With Cost Reductions Pushed Back To 2020, William Blair Downgrades Gogo

William Blair's bullish case for Gogo Inc GOGO was based on the in-flight internet company's ability to improve the profitability profile of its commercial division. This appears unlikely until late 2020, the sell-side firm said this week. 

The Analyst

William Blair's Louie DiPalma downgraded Gogo from Outperform to Market Perform.

The Thesis

Gogo's elevated engineer design and development spending was expected to drop notably in 2018 and 2019 as various projects came to an end, DiPalma said in the downgrade note.

For example, costs associated with developing its air-to-ground network; regulatory approvals; line-fit partnerships; and software development for new customers were expected to roll off, the analyst said. Gogo's business update Friday puts this into question, as any notable cost reduction isn't likely to be seen this decade, he said. 

The delay of any cost reductions to 2020 is material, since Gogo faces near-term convertible debt of $362 million — higher than the company's market cap, DiPalma said. A like-for-like refinancing deal could be "very dilutive" and double the number of shares outstanding, he said. 

Gogo also said it is evaluating strategic alternatives, but the unprofitable nature of its commercial division poses risk to a potential deal, the analyst said. If the company hypothetically sells its commercial division for $1, it would be left with a "crown jewel" business jet division worth more than $7 per share, depending on timing, DiPalma said. 

Price Action

Gogo shares were up 1.2 percent at $3.80 before the close Tuesday.

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