Gogo aims to fly through Covid-19 downturn via strong cash, liquidity

By Devika Patel

Knoxville, Tenn., March 13 – Gogo Inc. has had a negative impact on its commercial aviation division this quarter, but plans to weather the financial downturn due to the Covid-19 virus by preserving liquidity.

The company has a strong cash position, but has seen a dramatic decline in revenue.

“We had a great fourth quarter and a great full year, but the stock’s down substantially in recent weeks with the uncertainty around the coronavirus,” president and chief executive officer Oakleigh Thorne said on the company’s fourth quarter and year ended Dec. 31, 2019 earnings conference call on Friday.

“People are less interested in past performance than they are in trying to understand future unknowns.

“Let me start with the news of the day: The coronavirus.

“This is a very, very, very, very fast-moving situation in our industry.

“In fact, a great deal has just changed in the last 48 hours.

“Needless to say, our primary concern is the health and safety of our employees and our customers, but our next concern is with the financial health of Gogo,” Thorne said.

“Roughly 73% of in-air revenue is from flights originating in North America, 19% originating in Asia, 5% in Europe and 3% somewhere else.

“In January and February, we were on track for a great start to the year at both our business aviation division and our commercial aviation division.

“Then, two weeks ago, we started to see a significant decline in Asia for our CA division and U.S. airlines canceled flights to the region and domestic travel in Japan declined significantly.

“In the first week of March, we saw a decline in international travel more broadly, which lowered our total CA in-air sales by 6.7% versus trend for the prior two months.

“This week, we’re seeing a more pronounced decline in U.S. traffic with some of our larger commercial airline customers down as much as 15% and we expect a further decline in European traffic with the flight ban that goes into effect tonight,” Thorne said.

“In the CA division, it’s very hard for us to predict exactly how this will play out.

“Different airlines are predicting a wide variety of different outcomes.

“We will obviously be negatively impacted as airlines take planes out of service,” Thorne said.

The company has a good cash position and measures are being taken to preserve liquidity during the downturn.

“We had $204 million of cash on hand in the bank as of last night,” Thorne said.

“We’re planning through a variety of scenarios and taking immediate steps to match our revenue declines with cash expense reductions in order to preserve our liquidity.

“That starts today with the CEO deferring his 2019 bonus until Gogo is in happier times,” Thorne said.

“The accelerated working capital improvements have resulted in cash being higher at the end of 2019 than previously expected,” executive vice president and chief financial officer Barry Rowan said on the call.

“We have many levers we can pull to preserve cash,” Rowan said.

The company had a strong financial performance last year, leaving it in strong shape to weather difficult times.

Adjusted EBITDA of $34.4 million in the fourth quarter, a 78% increase over $19.4 million of adjusted EBITDA for the fourth quarter of 2018, resulted in record full-year 2019 adjusted EBITDA of $145.6 million, an increase of more than 100% from full-year 2018 adjusted EBITDA of $71.2 million.

“Twenty-nineteen represented a dramatic turnaround in Gogo’s financial performance,” Rowan said.

“In addition to the strong adjusted EBITDA performance, we reduced our cash burn during the year very substantially.

“For the first time since Gogo went public seven years ago, the company achieved positive unlevered free cash flow on an annual basis and it was meaningful at $85 million.

“The $153 million improvement in free cash flow over 2018 was well ahead of the at-least $100 million improvement we guided to coming into the year, and this was despite $39 million more in interest payments in 2019 due to the refinancing we completed in May,” Rowan said.

The refinancing in May has put the company in a good position, despite recent troubles.

“A significant accomplishment during the year was the comprehensive refinancing we completed in May.

“We are now in a very different situation than we were coming into 2019.

“We pushed out 80% of our debt maturities to 2024, lowered the interest rate on our senior secured notes by 2 5/8% and added a $30 million ABL facility to provide some additional liquidity buffer,” Rowan said.

Cash and cash equivalents were $170 million as of Dec. 31, 2019, but increased to $204 million as of March 12.

Given the uncertain impact that the quickly evolving Covid-19 pandemic will have on its business, Gogo did not provide 2020 financial guidance.

In May 2019, Gogo extended the maturities and lowered the interest rate of the majority of its debt through a refinancing of $200 million of 3.75% senior convertible notes due 2020 through the sale of new 9 7/8% senior secured notes due 2024.

On April 18, 2019, the company tendered for any and all of its $162 million of outstanding 3.75% convertible senior notes due 2022.

The company offered to purchase the notes at par plus accrued interest.

The offer expired at 11:59 p.m. ET on May 15.

There was no minimum tender condition.

On May 3, Gogo priced a $20 million add-on to the Gogo Intermediate Holdings LLC 9 7/8% senior secured notes (B3/CCC+) due May 1, 2024 at 100.5 to yield 9.743%.

Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC were the joint bookrunners.

The Chicago-based provider of inflight internet services earmarked the proceeds for general corporate purposes.

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