Description

Sky Dayton (founder of EarthLink) founded Boingo Wireless in 2001. CEO Dave Hagan joined shortly thereafter. Ten years and three venture rounds (raising about $95 million) later, Boingo is now the leading independent provider of Wi-Fi (802.11) software and services globally with a network of 325,000 hotspots in over 100 countries. Sky's timing was quite good as 802.11 was finalized in 1997 and started becoming the industry standard for mobile Internet in 1999 when Apple began integrating Wi-Fi into its iBooks (later into its iPhones and iPads) and others followed.

BUSINESS BACKGROUND

Boingo initially focused on exclusive agreements to manage and operate Wi-Fi services at airports. The company made a series of small acquisitions to bolster these efforts. In 2006, Boingo acquired Concourse Communications, which managed Wi-Fi services at 12 airports, including Chicago O'Hare and JFK. In 2007, Boingo acquired Sprint Spectrum's Wi-Fi network of 7 managed and operated airports and one non-exclusive airport for a negligible amount. In 2008, Boingo acquired Opti-Fi Networks, which had a Wi-Fi network of 25 managed and operated airports and the Washington State Ferries for about $1.3 million (in cash and contingent payments). Today, Boingo has exclusive agreements to manage and operate Wi-Fi services at airports representing 42% of passenger traffic in North America and 64% of passenger traffic in the United Kingdom.

Recently, Boingo has increasingly targeted hotspots outside airports, such as café/retail, stadiums/arenas and Quick Service Restaurants (QSRs). As of March 2011, Boingo's hotspot network included: 721 airports, 48,084 café/retail stores, 601 convention centers, and 32,261 hotels.

It's important to realize that Boingo has two main businesses, both of which have steady, organic growth: Retail Subscription Plans (51% of F10 sales) and Wholesale, Private-label Business (44% of F10 sales).

Retail subscription plans include Boingo Mobile ($7.95 per month; month-to-month) for iPhone, iPad, etc; Boingo Unlimited ($9.95 per month; month-to-month) for laptop; and, various Combo plans, International plans as well as single use passes. The retail subscription business is recurring and highly predictable (enabling Boingo to give guidance for 2011 during its IPO process in May). Retail subscribers have grown at 54.7% CAGR since 2007, from 54,000 at the end of 2007 to 200,000 at the end of 2010. Meanwhile, retail churn has declined steadily from 10.9% in 2007 to 9.5% in 2010. Subscribers pay monthly in advance by charge card (refunds are made on a case-by-case basis and have not been material historically).

Boingo's wholesale, private-label business enables network operator partners like Verizon to periodically off-load their subscribers to Boingo's Wi-Fi networks from their constrained cellular networks (in turn, Verizon pays Boingo integration fees, software licensing fees and access fees anytime a Verizon customer connects to a Boingo hotspot). T-Mobile started this trend, which has now become common among wireless carriers, including AT&T and Verizon. Boingo now has over 125 network operator partners in over 100 countries. On a case by case basis, Boingo also builds Distributed Antenna Systems (DAS) nodes to augment network operator partners' networks, with the partners typically reimbursing Boingo. As free Wi-Fi becomes more common, this wholesale business will continue to grow for Boingo. Some recent deals include five U.S. malls (The Citadel Mall in Colorado Springs, CO, Manhattan Town Center in Manhattan, KS; Oakland Mall in Troy, MI; The Grove in Los Angeles; The Americana at Brand in Los Angeles).

Boingo also generates sales from Advertising and promotion (5% of F10 sales). Boingo can offer partners location-based display advertising, as well as custom sponsorships and promotions from its landing pages. Advertising and other revenue was only $953k in 1Q11, down from $1.5 m in 1Q10 due to a large promotion with a sponsor in 1Q10. Recently, Boingo also launched a free software app called Boingo Wi-Finder (shows all hotspots for a particular location, including Boingo hotspots), which works securely across hardware device types (PCs, Macs) and operating systems (Apple, Android).

PROJECTED GROWTH IN WI-FI

Importantly, Boingo is benefiting from a massive tail-wind:

• Wi-Fi enabled devices are expected to grow from 395 million in 2010 to 1.2 billion devices in 2014, a 31% CAGR, according to Gartner/IDC.
• Meanwhile, data-intensive applications are becoming more popular (typical bandwidth by application: 96 Kbps for streaming audio, 384 Kbps for VoIP, 500 Kbps for low-res video, 1.5 Mbps for online gaming, 2.0 Mbps for video chat or high-res video).

The result is 27x (!) expected rise in mobile data traffic from 2010 to 2015, per Cisco Visual Network Index. That is, mobile data is expected to grow from 236 TB per month in 2010 to 6,254 TB per month in 2015.

At the same time, cellular networks in U.S. are operating at about 80% capacity today, and European networks are operating at about 70% capacity. The move to 4G/LTE is only expected to increase network capacity by 4x. That implies that data demand will far outstrip network capacity going forward, even with the move to 4G.

Wi-Fi appears to be the most popular solution to this dilemma as it is about 10x faster than 3G and 6x faster than 4G/LTE (based on Boingo's measurements with heavy simultaneous users). Wi-Fi is also about 75% cheaper than today's 4G plans (e.g. AT&T's HSPA 4GB data plan) on a cost per bit basis.  And, of course, Wi-Fi is the ubiquitous option as there are 400 million Wi-Fi enabled devices today.

VALUATION

Boingo sales have grown from $41.2 m in 2007 to $80.4 m in 2010, a 25.0% CAGR. Sales expected to be $93.0 m in 2011, which implies a 22.6% CAGR since 2007.

Adjusted EBITDA has grown from $4.3 m in 2007 to $26.5 m (mid-point of guidance) in 2011E, a 57.6% CAGR. Adjusted EBITDA margins are expanding nicely, from 10.5% in 2007 to 22.7% in 2010 to 28.5% in 2011E. Meanwhile, FCF (defined as OCF minus capex) has grown from $1.2 m in 2007 to $12.9 m in 2010.

Capex is relatively light: $11.3 m in 2010, $4.3 m in 2009 and $7.0 m in 2008. Capex was $6.4 m for 1Q11, but $5.7 m was for DAS build-out projects which were reimbursed by telecom operators.

Boingo has Federal NOLs of $19.8 m as of the end of 2010.

After its IPO, Boingo has about $81 m in net cash, or $2.4 per share.

With $26.5 m in EBITDA and perhaps $5 m in capex (ignoring DAS build-out because it is typically reimbursed), Boingo is trading at 8.9x EV/FCF (untaxed) for 2011. With modest growth next year, Boingo is trading around 7x EV/FCF (untaxed) for 2012.

• Few comparables; Wayport (founded in 1996; received $137 m in venture funding since inception) was acquired by AT&T for $275 million in cash in November 2008. Wayport (now called AT&T Wi-Fi Services) has 28,000 locations as of October 2010.
• Technology risk; "Super Wi-Fi" is a new technology has not yet been implemented and is in the proposal stage. By the way, I don't consider cellular networks' migration to WiMAX/4G/LTE a major technology threat (it's just the evolution of cellular networks).
• Increasing competition for managing Wi-Fi networks both from network operators (who are also its "partners") and other companies like Trustive and iPass.
• Employee/Investor lock-up is 180 days after IPO (May 9, 2011);

Catalyst

• Acquisition candidate. Boingo is rumored to have received a $250 million buyout offer a couple years ago from a major wireless carrier, higher than its current EV. Also, a company like Google could easily buy Boingo and then offer its Wi-Fi networks for free, supported by ads from mobile search.
• 27x potential growth in mobile data traffic (2010 - 2015) drives huge need for Boingo services, especially as wireless carriers start capping data plans and charging for tiered data plans.
• Continued growth in retail subscribers.
• Continued growth in wholesale, private-label business.
• Growth in advertising platform and software.