Gogo has a new boss. Michael Small and the Board of Directors reached a “mutual decision…for Mr. Small to step down as President and Chief Executive Officer, and as a director of the Company.” The move was announced this afternoon after market close. He is replaced by Oakleigh (Oak) Thorne, a member of Gogo’s Board of Directors since 2003 (including Aircell, the prior company name) and CEO of Thorndale Farm, LLC. Thorndale Farm is the largest shareholder in Gogo, holding nearly 30% of the company shares.
“I am excited to work with the Gogo team as we move forward with urgency to execute on four strategic priorities: driving quality for airlines and passengers, sharpening our operational focus, achieving profitability with the money we have in the bank and driving shareholder value,” said Mr. Thorne. “We are highly confident in our ability to achieve our strategic and financial objectives as we improve execution and realize our significant growth opportunities.”
Thorne’s corporate leadership history includes two significant corporate growth spurts that led to sales of those companies. Gogo’s choice to highlight that fact in its release on the transition suggests that the company is looking to appease investors (including Thorne) tired of a stagnant share price. Gogo’s stock currently trades only 12% above the 52 week low and 35% off the 52-week high. It is more than 70% off the all-time high.
With our best-in-class technology and capabilities, the Board believes that Gogo has a clear path to achieving our objectives and that now is the right time to transition leadership. After a comprehensive search process, the Board determined that Oak is the best person to help Gogo achieve our next phase of growth. Oak is a seasoned executive with a strong track record and his interests are aligned with all shareholders. Oak has made significant contributions to Gogo as a member of our Board and has a deep understanding of our business, strategy and operations. On behalf of the Board, we also thank Michael for building Gogo into a global leader and we wish him the best. – Ronald T. LeMay, Chairman of the Gogo Board of Directors
Gogo faces some challenges with its newest 2Ku connectivity product resulting in outages for Delta Air Lines well above expected levels. The carrier recently issued an explanation of the outages to its inflight crewmembers describing some systems as offline for more than 30 days. The memo describes the system as “fragile and difficult to maintain.” While Small acknowledged some of the issues in the recent earnings call, specifically alluding to retrofits of seals to keep deicing fluid out of the kit. At the time the fix was described as easy. Delta’s statement that de-icing is “highly unlikely to cause this level of outages and degraded antennas,” is concerning. COO John Wade suggested in the recent earnings call that Gogo identified “the root cause of all these issues and have fixed this for all of them that have either been deployed or in the process of being deployed.”
Also concerning is the ongoing 12.5% interest rates the company is paying on the bonds it issued to finance operations. Getting the funding came at a bad time for Gogo, concurrently with American Airlines announcing it would like to deinstall the Gogo kit from many aircraft. The 550+ aircraft leaving is bad news for Gogo overall but the company believes it remains on a steady growth path by 2019; the hurt from AA’s departure will be felt mostly in 2018. Fortunately the company does not believe it needs more cash, but it has not yet found the right opportunity to refinance those bonds.
"We will continue to monitor opportunities" for refinancing the outstanding 12.5% debt. But no need to raise more cash to meet current deployment & R&D needs. -$GOGO #PaxEx
— Seth Miller (@WandrMe) February 22, 2018
Gogo is also betting on a shift in its business model to drive revenue growth with more airlines controlling pricing and marketing of the product. Small previously noted that the company expects airlines “are likely to put more marketing dollars behind this, increase distribution channels. We believe this will drive take rate upward over time.” Those increased take rates come with lower per user revenue to Gogo so increasing the numbers is a critical step in keeping the income flowing. The 1400+ install backlog for 2Ku, with approximately 500-600 installed in 2018, should also help given the significantly higher average revenue per aircraft the company sees on satellite-serviced aircraft.