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Gogo (GOGO) made its public debut on Friday, June the 21. Shares of the provider of in-flight connectivity services ended their first trading day with losses of 5.9% at $16.00 per share.

Shares continued to slip at the start of the new trading week, currently exchanging hands around $14 per share, halfway during Thursday's trading session. Despite the recent sell-off, shares offer little appeal on the back of increased competition and lack of profitability.

The Public Offering

Gogo is a leading provider of in-flight connectivity services, being a pioneer in wireless digital entertainment and other services for the aviation market.

Key solutions offered by the company includes connectivity for passengers allowing them to use their personal Wi-Fi enabled mobile devices. Services are also used for entertainment, in flight portals and communication by the airline towards its clients.

Gogo sold 11.0 million shares for $17.00 a piece, thereby raising $187 million in gross proceeds. All shares were offered by the company with none being offered by selling shareholders.

The public offering values the equity of the firm at $1.46 billion. The offering took place at the high end of the preliminary $15-$17 offer range. Some 13% of the total shares outstanding were offered in the public offering. Trading around $14 per share, the firm is valued at $1.20 billion.

The major banks that brought the company public were Morgan Stanley (MS), JPMorgan (JPM), UBS, Allen & Company, Evercore Partners and William Blair.

Valuation

Gogo is partnering with major U.S. airlines including Delta Air Lines (DAL), American Airlines, US Airways (LCC) and Alaska Air Group (ALK), airlines with which the firm has long-standing agreements for its services.

Gogo's services are enabled in 1,908 aircraft at the moment, which is 81% of the U.S.-based Internet-enabled fleet, operating an average of 6,500 flights per day. The company has entered contracts to expand its services in another 390 aircraft in North America, of which 140 will be realized in 2013.

Since its inception in 2008, airline passengers have used Gogo Connectivity a total of 37.0 million times.

For the year of 2012, Gogo increased its annual revenues by 45.8% to $233.5 million. While operating losses narrowed slightly towards $27.4 million, net losses rose sharply. Gogo lost $95.6 million over the past year, mainly on the back of payments on preferred stock and convertible preferred stock outstanding.

First-quarter revenue rose by 30.4% to $70.8 million, as net losses almost doubled to $32.4 million, again on the back of sizable payments on preferred stock.

In total, some 250 million passengers had the opportunity to use Gogo's products in 2012, of which 5.3% actually used the company's services. Average revenues per connection increased towards $9.74, resulting in average revenue of $0.53 per passenger opportunity. First-quarter revenue growth was primarily driven by a 6.2% connectivity rate, while average revenue per session rose to $10.30.

Gogo ended its first quarter ending on March 30, with $78.0 million in cash and equivalents. The company operates with $130.7 million in total debt. Factoring in the gross offering proceeds of $187 million, the firm operates with a net cash position of around $120 million. All outstanding convertible preferred stock will be converted into normal stock.

Trading around $14 per share, the market values Gogo's operating assets at $1.08 billion. This values the assets of the firm at 4.6 times annual revenues.

Investment Thesis

The offering of Gogo has been quite a disappointment. Shares were offered at the high end of the preliminary offer range, but fell ever since. Trading around $14 at the moment, shares have fallen some 12.5% from the midpoint of the preliminary offering range.

The company is truly one of a kind, which makes a competitive comparison not possible. The business sees strong growth in its aviation business, but growth at the business unit is much lower.

A key issue is the profitability, or better the lack of profitability, as historical earnings have been heavily impacted by payments on preferred and convertible preferred stock. Following the public offering, this will no longer have an impact on the income statement. Consequently, adjusted EBITDA for 2012, which excludes the impact of payment on preferred stock, rose to $9.3 million compared to a modest loss a year earlier.

Yet there are some key risks. The firm holds an 81% market share in the U.S., leaving little room for expansion, except to increase the connectivity rates from its users and expanding the installed plane base. Concentration risks are notable as well, as Gogo relies on Delta Air Lines for a quarter of its revenues, while major air lines have been installing competitor products as well.

At the same time, there is room for international expansion as the firm is entirely focused on the U.S. at the moment. In the domestic market, roughly a third of all flights have connectivity services enabled. The international flights could see greater connectivity rates as they are typically long-distance flights.

The price at the high-end of the preliminary range was a bit too high given the volatile equity markets over the past week following the FOMC meeting, and the lack of profitability of the firm. While average rates and connectivity is on the rise, it is likely that the majority of revenues are being generated by business users as retail users are not eager to pay $14 for a daily pass. The prospects for Gogo Vision are not that great either, as users do not expect to pay for movies and television shows within a plane.

Despite the strong market position and the complementing revenue growth I remain on the sidelines. Potential for increased competition outweighs international expansion opportunities. Lack of profitability is worrying as well, as relative usage rates have little room to increase to my taste.

Despite the recent sell-off, with shares exchanging hands at $14 per share, I remain on the sideline as I see more downside potential.

Source: Gogo - This Recent Public Offering Is Not Going Yet