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GOGO INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 Gogo Inc. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated or where it is clear that the terms mean only Gogo Inc. exclusive of its subsidiaries. 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 2013 10-K and in "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 December 31 and, unless otherwise noted, references to years or fiscal are for fiscal years ended December 31. See "- Results of Operations." Company Overview Gogo is a leading global aero communications service provider. We operate through the following three segments: Commercial Aviation North America, or "CA-NA," Commercial Aviation Rest of World, or "CA-ROW," and Business Aviation, or "BA." Services provided by our CA-NA business include Gogo Connectivity, which allows passengers to connect to the internet from their personal Wi-Fi-enabled devices, Gogo Vision, which offers passengers the opportunity to enjoy a broad selection of in-flight entertainment options on their personal Wi-Fi enabled devices, and our Gogo Signature Services, which include a broad range of customizable, targeted content, advertising and e-commerce services. Such services are provided by the CA-NA business to commercial airline passengers flying routes that begin and end within North America, which for this purpose includes the United States, Canada and Mexico. Our CA-ROW business, which was established to provide in-flight connectivity and wireless digital entertainment solutions to passengers flying on foreign-based commercial airlines and international flights of North American based commercial airlines, is in the start-up phase as we launched commercial international connectivity service in March 2014. The routes included in our CA-ROW segment are those that begin and/or end outside of North America (as defined above) for which our international service will be provided. Our BA business sells equipment for in-flight telecommunications and provides in-flight internet connectivity and other voice and data communications products and services to the business aviation market. BA services include Gogo Biz, our in-flight broadband service that utilizes both our ATG network and our ATG spectrum, and satellite-based voice and data services through our strategic alliances with satellite companies. Recent Developments On July 30, 2014, the Borrowers entered into an Amendment to the Amended Senior Term Facility (as defined below in "-Liquidity and Capital Resources"). Prior to the Amendment, under the Amended Senior Term Facility we borrowed an aggregate principal amount of $248.0 million, of which $237.7 million was outstanding as of June 30, 2014. Pursuant to the Amendment, we borrowed an aggregate additional principal amount of $75.0 million. See below "-Liquidity and Capital Resources" for additional information regarding the Amendment. 23-------------------------------------------------------------------------------- Table of Contents Factors and Trends Affecting Our Results of Operations We believe 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 costs associated with implementing, and our ability to implement on a timely basis, our technology roadmap, including the need for additional cell sites in our ATG network, upgrades andinstallation of our ATG-4 technology, the roll-out of our satellite service, including hybrid technology solutions that are in part dependent on our satellite service, such as our GTO and 2Ku offerings, and the implementation of improvements to our network and operations as technology changes and we experience increased network capacity constraints; • the costs associated with and our ability to execute our international expansion, including modification to our network to accommodate satellite technology, compliance with applicable foreign regulations and expanded operations outside of the U.S.; • the costs associated with managing a rapidly growing company; • the pace and extent of adoption of the Gogo service for use on international commercial aircraft by our current North American airline partners and new international airline partners; • the number of aircraft in service in our markets, including consolidation of the airline industry or changes in fleet size by one or more of our airline partners; • the economic environment and other trends that affect both business and leisure travel; • the extent of customers', airline partners' and other aircraft operators' adoption of our products and services, which is affected by, among other things, willingness to pay for the services that we provide, changes in technology and competition from current competitors and new market entrants; • the continued demand for connectivity and proliferation of Wi-Fi enabled devices, including smartphones, tablets and laptops; • changes in laws, regulations, and interpretations affecting telecommunications services, including those affecting ourability to maintain our licenses for ATG spectrum in the U.S., obtain sufficient rights to use additional ATG spectrum and/or other sources of broadband connectivity to deliver our services, and expand our service offerings; • 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; and • our ability to obtain required foreign telecommunications, aviation and other licenses and approvals necessary for our international operations. Summary Financial Information Consolidated revenue increased to $99.5 million and $195.2 million for the three and six month periods ended June 30, 2014, respectively, as compared with $79.4 million and $150.2 million, respectively, for the prior year periods. As of June 30, 2014, the CA-NA segment had 2,058 commercial aircraft online to provide the Gogo service as compared with 1,982 as of June 30, 2013. As of June 30, 2014, the BA segment had 5,224 aircraft online with Iridium satellite communications systems and 2,415 Gogo Biz systems online as compared with 5,099 and 1,684, respectively, as of June 30, 2013. The BA segment became a reseller of Inmarsat SwiftBroadband satellite service in 2013 and had 17 systems online as of June 30, 2014 as compared with six systems online as of June 30, 2013. Our CA-ROW segment began providing connectivity service in March 2014 and had 19 aircraft online as of June 30, 2014. 24-------------------------------------------------------------------------------- Table of Contents Key Business Metrics Our management regularly reviews a number of financial and operating metrics, including the following key operating metrics for the CA-NA and BA segments, to evaluate the performance of our business and our success in executing our business plan, make decisions regarding resource allocation and corporate strategies and evaluate forward-looking projections. Commercial Aviation North America For the Three Months For the Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Aircraft online 2,058 1,982 2,058 1,982 Average monthly service revenue per aircraft online (ARPA) $ 9,994 $ 8,441 $ 9,598 $ 8,078 Gross passenger opportunity (GPO) (in thousands) (1) 82,700 77,186 153,970 142,210 Total average revenue per passenger opportunity (ARPP) (1) $ 0.75 $ 0.64 $ 0.77 $ 0.65 Total average revenue per session (ARPS) $ 10.70 $ 10.38 $ 10.62 $ 10.34 Connectivity take rate (1) 6.7 % 5.9 % 6.9 % 6.0 % (1) Amounts for the six month period ended June 30, 2014 reflect GPO for the three month period ended March 31, 2014 as revised to reflect updated operational data that became available following the filing of our Quarterly Report on Form 10-Q for the period ended March 31, 2014. GPO (in thousands), ARPP and connectivity take rate for the three month period ended March 31, 2014, as revised, are 71,270, $0.79, and 7.2%, respectively, as compared to the previously reported GPO (in thousands), ARPP and connectivity take rate of 74,668, $0.76, and 6.9%, respectively. • Aircraft online. We define aircraft online as the total number of commercial aircraft on which our ATG network equipment is installed and Gogo service has been made commercially available as of the last day of each period presented. • Average monthly service revenue per aircraft online ("ARPA"). We define ARPA as the aggregate service revenue for the period divided by the number of months in the period, divided by the number of aircraft online during the period (expressed as an average of the month end figures for each month in such period). • Gross passenger opportunity ("GPO"). We define GPO as the estimated aggregate number of passengers who board commercial aircraft on which Gogo service has been available during the period presented. We calculate passenger estimates by taking the maximum capacity of flights with Gogo service, which is calculated by multiplying the number of flights flown by Gogo-equipped aircraft, as published by Air Radio Inc. (ARINC), by the number of seats on those aircraft, and adjusting the product by a passenger load factor for each airline, which represents the percentage of seats on aircraft that are occupied by passengers. Load factors are provided to us by our airline partners and are based on historical data. • Total average revenue per passenger opportunity ("ARPP"). We define ARPP as revenue from Gogo Connectivity, Gogo Vision, Gogo Signature Services and other service revenue for the period, divided by GPO for the period. • Total average revenue per session ("ARPS"). We define ARPS as revenue from Gogo Connectivity divided by the total number of sessions during the period. A session, or a "use" of Gogo Connectivity, is defined as the use by a unique passenger of Gogo Connectivity on a flight segment. Multiple logins or purchases under the same user name during one flight segment count as only one session. • Connectivity take rate. We define connectivity take rate as the number of sessions during the period expressed as a percentage of GPO. Included in our connectivity take-rate calculation are sessions for which we did not receive revenue, including those provided pursuant to free promotional campaigns and, to a lesser extent, as a result of complimentary passes distributed by our customer service representatives or unforeseen technical issues. For the periods listed above, the number of sessions for which we did not receive revenue was less than 3% of the total number of sessions. 25 -------------------------------------------------------------------------------- Table of Contents Business Aviation For the Three Months For the Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Aircraft online Satellite 5,241 5,105 5,241 5,105 ATG 2,415 1,684 2,415 1,684 Average monthly service revenue per aircraft online Satellite $ 172 $ 154 $ 166 $ 153 ATG 2,015 1,912 2,011 1,903 Units Shipped Satellite 119 173 272 320 ATG 233 201 474 372 Average equipment revenue per unit shipped (in thousands) Satellite $ 44 $ 36 $ 46 $ 38 ATG 63 52 63 53 • Satellite aircraft online. We define satellite aircraft online as the total number of business aircraft for which we provide satellite services in operation 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 in operation 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). • Units shipped. We define units shipped as the number of satellite or ATG network equipment units, respectively, shipped during the period. • Average equipment revenue per satellite unit shipped. We define average equipment revenue per satellite unit shipped as the aggregate equipment revenue earned from all satellite shipments during the period, divided by the number of satellite units shipped. • Average equipment revenue per ATG unit shipped. We define average equipment revenue per ATG unit shipped as the aggregate equipment revenue from all ATG shipments during the period, divided by the number of ATG units shipped. Key Components of Consolidated Statements of Operations There have been no material changes to our key components of consolidated statements of operations and segment profit (loss) as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 10-K. Off-Balance Sheet Arrangements We do not have any obligations that meet the definition of an off-balance sheet arrangement, other than operating leases, which have or are reasonably likely to have a material effect on our results of operations. See Note 10, "Leases" to our unaudited condensed consolidated financial statements for further information. 26 -------------------------------------------------------------------------------- Table of Contents Critical Accounting 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 the United States of America ("GAAP"). The preparation of our unaudited condensed consolidated financial statements and related disclosures require us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related exposures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. In some instances, we could reasonably use different accounting estimates, and in some instances results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the assumptions and estimates associated with long-lived assets, indefinite-lived assets and share-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. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in our 2013 10-K, except that with the closing of our IPO in June 2013, the accounting policy for derivative liabilities and fair value derivative adjustments, as described in our MD&A, is no longer considered a critical accounting policy as the preferred stock which contained embedded derivatives is no longer outstanding. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue From Contracts With Customers ("ASU 2014-09"). This pronouncement outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We will adopt this guidance as of January 1, 2017. We are currently evaluating the impact of the adoption of this guidance on our financial position, results of operations and cash flows. 27 -------------------------------------------------------------------------------- Table of Contents 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. |