Investment Thesis
I am Gogo (Nasdaq:Go go) is a strongly bulwarked company in the U.S. market, but its ability to maintain and even strengthen its competitive position, especially through international expansion, will depend heavily on the launch of two key products. Product upgrades. If successful, the company could enjoy several years of revenue growth with rising profit margins. However, with multiple product launch delays in the past, the stock is currently trading at a double-digit free cash flow yield to next year’s earnings. While the valuation is attractive, I think it is prudent to wait and see until the risks of further delays are mitigated.
Company Profile
Gogo is the leading internet service provider for private aviation. Purchase successful 3 MHz Air-to-Ground (ATG) spectrum From the FCC In 2006, Gogo partnered with the company to secure exclusive rights to use frequencies for in-flight communications. This exclusive network allows the company to offer cheaper and more reliable internet speeds than its North American competitors. In simple terms, Gogo puts equipment on aircraft that connects to cell towers around the country through spectrum frequencies.
The company has been run by CEO Oakley Thorne since 2018 and is currently 20% of the companyIn December 2020, he strategically Sold Gogo sells its commercial in-flight entertainment business to Intelsat for $400 million.
Gogo’s Value Proposition
As of the end of the last quarter, the company 7136 ATG Aircraft Online (AOL)Approximately 4,110 AOL locations have the company’s latest devices. Avance The remaining two devices are equipped with 5G, and the remaining devices are equipped with Gogo’s older devices. The main difference between the AVANCE and the older devices is that the AVANCE can support 5G on its own spectrum in the U.S., where the company has not yet launched 5G services. GoGo5Gis expected to be launched by the end of this year. The company is phasing out its older products and replacing them with the partly funded AVANCE. Government subsidies, this is, ZTE’s Chinese-made devices.
To further strengthen its strengths, Gogo is OneWeb use Low Earth Orbit The Company provides high-speed internet to private aircraft internationally through its Lightning Orbit (LEO) connectivity. Gogo Galileo Product. This product allows you to easily add an antenna to an existing AVANCE system.
Financial Highlights
The majority of the company’s revenue comes from recurring revenue related to the in-flight communications services it provides. The remaining revenue comes from sales of hardware equipment, which have much lower margins. GoGo’s CEO expects the company’s service revenue margins to remain strong going forward, which he said during the company’s press conference. 2024 Q1 Financial Results Announcement:
On the profitability front, Gogo achieved service margins of 78% in the first quarter, beating expectations due to lower network and data center costs and relative flatness compared to the prior quarter. The company expects service margins to continue in the 75% range this year with some declines over the next few years.
As mentioned above, the company’s service revenues have been steadily increasing and the company continues to leverage its market dominance to raise prices to consumers every year. This is evident when tracking ATG’s average monthly revenue per aircraft (ARPU) metric. As the company’s report notes, the global business aviation market of 39,000 aircraft is still largely unpenetrated. Announcement of fourth quarter 2023 financial resultsThis leaves Gogo plenty of room to grow in the industry, especially with its upcoming 5G and Galileo products.
The company continues to demonstrate robust EBITDA margins of 25% to 30%, with incremental margins exceeding 50% as it leverages the mostly fixed costs of operating the ATG network. Management targets EBITDA margins approaching 40%, assuming both 5G and Galileo are launched by 2028.
evaluation
When valuing Gogo on an EV to EBITDA basis, investors should consider that the company has approximately $415 million in net debt. While leverage seems high, the company’s balance sheet is robust with a net debt to EBITDA ratio of 3.5, which is expected to decline significantly next year. At today’s share price of $10.5, Gogo’s EV to EBITDA is valued at 15.
However, I believe it is better to value the business using the price-to-FCF ratio based on the company’s 2025 forecasts, as 2024 forecasts understate the company’s true earnings power given the heavy investments currently being made in 5G and Galileo. FCF is expected to be ~$40 million this year, but management guidance for next year expects FCF to more than triple to $150 million to $200 million, with the CEO reiterating the following in the Q1 2024 earnings call:
The Company continues to expect free cash flow to be in the range of $150 million to $200 million in 2025, excluding the impact of the FCC program. The significant increase in projected free cash flow in 2025 is driven by increased EBITDA due to increased revenue, reduced engineering design and development OpEx and lower CapEx due to the launch of Gogo 5G and Galileo and the completion of investments in these strategic programs, and increased net working capital due to planned inventory purchases and prepayments for equipment shipments in 2024 or 2025.
Assuming the company achieves the midpoint of management’s guidance of $175 million, its current market cap is $1.35 billion, its shares are trading at a very attractive cash flow yield of 13%, and it has attractive growth prospects with upcoming product launches.
catalyst
Going forward, the most important catalysts driving the company’s double-digit growth and rapid margin expansion will be the launch of Gogo 5G and Gogo Galileo, which will not only help boost ARPU metrics but also strengthen its edge over competitors.
risk
Delays in 5G and Galileo rollout
The biggest risk to achieving next year’s FCF target is the possibility of delays in product launches. Multiple Delays The 5G launch has been delayed multiple times due to chip supply shortages and contractor issues, with the most recent issues also being addressed in the latest earnings report. The company still expects to launch 5G by the end of the year, but the market remains skeptical, which I believe is the main reason for today’s low valuation. Continued delays could increase the company’s ongoing costs and cause customers to look for alternatives.
Competition with StarLink
of Provided by StarLink remains a competitive threat and was mentioned multiple times in Gogo’s most recent earnings call. Gogo’s CEO tried to explain the benefits of their service by saying:
StarLink, on the other hand, is focused on mass-producing a consumer off-the-shelf product for a much larger market, then repurposing it for the aviation industry. We may see some initial success just because of Musk’s appeal, but ultimately, the simplicity of installation of our Galileo terminals, the superior reliability of our equipment, and our white glove customer support position Gogo to be competitive and capture a significant share of this market.
We believe that the Gogo Galileo product has significant advantages over StarLink at this time due to its smaller size and lower cost, but this will depend primarily on the company being able to launch its Galileo product as planned.
Ongoing litigation
The company is now facing a lawsuit from a competitor. Smart Sky The case relates to patent infringement in Gogo’s 5G products and is expected to go to trial in April 2025.
Conclusion
Gogo shares are currently trading at an FCF yield of 13%, based on management’s FCF target for next year. If the 5G launch and subsequent Galileo launch are successful, the company will benefit from multi-year double-digit growth and margin expansion. However, given the continued potential for execution-related risks, I prefer to wait on the sidelines until I can be confident that 5G products will be successfully deployed to customers as planned.