Updated at 3:30BST with notes from the analysts’ conference call (see bottom).
Gogo says it has completed a comprehensive analysis of its business and is implementing a new business plan to improve the company’s operational and financial performance.
It says the “Gogo 2020” integrated business plan (IBP) is intended to significantly reduce its cost structure, improve quality, drive revenue, streamline business processes and prudently strengthen its balance sheet.
The plan is a response to movement in Gogo’s share price that has seen it fall from a high of more than $32 in November 2013 to less than $5 over the past month.
In May 2018 Moody’s lowered Gogo’s corporate credit rating and probability-of-default grade from B3 to Caa1. In other words, Moody’s view of Gogo moved from “highly speculative” to “substantial risks,” with a negative outlook that could lead to further rating cuts.
The stock rallied in extended trading on the news of the new plan, climbing as high as $5.35. Gogo has scheduled a Friday 13th July conference call to discuss the plan at 9 am Eastern time.
Oakleigh Thorne, President and CEO of Gogo, said: “The initiatives we are executing under our IBP demonstrate our commitment to taking aggressive action to position Gogo for sustainable value creation.
“Gogo 2020 represents a new era for Gogo with a significantly-reduced cost structure, much lower capital expenditures, and a streamlined and standardised approach to meeting the needs of our customers with improved quality and service.
“As we prioritise resources to strengthen the resiliency of our model, we remain focused on accomplishing our objectives without sacrificing our long-term growth opportunities and will continue to evaluate strategic options to drive revenue, monetise assets and realise the significant value of our business.”
It says the Gogo 2020 plan features:
- Targeting free cash flow break-even for the full year 2020;
- Targeting significant annual EBITDA growth each year in our plan, reaching more than $200 million in 2022;
- Continuing to build on the significant improvement in 2Ku performance metrics, including availability of more than 97% in June, by enhancing product and service quality;
- Maintain cash capex reduction in 2018 with further material reductions in 2019;
- Materially reducing upfront equipment subsidies for airline contracts;
- Reducing total operating spend in Gogo’s Commercial Aviation “CA” business (excluding satellite costs) by nearly 20% by the end of 2020;
- Reducing total cash burn in 2019 by over $100 million from expected 2018 cash burn and by a further $100 million in 2020;
- Reviewing multiple options to address our outstanding convertible debt before it becomes current in March of 2019;
- Renewing focus on third-party payer revenue streams to better monetise existing connected aircraft;
- Focusing on improving the range of user experiences;
- Reviewing a range of attractive strategic alternatives, including opportunities suggested by various strategic and financial parties, with the goal of maximizing shareholder value.
During Gogo’s first quarter of 2018 earnings call, the company discussed increased strategic activity in the industry. Since that time, a number of parties have contacted its management to suggest various strategic and/or financial relationships and transactions, some of which would involve splitting the company into separate business aviation and commercial aviation businesses.
New – bullet points from the 9am Gogo analysts’ conference call:
- Gogo now has 102 separate projects to be completed over the next 10 quarters under “Gogo 2020”.
- The cost of correcting 2Ku manufacturing and de-icing issues is estimated to be in excess of $25m
- 2Ku systems availability over the last winter sank as low as 84% due in part to de-icing issues. However, performance reached 98% availability for first week of July.
- Gogo is moving away from subsidising equipment on future installs. Oak Thorne, President and CEO of Gogo, said the subsidy model was started by us, but “quality airlines want the quality IFC suppliers to survive”.
- Gogo is starting to charge for engineering and certification services that airlines are used to paying for and it previously completed free of charge.
- Gogo is to develop more data and analytical tools for its customers to save them and Gogo money.
- The new Gogo 2020 plan should dramatically reduce its costs.
- Gogo is modelling its business plan on a commercial airline passenger take rate of 12.6% in 2022.
- Gogo confirms it has let go 55 employees and plans further personnel reductions through 2020, mainly through attrition and contractor cuts.
- Thorne said he and others have bought more Gogo shares and said they would buy further shares if they became available.
- Re. a change in emphasis from inflight connectivity for passengers to connected aircraft predictive maintenance, Thorne said realistically, Gogo is not well-equipped to drive that analytical business, but its technology “puts us in a good position as a conduit” for others.
- Thorne said airlines may be able to migrate 2Ku technology from geostationary satellites to LEO systems in the future.
- Gogo is still assessing the impact of the ZTE equipment import ban on next-gen ATG deployment as it is “with the regulator”.
By 10:35am EDT, 95 minutes after the start of the conference call, Gogo’s share price had fallen 8.3% to 4.42.