Gogo: Shares Keep Going After A Very Strong Third Quarter

Nov.12.13 | About: Gogo (GOGO)

Shares of GoGo (NASDAQ:GOGO) jumped up on Tuesday following the release of an outstanding third quarter earnings report. I congratulate the company and management on the great performance, but remain on the sidelines for now after very strong momentum over the past quarter.

Third Quarter Results

GoGo generated third quarter revenues of $85.4 million, up 48% on the year before. Revenues came in far ahead of consensus estimates of $76.8 million.

Adjusted EBITDA rose by roughly 250% to $2.0 million.

Reported net losses narrowed from $29.0 million to $18.7 million over the past quarter. Adjusted net losses which were similar to net losses came in at $0.22 per share. Analysts were looking for losses of $0.30 per share.

Looking Into The Results

Gogo's growth was entirely driven by a 52% jump in service revenues. This in its turn was driven by a 24% increase in the number of aircraft carrying GoGo's solutions, and a 21% increase in average revenue per aircraft. Note that roughly three quarters of total revenues consist out of service revenues, with the remainder being generated through equipment sales.

While reported revenue growth of 48% to $85.4 million looks solid, operating expenses grew fast as well, increasing by nearly 45% to $96.3 million.

Reported net losses narrowed, on the back of lower preferred stock returns which totaled $16 million last year. On an adjusted basis, net losses increased from $13.0 million to $18.7 million.

Outlook

Based on the solid performance, GoGo is raising the high end of its full year revenue guidance from $315 million to $325 million. The high end of the adjusted EBITDA range is increased from zero to $10 million. The new full year revenue guidance is for $305 to $325 million.

Analysts were looking for revenues of $311.2 million for the full year.

Given the reported numbers for the first nine months of the year, the high end of the revenue guidance implies that fourth quarter revenues could total $90 million. The low end of the guidance now seems very conservative.

Valuation

GoGo ended its third quarter with $284.7 million in cash and equivalents. Total debt and capital lease obligations stood at $244.9 million, resulting in a modest net cash position of around $40 million.

Revenues for the first nine months of the year came in at $235.6 million, up 38.6% on the year before. Due to convertible preferred stock payments and large fair value adjustments on derivatives, net losses more than doubled to $123.7 million.

Factoring in gains of 30% on Tuesday, with shares trading at $24 per share, the market values GoGo at $2.0 billion. This values operating assets of the firm at 6.1 times annual revenues at the high end of the revenue guidance.

GoGo does not pay a dividend at the moment.

Some Historical Perspective

Shares of GoGo were sold to the general public in June of this year. In the meantime shares have fallen from levels in their mid-teens to levels around $10 per share by August. Shares have bounced back a bit and after Monday's jump, shares trade around $24 per share, for great returns over the past quarter.

GoGo has seen phenomenal growth, increasing its annual revenues from merely $37 million in 2009 to $233 million in 2012. The company reported losses, but these have narrowed quite a bit in 2011 and 2012.

Investment Thesis

GoGo offers internet packages ranging from $14 for a daily pass and $50 for monthly unlimited use. GoGo has seen a few good developments in recent times. First of all, it signed a contract with Japan Airlines for its domestic fleet, the first significant international contract.

Furthermore, GoGo is introducing more services to send and receive text messages as well as make phone calls on their own phones. On top of that, the speed of services is increasing to 70 mbps. This service should become available in 2014. To provide better coverage, GoGo is trying to create better internet connectivity, especially over oceans.

And for now the best news seems to be a ruling from the Federal Aviation Administration, which recently announced that electronic devices may be used onboard, even during take-off and landing.

Also interesting to note is the intra-company performance. The North American consumer business reported healthy 53% revenue growth to $50.6 million, while losing some $1.6 million. The business unit performs great, generating revenues of $34.8 million, up 42%. This is combined with large profits of $14.8 million. This is largely offset by the international business which reported losses of $11.0 million on little to no revenues.

Back in June of this year, just after the public offering, I last took a look at Gogo's prospects. I noted that this offering is not going yet as the company saw rapid growth with a lack of profitability. I noted that concentration risks and high market shares are a risk, however the industry grows rapidly with major opportunities for international expansion.

I concluded to remain on the sidelines as potential for competition outweighs international expansion opportunities. The lack of earnings, given the high usage rates, left little room to increase these prices to my taste. I concluded to be on the sidelines around $15 per share, seeing more downside potential. This has materialized in the months following the offering.

As I forgot to analyze the second quarter earnings reports in August, I failed to observe the promising developments which have materialized. The recent trends and this outstanding earnings report has spurred much more upside.

For now I remain on the sidelines.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.