Boingo Wireless: Streaming Toward A Wireless - And More Profitable - Future

| About: Boingo Wireless (WIFI)
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At first glance, Boingo Wireless (NASDAQ:WIFI) may not seem like an ideal investment. With 2013 profits estimated to reach just 6 cents per share, shares closed at over nearly 108x estimated 2013 earnings on June 19. However, when investors look underneath the surface, they will see a multitude of favorable attributes. Boingo is executing on a number of strategic initiatives, has a solid growth trajectory and a clean balance sheet rich in cash and investments, capital that the company is set to deploy in 2013 and the years beyond.

With shares of Boingo down over 14% year-to-date, and down over 50% since its May 2011 IPO on concerns over Wi-Fi's long-term sustainability, as well as missed expectations. However, with shares now trading under $6.50, we believe that the sentiment surrounding Boingo has become too negative. While we do not expect Boingo to return to its IPO level of $13.50, the shares need not rise to such levels for investors to see meaningful upside. We believe that for patient investors, shares of Boingo present a good buying opportunity at these levels as the company continues to invest in positioning its business for long-term success. Unless otherwise noted, financial statistics and management commentary used in this article will come from one of the following 3 sources: Boingo's Q1 2013 earnings release, its Q1 2013 earnings conference call, or its latest 10-Q filing.

Reviewing Q1 2013 And Ensuring Boingo's Relevance

In our view, a review of Boingo's most recent quarter would be incomplete if it did not incorporate a discussion of Boingo's long-term relevance. Since the company's May 2011 IPO, one of the chief concerns surrounding the company has been how it will stay relevant with the continued growth in cellular data usage. However, the continued surge in mobile data usage is not a threat to Boingo, but rather an opportunity. Many carriers, both here in the United States as well as abroad, are struggling to handle surging volumes of data. Enter Boingo and the trend of Wi-Fi offloading. Industry observers, including the Competitive Carrier Association (an American industry group representing a collection of rural carriers), forecast that as much as 22% of cellular data traffic will be offloaded to Wi-Fi networks by 2016. And Boingo is poised to benefit from this trend, specifically in its wholesale business through agreements with carriers such as KT (NYSE:KT) and NTT DoCoMo (DCM) (more on Boingo's network partnerships later).

For Q1 2013, Boingo posted revenue of $23.134 million, beating consensus estimates by $960,000 and a loss of 3 cents per share, matching consensus estimates. Revenue fell 4.32% due to declines in the company's wholesale and single use business. This decline was offset by growth in advertising and subscription revenues (wholesale represents 50% of Boingo's revenue, with retail accounting for 46% and advertising the remaining 4%). Wholesale revenue fell by 4.4% in Q1 2013 due in large part to unfavorable comparisons stemming from a $1.4 million DAS contract completed in Q1 2012. Subscription revenue grew 2.8% in the quarter, with an ARPU decrease more than offset by a 12.1% increase in total subscribers to 296,000, driven by growth in smartphone and tablet users. Notably, Boingo's subscriber base grew by 4.4% sequentially in Q1 2013. And although retail single-use revenue fell by 28.5% in the quarter (retail single-use revenue accounted for 11.18% of Boingo's revenue in the Q1 2013), this is Boingo's 2nd smallest business segment, and the transition of single-use customers to Boingo's subscription plans is a long-term positive for the company's business. CEO David Hogan stated on Boingo's Q1 conference call that he believes that the most severe pressures on Boingo's retail business are behind it, and that the continued presence of non-carrier devices (such as laptops and non-3G tablets) will (alongside a growing subscriber base) help stabilize the company's retail business. For all of 2013, Boingo is forecasting revenues of $108.5 million at the midpoint of guidance, representing growth of 5.85% over 2012 levels. And although profits are forecast to fall between 3 and 8 cents per share (down sharply from $0.20 in EPS for 2012), 2013 is not representative of Boingo's longer-term potential.

The company is investing in multiple aspects of its business, both here in the United States and abroad. In February, the company acquired Endeka, a provider of broadband and IPTV services to military bases around the world. With this acquisition, Boingo has gained contracts with the Department of Homeland Security, FBI, Air Force and Marine Corps, and CEO David Hagan has noted that Endeka will allow Boingo to tap into a growing market in both domestic and international military bases.

However, military bases are far from Boingo's only international growth opportunity. In early May, Boingo activated new Wi-Fi networks in 3 new Chinese airports (Guangzhou, Shanghai Pudong and Shanghai Hongqiao), giving the company a presence in 4 out of the 5 largest Chinese airports. These networks, which will operate under a retail model (both single use and subscription), will allow Boingo to tap into the long-term growth potential of China's economy as more and more travelers cross through the country's major airports. During the first quarter, Boingo also inked deals to expand into 3 German airports (Berlin, Stuttgart and Nuremberg), as well as 5 Japanese airports (including both Tokyo-Haneda and Tokyo-Narita), covering a total of 160 million passengers annually. In addition, Boingo is expanding in Europe as well, activating Wi-Fi networks in over 50 European cities in Belgium, Spain, France and Ireland, covering both public transportation networks as well as municipal and metropolitan Wi-Fi networks. These deals have helped bring Boingo's total number of hot spots to over 1 million, including 300,000 crowd-sourced hotspots. And even as Boingo continues to expand internationally, it is maintaining focus on the domestic market as well.

In May, Starbucks (NASDAQ:SBUX) chose Boingo to serve as its advertising partner across 7,000 stores in both the United States and Canada, with the ability to target ads based on a user's device, location as well as the time of day that they choose to enter Starbucks. Boingo has also recently expanded its New York subway system network (the company inked the deal in May 2012) from 6 to 36 stations, specifically noting the potential for carrier offload during peak usage periods in one of the world's busiest transit systems.

However, Boingo's most notable domestic deal is the deal it has struck with AT&T (NYSE:T). Signed in April, this bilateral deal with AT&T allows for AT&T's wireless subscriber base to gain roaming access to Boingo's international Wi-Fi networks, and gives Boingo's own subscribers roaming access to AT&T's Wi-Fi networks here in the United States. AT&T and Boingo will pay each other on a per megabyte basis, and although the deal will force Boingo to pay AT&T, we expect the bulk of payment flows will move towards Boingo, given the sheer size of AT&T's subscriber base in relation to Boingo's. CEO David Hagan noted on the company's Q1 earnings call that the deal will begin to ramp in late 2013, with high volumes of traffic set to occur in early 2013. Boingo's profitability is being weighed down by continued investments across multiple channels. Total operating expenses jumped by 13.11% year-over-year in Q1 2013, led by a 17.98% increase in development & technology expenses, as well as a 32.83% surge in marketing expenses tied to the rollout of Boingo's advertising business and expenses tied to the acquisition of Endeka. However, Boingo's investments are set to pay off in the years to come, providing the company with even more capital to invest in its long-term strategic initiatives, as well as return capital to shareholders.

Capital Structure, Growth and Valuation: Looking Beyond the IPO

Far too many investors subscribe to the belief in the sanctity of the link between a company's stock price and its fundamental potential. The fact that Boingo has fallen sharply from its $13.50 IPO price is seen by some as not only a commentary on its historical performance between May 2011 and today, but as an indictment against its future potential. However, we do not see things in this way. Although Boingo has made missteps since becoming a public company, a large portion of its decline can be tied to an inflated IPO price. We believe that a comparison with Groupon (NASDAQ:GRPN) is apt, for these two companies have several things in common, at least when it comes to their post-IPO performance. Like Boingo, Groupon went public at a stock price ($20) that was not supported by its fundamentals. Shares of Groupon began falling once cracks began to appear in its business. And although these cracks may not have been meaningful had Groupon debuted at a lower price, they were material given the company's inflated share price. Naturally, the sentiment surrounding Groupon turned sharply negative, and shares plunged. However, shares fell too far, presenting patient investors with a buying opportunity. We have covered Groupon at length, and our last recommendation to buy shares of Groupon occurred on November 9, 2012, when shares of Groupon closed at $2.76. Through the close of trading on June 19, investors who followed our recommendation have seen a return of 180.07% as Groupon has rebounded to nearly $8. Although we do not think that Boingo's upside potential is as large as that of Groupon, we believe that there is still meaningful upside to be realized for new investors due not only to Boingo's forward growth, but its balance sheet as well.

One of Boingo's most notable attributes is its pristine balance sheet. The company ended Q1 2013 with $91.872 million in cash and investments and no debt. Based on its 35,669,971 outstanding shares, Boingo currently holds $2.57 per share in cash and investments, which is equivalent to 39.78% of its current market capitalization. And Boingo is putting its capital to good use. The company announced a $10 million buyback program in April, equivalent to over 4% of its current market capitalization, and the company continues to remain cash flow positive, with $5.256 million in operating cash flow in Q1 2013, a 7.19% fall from Q1 2012, even with both a decline in revenue and an increase in expenses. However, Boingo is poised to see increased profitability in 2014 and beyond, which will enable it to not only invest further in its business, but to return more capital to shareholders. The following table breaks down Boingo's forward earnings forecasts, growth rates and valuation (which is based on the company's June 19 closing price of $6.46). As a frame of reference, 2012 EPS was $0.19.

Boingo Consensus EPS Forecasts

Year

EPS

Growth Rate

P/E Multiple / P/E Multiple ex-Cash

2013

$0.06

-68.42%

107.67x / 64.83x

2014

$0.17

+183.33%

38x / 22.88x

2015

$0.22

+29.41%

29.36x / 17.68x

2016

$0.30

+36.36%

21.53x / 12.97x

Boingo's myriad of investments, both here in the United States and abroad, are poised to pay off in the years to come, thereby adding further cash to Boingo's balance sheet, thereby allowing it to continue executing on its strategic initiatives. As we noted at the beginning of this article Boingo's headline 2013 P/E multiple of nearly 108 does not tell the full story. Nearly 40% of the company's market capitalization is in cash, and for Boingo, 2013 will be a transition year as it makes meaningful investments in its business to ensure that its long-term potential remains intact.

Conclusions

At current levels, we believe that shares of Boingo Wireless present a solid opportunity for new investors. Although we do not believe that shares will return to their $13.50 IPO price, we do believe that shares can reach the consensus price target of $8.83, representing upside of nearly 37% from current levels. In our view, the sentiment surrounding Boingo is unwarranted given the company's financial strength and business opportunities. Boingo is not threatened by the surge of wireless data traffic. Rather, it represents a meaningful opportunity for the company and one that we believe will come to play a meaningful role in its profitability in 2014 and beyond. In our view, investors who add to or initiate positions in Boingo Wireless at this point in time will be rewarded for their conviction as the company continues to invest in its business and streams toward a more wireless and more profitable future.

Disclosure: I am long WIFI, GRPN, T, SBUX. 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.