Gogo IPO: Take A Flyer On This Airline Internet Leader

Jun.21.13 | About: Gogo (GOGO)

On Friday, shares of Gogo, Inc. (NASDAQ:GOGO) hit the public market with a debut on the Nasdaq Stock Exchange. The company is a leader in passenger connectivity aboard more than 1,000 North American flights. With large existing partnerships, a strong backlog, and upcoming new initiatives, investors should pay close attention to this IPO (prospectus).

Offering

Gogo priced its shares at $17, which was the high end of a range of $15 to $17. The company sold 11 million shares to the public out of a total outstanding 86 million. The proceeds from the IPO will be used for working capital. Gogo is going public to create additional capital and create a public market for its company.

Company

"Gogo brings the mobile Internet to the sky" is the company's catchphrase, and for good reason. The company offers the following services for airline passengers and business aircraft:

  • Passenger connectivity
  • In-flight passenger entertainment
  • In-flight customizable portal
  • Operations-oriented communications services

The company operates in two segments: commercial aviation and business aviation.

Commercial Aviation

One of the reasons for Gogo's dominance has been its partnerships with airline companies. Currently, Gogo has deals with Delta Air Lines (NYSE:DAL), American Airlines, US Airways, and Alaska Airlines (NYSE:ALK). These deals have given the company the largest number of aircraft in the in-flight connectivity market. As of April 30, Gogo was aboard 1908 commercial aircraft, giving the company an 81% market share of North America. Gogo holds 10-year contracts with 96% of its aircraft.

Business Aviation

In the business aviation segment, Gogo also has deals with the large players including NetJets, Flexjets, Flight Options, and Citation Air. Gogo is the leader in the market and remains the only ATG broadband connectivity service in business aviation. At the end of 2012, Gogo had 5,030 aircraft with its satellite technology and 1,455 with its ATG technology.

Opportunities and Advantages

From the company's prospectus, here are several opportunities:

  • Large, underserved air travel market
  • Emergence of the connected lifestyle
  • Commercial aviation industry focused on new revenue sources, cost management, and passenger experience
  • Aircraft operators looking to maximize operational efficiency

The advantages Gogo has are:

  • Strong incumbent position
  • Compelling user experience
  • Compelling offering for airlines and aircraft operators
  • Broad suite of advanced and expandable technology
  • Leading brand

Financials

Here is a look at financials of Gogo:

2010

2011

2012

Q1 2012

Q1 2013

Service Rev.

$58.3 mil

$103.9 mil

$167.1 mil

$36.4 mil

$54.9 mil

Equipment Rev.

$36.3 mil

$56.2 mil

$66.4 mil

$17.9 mil

$15.8 mil

Total Rev.

$94.7 mil

$160.2 mil

$233.5 mil

$54.3 mil

$70.8 mil

Avg. Rev per passenger

$0.32

$0.43

$0.52

Avg. Rev per session

$6.62

$9.01

$9.74

$9.34

$10.30

Connectivity Take

4.7%

4.7%

5.3%

5.6%

6.2%

Avg. Monthly per satellite

$127

$131

$133

$139

$151

Avg. Monthly per ATG

$1530

$1791

$1857

$1791

$1893

Click to enlarge

In the first quarter of 2013, revenue increased 30.4% to $70.8 million. This increase came despite a tough market in business aviation. Business sales climbed only 6.2% compared to the 46.4% increase from the commercial aviation segment.

Growth

Going forward, Gogo will grow with new initiatives and an expansion in aircraft deals. Currently, the company has deals to be installed on 390 additional commercial aircraft, with 140 expected to be complete by the end of 2013. Another key growth driver is Gogo Vision, the company's new pay-per-view movie service. Gogo Vision is currently on 650 aircraft, but is set to more than double in 2013. A total of 900 aircraft are expected to add the service by the end of 2013.

One of my favorite reasons to invest in Gogo is the possibility of international expansion. The company has only started looking toward international markets since 2012. In the prospectus, Gogo said, "Our CA-ROW business is in the startup phase." In March 2013, Gogo added its service to 170 aircraft. Gogo Vision was also added to four international aircraft in a partnership with Scoot. In the first quarter of 2013, international revenue was only $1.2 million.

Recently, Gogo acquired additional spectrum in Canada. The company is working on building out its service in the country. It's new ATG-4 technology is also helping the company take on bigger international markets. The new technology allows peak downloads of 9.8 Mbps vs. 3.1 Mbps, which was the old peak. The additional speed will help the company with its expansion into trans-Atlantic and international flights.

Conclusion

Gogo's prospectus presents many reasons to invest in the market leader going forward. Here are my top reasons investors should invest in this IPO:

  • Market position: Gogo maintains an 87% market share among North American connected flights. This gives the company a near monopoly of the market it operates in. In fact, Gogo was even sued for monopolistic practices in 2012, but the suit was dismissed by the judge. With Gogo's owned spectrum, technology, and contracts with aircrafts it is incredibly hard to anyone to compete with the company.
  • Backlog: One key for a company like Gogo is its backlog to guarantee future revenue. By the end of 2013, it will add 140 aircraft to its existing base. Gogo will still have 150 aircraft to be installed following 2013.
  • International expansion: I presented several points above about new technology that will help the company aboard trans-Atlantic flights, and a purchase of spectrum in Canada. These items along with a need for passenger connectivity aboard long flights will give Gogo a huge revenue opportunity going forward.
  • Gogo Vision: The company's pay-per-view service for television and movies is a higher margin service and offers a huge opportunity. The service is more than doubling its aircraft base by the end of 2013. This service is also a huge opportunity going forward on long flights, including the future growth of international aircraft. Gogo Vision accounted for only $1.5 million of revenue in the first quarter of 2013.

As noted above, shares of Gogo priced at $17, which was the high end of the range. I actually expected shares to price higher, and would be a buyer of shares under $20. The company is increasing revenue at rates of 40%-50% and should continue to post huge gains from new segments of growth. But the company does come with risks, as it is unprofitable.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOGO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.