Investors in Gogo (NASDAQ:GOGO) saw a much-welcomed bounce back in the stock price after shares have been hit hard amidst the momentum sell-off and worries about the entrance of competition.
At these relatively low levels, shares might be worth the gamble as growth and exclusive contracts combined with a relatively fair valuation outweigh my concerns for competition and reported losses.
First Quarter Headlines
Gogo reported first-quarter revenues of $95.7 million which was up 35% compared to last year. Net losses narrowed significantly from $32.5 million last year to $16.9 million over the past quarter.
The North American aviation business drove the results. The number of aircraft online rose by 9% to 2,056, yet monthly average revenues per aircraft rose by 20% to $9,199 per aircraft. Some 6.9% of all passengers on board used the service, up 70 basis points compared to last year. Revenues at the business rose by 32% to $57.1 million as the unit turned a segment profit of $5.8 million.
Business aviation revenues rose by 47% to $38.6 million driven by strong equipment sales. The unit remains very profitable with segment profits of $16.5 million.
These earnings were offset by losses from the commercial business in the rest of the world which totaled $16.9 million on a segment basis. The unit has yet to generate revenues as Gogo anticipates to have between 50 and a 100 Delta (NYSE:DAL) airplanes online before the end of the year.
Back in March, Gogo held its investor presentation. Management stresses being a pure play for in-flight communications for the global aviation industry.
At the moment the business is still very much domestically oriented. It has a 79% market share in the commercial aviation segment with some 2,000 aircraft being online, carrying out 7,500 flights per day which has resulted in a cumulative 50 million sessions to date.
Gogo's systems are found at some 7,200 business aviation aircraft. The international commercial aviation business represents the company's largest opportunity. So far it has awards for 332 aircraft while it is nearing a global satellite network.
A Sizable Opportunity...
In 2012 there were some 4,000 commercial aircraft flying in the US, a number expected to grow towards 6,000 by 2032. This is according to Gogo's investor presentation which itself is based on a report from airplane manufacturer Boeing (NYSE:BA). Yet the real opportunity is in the rest of the world as the number of commercial aircraft is expected to more than double from 13,000 to roughly 30,000 over the same time period.
For now, Gogo is already reporting impressive topline results, while still reporting losses. Topline revenues rose at a 73% CAGR between 2009 and 2013 as revenues increased from merely $37 million to $328 million.
The company is however switching towards a less capital-intensive business as exclusive ATG spectrum licenses and long-term contracts should provide it with a strong barrier of entry. A rapid upgrade of connectivity speeds should be helpful as well.
With Gogo holding an 80% market share in a growing industry, it takes little time to attract competition. AT&T (T) and Honeywell (HON) last month announced that they will combine forces to offer a competing 4G LTE in-flight connectivity service in the US by next year.
The news triggered a huge sell-off in Gogo's shares at the end of April, losing more than a quarter of its value in just a day. Honeywell which will deliver the hardware expects to generate a billion in revenue in the first decade after the launch.
Gogo's CEO Michael Small believes that the new combination will have serious difficulty competing with Gogo despite having access to vast more resources. Almost all commercial US planes are under exclusive contracts with Gogo which has long-term 10-year contracts, running through at least 2020. Furthermore he stresses that Gogo's GTO and 2Ku solutions will be faster and more quickly available compared to the proposed solutions by AT&T.
At the moment, Gogo holds nearly $220 million in cash and equivalents. Total debt has actually surpassed cash holdings and at $242 million results in a modest net debt position of about $22 million.
For the current year, Gogo foresees revenues of $400 to $422 million. Adjusted EBITDA is seen between $8 and $18 million, which based on the first quarter performance implies that annual losses could easily come in between $60 and $80 million.
With cash capital expenditures seen between $105 and $125 million this means that Gogo's cash balances are shrinking rather quickly.
At $13 per share, Gogo's equity is valued at $1.1 billion, the equivalent of roughly 2.7 times annual revenues.
Takeaway For Investors
Gogo has a promising business, yet uncertainty about competition, losses and a slowdown in growth has triggered a huge sell-off. Shares made their debut at $17 last summer and spiked towards $35 by December of last year. The momentum sell-off and news about AT&T entering the market send shares towards levels of just $11 in recent weeks.
Of course Gogo is losing sizable amounts of money which is completely attributable to the international operations, with the profitable domestic and business operations picking up steam.
The launch of the international business should allow for much greater operating leverage as the company continues to improve its service. The initial offerings in 2008 provided 3 megabits of bandwidth per second, while most carriers will switch to 10 megabits this year and even 100 megabits in the near future.
Undoubtedly Gogo will report profits, yet it remains to be seen how the company can compete effectively with AT&T as exclusive contracts run out in about six years' time, despite its head start.
Don't get me wrong, the stakes are huge. With an average rate of little above $10 per session and a nearly 7% take rate, the global opportunities are very sizable. If a take rate could increase towards let's say 30%, Gogo could earn about $500,000 per plane per year. With an anticipated 32,000 global aircraft flying around by 2032, we are talking about a huge potential market of $16 billion per annum.
While I don't believe that Gogo will go belly up anytime soon, my biggest concern is competition. That being said, a huge head start gives the company some advantages, including long-term exclusive contracts.
At current levels shares might be worth the gamble for long-term investors to pick up a small stake for their portfolios.
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.