Gogo Inc. (GOGO), which provides in-flight Internet Wi-Fi services on airplanes, is trading lower today after announcing a business transformation plan. In case you're not familiar, Gogo calls itself the Inflight Internet Company. It's a Chicago-based provider of broadband connectivity for passengers on an airplane. You can find Gogo's products and services on thousands of aircraft operated by global commercial airlines and thousands of private aircraft, including those of the largest fractional ownership operators. Its equipment is installed and services provided on approximately 3,200 commercial aircraft and approximately 4,700 business aircraft.
This was a hot stock in late 2013, but has been trending lower each year since then. This time last year, the stock was trading around $12 and it closed under $5 yesterday. Gogo has been falling on hard times lately as its in-flight equipment has been seen as a bit unreliable and pricey. Gogo has been shifting its business model from selling to individual passengers to selling a certain amount of bandwidth to airlines and let them set their own prices. Also, it's difficult for Gogo when airlines like JetBlue and Southwest provide free WiFi. Consumers want bandiwdth on planes but they don't want to pay for it. So it's unclear how this will all shakeout. Investors have been questionng whether this is a good business to be in at all.
Another problem is that GOGO has a lot of debt (building its terrestrial networks requires a good deal of capital). In fact, the stock fell quite a bit in early May on a Moody's downgrade. Also, a lot of its debt is convertible into equity, which has caused an overhang on the share price.
Over the past few years, GOGO has been installing its next-generation equipment on planes, it's called the 2Ku global satellite system (2Ku). GOGO says it has become the most rapidly adopted technology in the industry. The 2Ku system is capable of delivering peak speeds of 100 Mbps to the aircraft. 2Ku employs two low-profile, highly efficient satellite antennas (one for transmission to the aircraft and the other for transmission from the aircraft) that provide twice the spectral efficiency of GOGO's older Ku-band service. Its thin profile also results in less drag and fuel burn for the aircraft.
GOGO has also been improving its North American terrestrial networks by deploying a next-generation air-to-ground network (ATG-NG), which will be commercially available in 2018 for both commercial aviation and business aviation aircraft. ATG-NG has achieved speeds in excess of 100 Mbps in testing, a 10x increase from the speed of its current ATG-4 system.
In March 2018, Gogo hired a new CEO to hopefully turn the company around. Oakleigh Thorne was named as CEO, replacing Michael Small. Mr. Thorne, a private equity investor and director of the company since 2003, has approximately 30 years of leadership experience with significant operational and financial expertise. He had been CEO of Thorndale Farm LLC, the family office of the Thorne family, which is the largest Gogo shareholder, owning approximately 30% of the company. From May 2000 until July 2007, Mr. Thorne served as CEO of eCollege.com, which was sold for more than $500 mln. Earlier in his career, Mr. Thorne served as CEO of Commerce Clearing House (CCH), which culminated in CCH's $1.9 bln sale to Wolters Kluwer in 1996.
Turning to today's news, Gogo says it has completed a comprehensive analysis of its business. Its "Gogo 2020" plan transforms Gogo's business model and is intended to significantly reduce its cost structure, improve quality, drive revenue, streamline business processes and strengthen its balance sheet.
During Gogo's Q1 earnings call in May, the company discussed increased strategic activity in its industry. Since that time, a number of parties have contacted Gogo to suggest various strategic and/or financial relationships and transactions, some of which would involve splitting the company into BA (Business Aviation) and CA (Commercial Aviation). The Board has asked management to assess various alternatives but a decision has not been made at this time.
They do lay out some financial goals that resulted from the Gogo 2020 review: 1) targeting Free Cash Flow break-even for the full year 2020; 2) targeting significant annual EBITDA growth each year in the plan, reaching over $200 mln in 2022. Gogo also plans to build on the significant improvement in 2Ku performance metrics, including availability of over 97% in June, by enhancing product and service quality. Gogo also plans to materially reduce upfront equipment subsidies for airline contracts. They also plan to reduce total operating spend in Gogo's CA business (excluding satellite costs) by nearly 20% by the end of 2020 and they want to reduce total cash burn in 2019 by over $100 mln and by a further $100 mln in 2020. Gogo is also reviewing multiple options to address its convertible debt before it becomes current in March 2019.
Gogo reaffirmed prior guidance for 2018 revenue of $865-935 mln. However, 2Ku incremental aircraft on-line should be at the low end of prior guidance of 550-650. Adjusted EBITDA guidance for 2018 is in the $35-45 mln range.
In sum, the stock initially popped when this news was announced last night but has pulled back and is now trading lower. While investors are happy to see Gogo looking to make changes, perhaps investors were hoping there would be more specificity about what is going to happen. And there is some ambiguity as to what will happen with that convertible debt, which has been an overhang on the stock. Hopefully, Gogo will be able to turn its business around, we'll stay tuned to see what management decides to do.