Monday, July 29, 2013 3:48:47 PM
"In this year's first quarter, the company posted an operating loss of $10.3 million. And $13.8 million of its reported operations expenses was a non-cash charge for depreciation and amortization. Without these charges, which make up for money spent long ago, Gogo would have posted an operating profit, or at least broken even -- and that's been true for some time. Yet the bottom line is still jacked, with nearly $100 million in red ink in 2012.
The important question, then, which is always posed in all of the best business schools, is this: What gives?
If the company is so close to an operating profit, then what is killing its bottom line? What's eating away at the south end of the income statement?
In a word, the shareholders' cut.
More formally, the dividend (which acts a lot like "interest") that preferred shareholders are getting right now. In 2012, taking care of the preferreds accounted for $62.8 million of a $95.6 million net loss. That's two-thirds, or 67%.
Hold onto your hat, though. Careful readers of the prospectus will realize something very important.
This expense disappears immediately.
You see, only 11 million shares were offered -- that is, actually "sold" -- in the IPO. But scads more are being created. You see, all of the preferreds are being converted to common shareholders. The number of shares outstanding after the offering won't be 11 million. It will be 86 million.
Presto! Gogo just wiped away the biggest expense on its income statement!
Absent noncash charges for depreciation and the cost of servicing the preferreds, Gogo looks like a potential profit juggernaut if it can control other expenses, even without adding more customers.
This high degree of inside ownership is usually a good thing over the long term. It's an immutable law of economics that everyone will act in his own best interest, and the preferred shareholders will remain owners of the company. In fact, they're locked in for a while.
With so much tied up in these shares, you can imagine that they want the company to do well. They want to see strong quarters and good performance that will drive their stock price up. They will insist that management control selling, general and administrative expenses and engineering expenses, which are currently fairly outsized. Further, they will insist that the marketing dollars capture a solid return on investment.
All in all, they will demand that the bottom line be printed in black ink. They have hundreds of millions of reasons to make sure."
Win a few. Lose a few.
Only the long term counts.
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