Investors in Gogo (NASDAQ:GOGO) were not so happy with the company's second quarter results as the full year EBITDA result is anticipated to come in at the low end of the previous guidance while analysts were anticipating profit improvements.
I like the solid growth of the domestic operations, the still impressive growth rates, the relatively protected market share in the short to medium term and appeal following this year's correction.
Key Results For The Second Quarter
Gogo posted second quarter sales of $99.5 million which represents 25% growth on an annual basis. Revenues were in line with consensus estimates.
Adjusted EBITDA fell from $3.8 million last year to $3.1 million over the past quarter and was down from $5.3 million in the first quarter of this year.
Reported GAAP losses came in a $18.7 million, or at $0.22 per share. This compares to losses of twenty cents in the first quarter of this year. Analysts were projecting losses of $0.23 per share for the quarter.
Looking Into The Numbers
Reported revenue growth seems impressive, but growth on a sequential basis slowed down to just 4%, as sales in the first quarter rose by 35% on an annual basis.
Service revenues continue to drive results, posting a 28% increase to $79.2 million. This is as equipment sales were up by just 17% to $20.4 million amidst a modest pace of growth in the domestic aviation business.
No real leverage in the business model was shown for the moment with losses in the international business on the increase. Total operating expenditures were up by 25%, in line with reported revenue growth.
Looking Through Each Business Line
The commercial aviation business serviced 2,058 air planes, a 4% increase compared to last year. Average revenues per aircraft rose by 18% to levels just shy of ten thousands dollar per month. This in its turn was driven by a big 80 basis points improvement in the ¨take¨ rate to 6.7% of the passengers boarding a plane equipped with Gogo's connectivity solutions. Total revenues for the unit came in at $62.1 million as operating earnings rose by 73% to $6.4 million.
The business aviation business benefited from a 43% increase in the number of ATG systems being online which rose to 2,415 systems, while satellite systems installed rose by 3% to 5,241. Total revenues of the business were up by 26% to $37.1 million as operating earnings rose by 48% to $15.5 million. This resulted in very healthy operating margins of 42%.
All these earnings were ¨invested¨ in the commercial business in the rest of the world. Just 19 aircraft were fitted with Gogo's services, up by 5 over the past quarter. The company does expect this pace of growth to pick up, anticipating 50-100 planes to be online by the end of the year. Losses doubled to $18.8 million due to certification costs of connectivity businesses, among others.
For the full year, Gogo continues to anticipate sales between $400 and $422 million. Of these revenues, merely $2 million in revenues are anticipated in the rest of the world division which is posting huge operating losses currently. Revenues are in line with consensus estimates at $410 million.
Cash capital expenditures are seen between $105 and $125 million as adjusted EBITDA is now seen at the lower end of the $8-$18 million guidance. This implies that given the reported EBITDA so far this year, profitability will remain heavily under pressure in the coming two quarters. Analysts projected that adjusted EBITDA would increase towards $21 million for the year.
At the end of the quarter Gogo held $196 million in cash and equivalents, wile it also has access to $75 million in cash through a new credit facility. It should be noted that the company also has $240 million in debt outstanding.
With some 85 million shares outstanding and shares trading around $15 per share, the equity in the business is valued around $1.3 billion. Based on the full year outlook the business is valued at 3.2 times sales and a non-meaningful profit multiple. Yet it should be noted that the international expansion is costing the company dearly.
The domestic and business aviation segments are posting operating earnings in the low twenty millions in the time frame of a just a quarter, on track to post annual operating earnings of $90 million given the current run rate. This is amidst solid and rapid revenue growth.
This creates quite some appeal, valuing those profitable segments at around 15 times operating earnings before financing costs, taxes and some corporate costs.
Gogo continues to show a meaningful growth in its core business. Connectivity rates improved to 6.7% with average revenues per session increased by 3.1% to $10.70 per session.
To boost revenue growth and remain relevant the company has a few initiatives going on. Of course this encompasses the planned international expansion which is very expensive at the moment. While the company still focuses heavily on the business-to-consumer market, greater and more stable revenues are to be anticipated in the future. This is as the company will focus more on the business-to-business market going forwards, providing internet to the entire plane through billing the plane operator.
Yet the real costs for now are related to improving the speed and reliability of its internet offerings. Gogo will start to use testing of 2KU and Ground to Orbit IFC solutions at the start of 2015. These technologies could provide speeds of upto a 100 megabits per second, more than sufficient for streaming and other related internet usage.
As such Gogo is still heavily investing in the future as shares have seen a full boom and bust cycle over the past year. Shares rose from just $10 in August of last year to levels in their mid-thirties by December. Ever since, shares have given up more than 50%, currently trading around $15 per share.
I must say that I am impressed with the profitability of the business and domestic aviation unit. This in combination with the growth can justify a great deal of the current valuation if it was not for the foreign losses. For now the medium term position is solidified by long term contracts, running until 2020 or longer. These contracts have been closed with some of the most prominent US carriers.
If shares fall further towards the $11-$13 region, which would be a re-test of the lows of May, I like the risk-reward ratio even more. At those levels I would be a buyer based on the growth prospects, the relatively protected short to medium term market share and operational profitability of its key domestic businesses.
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