Gogo Has Potential To Grow Consistently For Several Years

Over the last year, Gogo Inc. (NASDAQ:GOGO) has had a triple bottom of approximately $11.60 per share, and since it hit its 52-week low of $11.57 per share, has made a nice move up to trade at $16.41 per share as I write.

Even though GOGO stock made that move since mid-October 2022, I like the fact that it was, relatively speaking, a steady upward move and not a quick spike. That's important to me because it suggests the market was responding to the performance and potential of the company in a measured manner, which probably means it was longer term investors taking positions, and not traders.

The company is investing in growth initiatives that should pay off over the next several years, but in the near term that will probably result in modest results, especially in 2023. The rolling out of GOGO 5G in the near future should be a nice catalyst for the company, as will global broadband (GBB) when it rolls out in 2025.

In this article, we'll look at some of its recent numbers, some specifics associated with 5G and GBB, and what the future outlook for the company over the next few years is likely to be.

Some of the numbers

Gogo recently announced record fourth quarter and 2022 results, and provided 2023 guidance with updated long-term targets.

Revenue in the fourth quarter of 2022 was $108.2 million, up 17 percent year-over-year. Full year 2022 revenue came in at a record $404.1 million, a gain of 20 percent over full year 2021.

Both service and equipment revenue reached record levels for the fourth quarter and full year, with service for the fourth quarter reaching $77.3 million, up 12 percent year-over-year, and up 3 percent sequentially. For full year 2022, service revenue was a record $296.3 million, an increase of 14 percent compared to full year 2021. Equipment revenue for the fourth quarter of 2022 was $30.8 million, up 34 percent over the fourth quarter of 2021, and up 2 percent sequentially. Full year equipment revenue was a record $107.7 million, up 42 percent year-over-year.

As for its ATG ARPUs, that averaged $3,370 in the reporting period, up two percent year-over-year, and down slightly sequentially. Management expects that to improve with premium data plans and the launch of its Gogo 5G and GBB initiatives, which should boost ARPUs over the long term. That said, the primary growth driver in service revenue will come from adding more aircraft to its offering.

Adjusted EBITDA in the fourth quarter of 2022 was a record $46.2 million, up 17 percent year-over-year. Full year 2022 adjusted EBITDA was $173.8 million, up 15 percent from full year 2021.

Net income in the fourth quarter was $27.7 million, or $0.21 per diluted share. Net income for full year 2022 was $92.1 million, down from net income of $156.6 million year-over-year. The bulk of that was a result of tax benefit of $187.2 million in 2021.

In the reporting period GOGO generated $25.00 million in free cash flow, down a little from the $25.7 million in free cash flow generated in the fourth quarter of 2021. That was attributed to CapEx related to GOGO 5G and an increase in net working capital. Free cash flow for full year 2022 was a record $57.8 million.

At the end of calendar 2022 the company had cash and short-term investments of $175.3 million, an undrawn $100.00 million on its revolver. At the end of the reporting period the company had $714.00 million of outstanding debt.

Looking ahead

GOGO guided for full year 2023 revenue to come in at a range of $440.00 million to $455.00 million. If it comes within that range, revenue would be up anywhere from $36.00 million to $51.00 million year-over-year. While that's not too bad, the company is still laying the foundation for future growth, so expectations at this time are more modest than they are likely to be in the future.

Revenue growth is primarily expected to come from aircraft online, as a result of customers activating the record amount of equipment units delivered in 2022. That will bolster its service business. On the other hand, based upon chip delays associated with GOGO 5G, equipment sales are projected to be lower in 2023 than originally expected.

Adjusted EBITDA for 2023 is guided to be in a range of $150.00 million to $160.00 million, lower than it was in full year 2022. As mentioned above, the company is setting the stage for future growth, and is investing in completing the launch of GOGO 5G while investing more in GBB. The company is also increasing investment in finding ways to increase business in the 70 percent of business aviation in-flight connectivity that remains unconnected.

Free cash flow for full year 2023 is projected to be in a range of $80.00 million to $90.00 million. That would be a solid result if the company is able to achieve it, taking into consideration the increase in spend mentioned above.

Expected CapEx for 2023 is estimated to be in a range of $30.00 million to $40.00 million, with somewhere around $20.00 million of that being allocated to GOGO 5G.

While I'm always a little dubious when companies guide for several years into the future, the nature of the business GOGO competes in, and the lack of penetration in key parts of the market, suggests it has at least a decent chance of achieving close to what it is guiding for through 2027, assuming it's able to gain share and remain competitive.

With that in mind, the company guides for revenue growth from 2022 through 2027 to average approximately 17 percent, with its global broadband business starting to contribute to revenue in 2025.

Concerning adjusted EBITDA margin, management sees it reaching to the mid-40 percent range by 2027. That is down from previous expectations, based upon lower equipment margins.

Taken together, guidance reflects the launch of GOGO 5G in the latter part of 2023, and the launch of GBB in 2025. In regard to operating expenses, the company expects to cut that by approximately 15 percent from 2023 through 2027. Free cash flow is guided to jump to over $200.00 million in 2025 and continue to grow in 2026 and further out.

GOGO 5G and GBB

Before getting into the details of GOGO 5G and GBB, it's important to know that 5G is targeting the North American market within value-oriented segments, while GBB targets all market segments outside of North America and North American segments in the "high performance super mid and heavy jet segments."

GOGO 5G

The significance of these two initiatives are that they will boost its speed from single-digit Mbps to 10s and ultimately 100s Mbps by 2027. As mentioned above, the company is on track to commercially launch GOGO 5G in the fourth quarter of 2023.

After passing a critical design review from companies working on the chip, including GOGO, Airspan, GTT, and Samsung, the chip has entered into the fabrication phase and is expected by ready for delivery in Q4 2023.

When it eventually goes live, delivery speeds will be up to 10 times faster than GOGO's ATG networks, which is what is currently in use. Peak speeds could even reach as high as 30 times faster than ATG networks.

The significance of that is it will empower users to be able to engage in multiple streaming sessions and video conferences. It will offer the services at a lower price than GEO satellite or LEO solutions.

GOGO is offering customers the chance to install the AVANCE L5 at this time, which can still operate on the existing 4G network, but can be quickly transitioned to 5G when the service goes primetime.

This is obviously a pre-lock in move that would presumably lower any churn from its 4G network as customers look forward to activating the 5G network.

As of the fourth-quarter earnings call, the company had already delivered 24 pre-provision chipsets to customers, with another 105 "end customers" signing up for pre-provisioning promotions. It also had 92 orders from dealers. Management said some of the 92 dealer orders may be duplicative of customer orders but is still significantly up from the 60 dealer orders it had in hand as of the Q3 2022 earnings call.

GBB

The proliferation of low Earth orbit (LEO) or low altitude satellites is a key catalyst for the global broadband business of GOGO, and it's only going to increase in the number of satellites operating in that area.

That suits business aviation (BA) particularly well, as required antenna can fit into smaller space of BA aircraft, providing them with the valuable service.

Within a few years management believes LEO satellite technology will advance to the point of empowering the company to launch services which have the capability of delivering 100s of Mbps, which will meet the demand from the company to engage in business practices not currently available to them at the quality they need.

Again, this targets the market outside of North America, as well as high-performance and heavier aircraft in that market. The key goals of GBB is to penetrate an addressable market of 14,000 business aircraft that are registered outside of North America; include a satellite feature for hundreds of super mid-size and heavy jets that fly over North America on their global purposes, i.e., have the option to switch between 5G to GOGO ATG when flying over North America; and last, to improve the stickiness in the medium-size aircraft segment of the North American market by offering an upgrade to a LEO product. When GBB is fully operational, it should have the capacity to video stream any type of business video session now used in physical offices or buildings on the ground. While management considers GOGO 5G and GBB to be complementary parts of its overall product and service portfolio, I do think they have potential to be gamechangers in the sense of offering a complete suite of products and services that could differentiate the company from its competitors, if it's able to execute on its strategy and introduce them in a timely manner.

Conclusion

GOGO is positioning itself for a potentially profitable and multi-year run, as it works on offering 5G and BGG to its customers, which will not only generate revenue and earnings in and of themselves but should provide a stickiness that keeps its churn rate down in the years ahead.

As management stated in the last earnings call, 70 percent of North American aircraft don't have broadband connectivity, and approximately 95 percent of the remainder of global aircraft don't. The addressable market is large, and there's an enormous amount of room for growth if GOGO can successfully execute its business plan and grow and retain market share.

If GOGO can solve the various problems the aircraft industry faces in relationship to broadband connectivity, it will have a strong moat to hold off most of its competitors.

To that end it's working on providing a comprehensive and customized solution that meets the needs and challenges of various potential customers. The company is putting together bundles of equipment, networks, and services designed to cater to different problems individual customers face, offering them lower-priced value solutions, or premium, high-performance solutions.

The bottom line is, if GOGO can take the lead and hold it, it's going to reward patient, long-term investors nicely.

Since it's going to take a while for this to play out, the best way to play GOGO in my opinion is to build a position up over time, using a strategy of dollar-cost averaging and disciplined position sizing to reduce risk.

I think there's strong probability the company is going to pull back sometime soon, and that could be the time to take a serious look at taking a position in the company.

With the share price elevated at this time, risk/reward isn't strongly in the favor of those taking a position. Further out, I think GOGO has a lot of potential for growth, but we really won't know for some time because we'll need to see how the initiatives it has instituted work out for the company.

Based upon company guidance, it should generate modest but consistent growth over the next few years, which should result in the stock moving up incrementally over that time. If it does fail to execute, it could be a rough ride for those with a higher cost basis.