IPO Preview: Gogo

Jun.21.13 | About: Gogo (GOGO)

Based in Itasca, IL, Gogo (NASDAQ:GOGO) scheduled a $176 million IPO with a market capitalization of $1.4 billion, at a price range mid-point of $16, for Friday, June 21, 2013. Four other new IPOs were also scheduled for the week of June 17th. The full IPO calendar is here.

  • S-1 filed June 10, 2013
  • Manager, Joint Managers: Morgan Stanley; J.P. Morgan; UBS
  • Co-Managers: Allen & Co; Evercore; William Blair

Summary

GOGO provides in-flight broadband services primarily to U.S. airlines.

Revenue up, losses up

Revenue increased 46% to $234 million for 2012 vs. 2011. Revenue was up 31% to $71 million for Q1 '13 vs. Q1 '12.

But losses kept pace: $31 million loss in 2012, and $14 million in Q1 '13, compared with losses respectively of $24 million in 2011 and $4 million in Q1 '12.

Losing market share?

It looks like GOGO will lose market share. As of April 30, 2013, GOGO provided the Gogo service to 81% of all internet-enabled North American commercial aircraft. 81% market share would normally be considered a monopoly share. But three major U.S. airlines have announced arrangements with GOGO's competitors, and two have begun installing products made by competitors to provide internet connectivity on all or a significant portion of their fleets.

Large accumulated deficit

GOGO has an accumulated deficit of $538 million

Valuation

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing Q1 '13

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Gogo

$1,376

4.8

-23.9

3.1

5.3

13%

Click to enlarge

Glossary

If GOGO can't make money with an 81% market share after spending $538 million, and with competition picking off major accounts, the future doesn't look especially bright for GOGO.

Conclusion

Even though top line revenue increases are enticing, it looks like GOGO's revenue trajectory is about to level off, at least for its major segment, commercial aviation in North America. Avoid the IPO because it is too risky. To put the above conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced earlier:

Segments

Commercial Aviation North America

Business Aviation

Recent development

On May 1, 2013, the FCC granted GOGO a non-exclusive license for blanket authority to operate Ku-band satellite transceivers on up to 1,000 aircraft, which allows GOGO to provide domestic and international broadband service (although some countries require additional authorizations of their own).

Recent agreements

On March 20, 2013, GOGO entered into a new connectivity agreement with Delta Air Lines to provide Gogo Connectivity service to Delta's international fleet, which currently consists of 170 aircraft. The aircraft will be installed with Gogo's Ku-band satellite-based solution, and installations are expected to begin in 2013.

On September 13, 2012, GOGO entered into an additional connectivity agreement with American Airlines, under which GOGO will provide Gogo Connectivity service and Gogo Vision on more than 200 of American's new Airbus A320 and Boeing 737 aircraft. Installations will occur as the aircraft are delivered to American between 2013 and 2017. The aircraft, which are expected to operate primarily in the United States and Latin America, will be installed with both Ku-band and ATG-4 technologies, which will allow them to stay connected domestically and internationally.

Short term

Many of GOGO's OEM customers may terminate their contracts on short notice and, in many cases, customers have not committed to buy any minimum quantity of GOGO's equipment.

FCC license

In June 2006, GOGO purchased at FCC auction an exclusive ten-year, 3 MHz license for ATG spectrum that expires in October 2016.

Prior to expiration of the initial license term, GOGO expects to apply to renew the license for an additional ten-year term without further payment.

While the 3 MHz FCC license allows GOGO to be the exclusive provider of ATG broadband connectivity, the FCC could auction additional ATG spectrum in the future.

FCC license risk

The FCC may in the future decide to auction additional spectrum for ATG use that is not currently designated for that purpose, or a competitor could develop technology or a business plan that allows it to cost effectively use spectrum not specifically reserved for ATG, but on which ATG use is not prohibited, to provide broadband connectivity.

For example, the single provider of a critical component of GOGO's ATG and ATG-4 networks filed a petition with the FCC requesting that it commence a rulemaking proceeding to designate certain spectrum, currently designated for non-ATG use, for use by ATG devices in an amount sufficient to accommodate more than one additional ATG network.

Under rules proposed by the petition, one provider could acquire all of the spectrum.

On May 9, 2013, the FCC granted the petition and issued a notice of proposed rulemaking. As a result of this rulemaking process or otherwise the FCC may decide to auction off spectrum for ATG use and if GOGO failed to adequately secure rights to such additional spectrum, the additional ATG spectrum, which may have greater capacity than GOGO's current spectrum, could be held by, or available for license to competitors.

In order to remain competitive, GOGO may have to make significant expenditures to purchase or lease spectrum that is currently held by other licensees or that is newly auctioned for ATG use.

The availability of additional spectrum in the marketplace that is authorized for ATG use may increase the possibility that GOGO may be forced to compete with one or more other ATG service providers in the future.

In addition, the FCC recently adopted an order establishing a more streamlined process for obtaining authority to provide satellite-based in-flight broadband service over the U.S., which could help facilitate the market entry of additional satellite-based competitors.

Non-exclusive agreements

GOGO has agreements with three CA satellite partners, the earliest of which expires in 2017, to provide Ku-band and Ka-band satellite service on a non-exclusive basis.

COMPETITON

Satellite-based competition

GOGO faces increased competition from satellite-based providers of broadband services that include in-flight internet and live television services. Competition from such providers has had in the past and could have in the future an adverse effect on GOGO's ability to maintain or gain market share.

While as of April 30, 2013, GOGO provided the Gogo service to approximately 81% of all internet-enabled North American commercial aircraft, the increased availability, development and adoption of satellite-based services by commercial airlines in North America and the rest of the world has and will continue to put additional pressure on GOGO's ability to maintain our market leading position.

Three major airlines going with GOGO's competitors

Three major U.S. airlines have announced arrangements with GOGO's competitors and two have begun installing products made by competitors to provide internet connectivity on all or a significant portion of their fleets.

Ground-based competition

While GOGO is currently the only provider of ATG service, existing or potential competitors, including a supplier on whom GOGO relies for critical components of its ATG and ATG-4 networks, may attempt to provide a similar service over a ground-based network using spectrum not currently designated for air-to-ground services.

For example, on May 9, 2013 the FCC granted a petition for rulemaking filed by such supplier and issued a notice of proposed rulemaking soliciting comments on a proposal to make additional spectrum available for air-to-ground network connectivity.

Use of proceeds

GOGO expects to net $162 million from its IPO.

IPO proceeds are intended for working capital and other general corporate purposes, including

(i) costs associated with international expansion, including costs incurred to modify GOGO's portal for international deployment, costs related to sales and marketing activities and administrative support functions and additional legal and regulatory expenses associated with operating in the international commercial aviation market and
(ii) certain costs associated with satellite or other technologies, such as costs incurred to develop and implement changes to ground and airborne software and hardware and the cost of obtaining satellite capacity.

GOGO does not intend to use the net proceeds from this offering to repay debt.

Early in-depth financial analysis is available to subscribers.

Disclaimer: This GOGO IPO report is based on a reading and analysis of GOGO's S-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.