminish over time as the contract nears its expiration date.
The estimates used to determine the allowances are based on management's assessment of anticipated payment, taking into account available historical and current information as well as management's assessment of potential future developments.
For the three months ended
As such, we recorded a noncash cumulative effect adjustment to retained earnings
of
We are continuously monitoring our assumptions used to determine our expected credit losses, including the impact of the COVID-19 pandemic, which could cause us to record additional material credit losses in future periods.
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Recent Accounting Pronouncements
See Note 3, "Recent Accounting Pronouncements," to our unaudited condensed consolidated financial statements for additional information.
Results of Operations
The following table sets forth, for the periods presented, certain data from our unaudited condensed consolidated statements of operations. The information contained in the table below should be read in conjunction with our unaudited condensed consolidated financial statements and related notes.
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