Will the US Department of Commerce’s decision to ban American companies from selling to Chinese technology firm ZTE for seven years impact ZTE customer Gogo in any way?
ZTE stands accused of breaching a pact reached after it was caught illegally shipping goods to Iran. Reuters reports that the Commerce Department has granted ZTE’s request to submit more evidence, and China has reportedly sought to relay its concerns to President Trump, but it’s unclear whether these measures will lead to a resolution.
Gogo and ZTE are long-time partners. In 2008, ZTE and Qualcomm announced their collaboration with Gogo (formerly known as Aircell) to create the networking platform for Gogo’s then new inflight Internet service. At that time, the firms disclosed that Gogo’s air-to-ground (ATG) service “relies on ZTE’s EV-DO Rev. A base stations and IP switching platform and Qualcomm’s aircraft-mounted modems”. ZTE is also a major supplier to Gogo’s next-gen ATG solution which will use unlicensed spectrum.
When the news about ZTE hit in the middle of last month, Gogo spokesman Steve Nolan said it was too early for the company to comment. “We are busy working to assess the impact and will make a public statement when we are ready,” he told RGN. In a 23 April exchange, Nolan said: “It’s still way too premature to know what/if this will have any impact on Gogo for us to comment.”
In a first quarter earnings conference call this morning – during which Gogo revealed it is presently withdrawing its free cash flow guidance – Gogo’s new president and CEO, Oakleigh Thorne, said Gogo’s assessment of the ZTE issue is still underway, but he revealed that Gogo was “literally in the middle of taking delivery of antennas” when the Commerce Department made its announcement.
“It caught us mid-stride,” he acknowledged.
He said if Gogo needs to change direction in its partnership with ZTE, “we can” but it would involve cost and delay the firm’s next-gen ATG plans.
The ZTE snag does not affect Gogo’s Business Aviation unit. “We have alternative suppliers in our supply chain there,” said Thorne.
Financial services firm Northland Capital Markets – which has been consistently bearish on Gogo – believes the action against ZTE represents storm clouds for Gogo.
“While the high level thought may be the ZTE restriction only relates to US domiciled companies selling to ZTE, we believe ZTE’s new/highly enforced restrictions will have a negative domino effect on their intra-connected supply chain. More specifically and as it relates to Gogo, we believe the removal of a major supplier like ZTE will likely negatively impact their hardware qualification for new airborne equipment, as these are specialized/previously agreed upon components,” stated Northland managing director Paul Penney in a report last month.
He added: “The lateral negative effect on the supply chain is likely to be surely felt by the likes of major telecom equipment/mobile chip supplier Qualcomm (QCOM – not currently covered by NCM). Put simply, the lack of access to QCOM’s widely used chips could hinder ZTE’s ability to provide Gogo with ATG related parts.”
In a statement, ZTE warned in relation to the Commerce Department decision: “The Denial Order will not only severely impact the survival and development of ZTE, but will also cause damages to all partners of ZTE including a large number of US companies.”
Gogo addressing 2Ku problems
Separately, as first reported by Runway Girl Network, Gogo last winter grappled with 2Ku reliability issues, when deicing fluid seeped under the antenna radomes, prompting Delta to take a more active role in 2Ku MRO.
But in its review of the problem, Gogo also identified manufacturing and software issues, and found that fluid entered the radome “through far more pathways than we originally thought”, resulting in reliability in the mid-80 percentile, revealed Thorne. This week, 2Ku is at 96% reliability, as Gogo works to regain its 98% reliability goal.
Gogo has “fixed” the software and manufacturing issues, he said, and is in the process of replacing all fluid-contaminated antennas this quarter.
The firm has “begged, borrowed and stolen” some of the talent in its successful Business Aviation unit to aid in remedying the Commercial Aviation issues.
Gogo’s challenges resulted in additional cost, and cut into the firm’s service revenue.
More broadly, during the first quarter, service revenue for Commercial Aviation decreased 8.6% to $88.8 million, “due primarily to a change in business terms associated with the transition by one of our airline partners to the airline-directed model, as well as the economic impact of such airline partner’s implementation of the airline-directed mode”, explained the firm.
"Fixing 2Ku" is @Gogo's most important initiative. This winter, when deicing fluid seeped under the radomes, reliability was in mid-80s. Software & manufacturing issues exacerbated the problem. It has fixed these, but is replacing fluid contaminated antennas this quarter. #PaxEx pic.twitter.com/nqOgnHll9W
— Runway Girl Network (@RunwayGirl) May 4, 2018
Thorne began his new role eight weeks ago, replacing Michael Small as CEO. Since then, he has tried to take a methodical approach to understanding the issues faced by the Chicago-based company. Gogo has since realigned its leadership team in a bid to drive operational excellence.
Going forward, Thorne and his family, which own 30% of the equity of Gogo, is “highly motivated to act in the best interest of shareholders”, assured Thorne.
Will Gogo require more capital? If it made no changes to the business right now, it would need some “but not a lot” of additional capital. However, Gogo is undertaking a review to extract enough cash out of its operations to mitigate that need, said Thorne. The firm will offer more guidance on this initiative in late June.
“If we can sign a lot of airlines we feel like we could raise more capital if we needed to because we’d have a successful business model to take to the street.”
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