Description

Gogo is best known for its shitty, money-losing in-flight WiFi service on commercial airlines such as United and Delta.

…except that isn’t our Gogo. 

In 2020, Gogo sold its Commercial Aviation WiFi business for $400 million to satellite competitor, Intelsat. That transaction was transformational, as Gogo got paid to sell a money-losing bandwidth hog - the influx of cash proceeds and the cessation of operating losses allowed Gogo to restructure a problematic balance sheet.

What remains is a healthy company with an absolutely dominant position in domestic US Business Aviation in-flight connectivity. At $13, it has a fully diluted market cap of ~$1.66 billion. Tha company provided long-term guidance of $125 million of FCF in 2023 and $200 million in 2025. I believe it is on-track to meet and exceed those numbers.

Note: The published share count can be deceiving. Gogo has a $103 million May 2022 convert that converts 166 shares per $1,000 of face - it matures in the next few months and is likely to be equitized. That puts the as-converted diluted shares at ~128 million (vs. the 109 million you see on Bloomberg). Buy this at your own risk. 

Thesis:

What is “Business Aviation”? Think private travel: corporate fleets, fractionals (e.g., Netjets uses Gogo), Charters, and owner operated (non-fractionalized private planes). 

Gogo has two primary revenue sources: equipment (razor) and service revenue (subscription razor blade). The service revenue is highly recurring - customers invest $100,000-$250,000 to buy and install a system on their plane, then pay Gogo a monthly fee to use it. The combination of a substantial upfront investment and secular growth in demand for in-flight connectivity make the high margin service revenue stream (razorblade) very predictable.

The basic Gogo thesis is built on:

• Massive secular tailwind in private travel growth

• Decade long penetration opportunity within private travel (only 35% of TAM has a connectivity solution today - this will relentlessly increase)

• Gogo is the dominant market share owner in US business aviation connectivity

• Razor / razor blade: very high margin recurring service revenue

• Gogo is building out a 5G offering that launches later this year

• Higher ARPU

• Much faster speeds

• Gogo increasingly “owns the cabin” and its Avance system allows for more Operating System-like profile

• Future upgrade cycles (e.g. LEO satellites) make more sense with Gogo as a partner

• Incremental service revenue margins are very high (mid-70s)

• Gogo’s costs poised to decline as it completes 90% of its planned 5G upgrade spend this year (and the balance next year)

• Low ongoing CapEx requirements

• Growing double digits for foreseeable future

• Poised to exceed its long-term free cash flow guidance

• CEO Oakleigh Thorne owns 20% of the company and PE firm GTCR owns 25%. GTCR acquired via a mix of equity and a convert. It has a board seat

Business Aviation (“BA” aka, “flying private”) has incredible secular tailwinds. Gogo’s ground-based tower system (“air-to-ground” or ATG) provides ubiquitous domestic in-flight WiFi coverage to customers who a) increasingly demand access everywhere; and b) can afford it. Today, ~35% of qualifying domestic BA planes have an in-flight connectivity solution. Over time, it seems obvious that will go toward 100%. Gogo dominates the domestic US market and is a secular winner that increasingly will look like a digital infrastructure business with strong, capital efficient growth. It has no operational ATG competitor and - currently - only competes with very expensive satellite systems.

For those who don’t know, Gogo’s ATG network is unique: rather than receiving a signal from a satellite in space, it basically mounts antennas on cell phone towers and points those at the sky, beaming a 3G, 4G, or 5G signal to the clouds. Bolted to the belly of the aircraft are two antennas - a receive and a send - that communicate with the towers. Gogo’s network has been moated by its 4 MHZ licensed spectrum block that it acquired in auction in 2006. I believe it has close to 90% domestic BA market share.

Gogo offers two primary tiers of service: Classic ATG and Avance. Within these are sub tiers and various pricing plans, but the key takeaway is it has a legacy “Classic” technology and a modern “Avance” system that powers its 4G and (soon to be launched) 5G products. 

Classic is limited and slow, whereas its Avance offerings are 2-3x faster at 3-7 mbps on average. For comparison, terrestrial 4G on your phone typically is 5-12 mbps. While not “fast,” Gogo’s service plans allow for several simultaneous devices surfing the internet, using email, and streaming (streaming is a premium ARPU feature).Gogo’s imminent 5G offering is expected to average 25 mbps, with peaks speeds at 75 mbps - a massive consumer experience upgrade.

Of its ~6,300 active planes (YE 2021e), about 2,300 are on its Avance services, with virtually all new installs using Avance. The balance are on its lower tier Classic service - over time, many of these will convert to Avance, creating an upgrade cycle within its customer base. Within that Classic base, roughly half are on planes with a body type that can support the larger L5 system. The remaining half can be upgraded to the lower-priced, smaller form factor Avance L3 with just an interior box upgrade - no new antenna required. 

Today, Gogo is in the midst of a once a decade network upgrade: 5G. It is halfway through a $100 million upgrade spend (mix of OpEx and CapEx) that will help set the company up for its next leg of growth. 90% of that spend will be completed this year, with the service set to launch in the second half of this year. Gogo 5G is expected to be 5x faster than the current offering - its 5G is being built on unlicensed spectrum and is a premium ARPU to its current premium product (the Avance L5).

Avance is the name of its modern in-cabin telematics system and is powered by a modern OS that can be updated and modified from the cloud, which I will touch on in a moment.

5G ARPU will be priced at ~$1000 monthly premium to Avance L5. Below, you can see Gogo is already pre-selling its 5G plans and the price gap to 4G (the Avance L5). Likewise, today’s Avance L5 has a ~$1000 ARPU premium to L3.

TAM:

Private travel is riding the strongest tailwinds in its history. The combination of rising wealth, increasing affordability, and Covid “challenges” for the commercial aviation history has created record demand for OEMs and charter services. 

The US has ~220,000 general aviation planes, the majority of which are too small to carry a Gogo system. Very small prop planes are generally too small to physically handle the antennas, so the addressable market starts at turboprops and small jets and goes up to personal 747s. Within that 220,000, there are ~24,000 US “Business Aviation” planes that make up Gogo’s current TAM:

• 10,000 turboprops

• 7,000 light jets

• 3,000 mid-sized jets

• 4,000 heavy jets

It is worth noting that Gogo is making headway toward smaller form factors that work at lower altitudes. It recently signed a deal with Cirrus for its very small “Personal Jet” airplane that moves it into even smaller bodies. While I do not assume Gogo cracks that GA market, it’s possible.

Another 14,000 BA planes are international. International is largely untapped, as there is no pervasive ATG system and expensive, bulky satellite systems have a naturally smaller TAM. While Gogo’s service does not currently address international, that could change with the advent of LEOs (see LEO section below), which would open up new markets to Gogo.

The existing domestic fleet of 24,000 planes is ~35% penetrated with wifi. I was shocked to learn it was that low - most planes in the sky are more than ten years old and the need for connectivity was lower. As that need is changing, it is driving a surge in aftermarket installations. 

Historically, Gogo’s business was evenly split between OEM and aftermarket. However, the surge in in-flight connectivity demand can only be met gradually by OEMs, who can only build so many planes per year. That same demand is more readily met in the aftermarket, where Gogo’s business is exploding: today, aftermarket represents closer to 60%. Keep in mind that the OEM business is also historically strong today, it’s just that aftermarket is even stronger.

This is a razor / razorblade model: practically speaking, winning the equipment installation locks the customer in for the life of the plane. Depending on what you select, the cost of equipment is ~$50,000 (Avance L3) to $220,000 (Avance L5 with 5G) plus ~$50,000 to install. While Gogo’s average monthly ARPU is ~$3,300 (Classic is lower, then Avance L3, then Avance L5), it varies a great deal by service level (and within service level by the size of your data plan). 

New Gogo Classic ATG systems are not actively sold, but many thousands are installed. These provide everything from simple talk and text support to a light internet experience that supports browsing and email, but with limited speeds. Gogo’s sales focus is on its Avance systems. As a software-based onboard operating system, Avance can be updated remotely, reducing down time. It also is flexible enough to allow customers to upgrade and downgrade plans and features seamlessly. The Avance system will also run Gogo’s 5G and, if Gogo partners with a LEO partner, Avance would be the operating system for that as well.

Today, a much higher percentage of new planes that come off the OEM assembly line are attaching WiFi. I believe that from now through eternity, that attach rate with increase toward 100%. Likewise, the existing fleet is undergoing a secular upgrade “cycle” that will last until virtually all planes have connectivity built-in.

Gogo is THE winner in the space, with ~90% domestic market share. 

It is in the midst of a 5G upgrade cycle that will increase speeds by 5x and should conclude in the second half of this year. That upgrade spend will conclude and Gogo’s operations will reveal massive cash flow and its new, higher performance tier will drive high margin service revenue growth for years to come.

Some Numbers:

Gogo typically sells out a month or two in advance. As of two months ago, Gogo was sold out through June of this year. When it announces Q4 earnings later this month, I expect Gogo will report that it is nearly sold out through Q3 (with additional sales all the way into 2023) 

It guided to $325 to $335 million of revenue for 2021 and EBITDA of $140 to $145 million. I believe it will come in at the high end and guide to 15% to 20% growth for 2022 (though margins may be slightly lower as it spends on its 5G buildout).

Service revenue will end 2021 with a runrate of ~$280 million. Incremental Service revenue has a contribution margin that is well above Gogo’s blended EBITDA margin of 40-45% - over 70%. As it continues to add 600+ planes per year (all Avance) while also upgrading Classic ATGs to Avance (and L5s to 5G), it has the opportunity to drive service revenue well into the high teens or low 20s over the next several years, at very high margins (and service revenue will become a larger and larger percentage of the total pie, pulling up blended margins).

Gogo ended Q3 with $133 million of cash and $713 million TL due 2028 L+375 (75 bps floor) as well as $103 million of convertible debt, which will convert to 18 million shares of equity, upon its maturity in May (barring a cash payoff, which would double as a share buyback).

With 128 million FD shares at $13.00 = $1.66 billion market cap

Net debt (ex-convert) of $580 million

Enterprise Value = $2.25 billion

2021 EBITDA of $145 million

Net Debt / EBITDA = 4.0x

My Guesstimates (informed by company guidance) for the next few years:

2023 Revenue: $460 million

2023 Service Revenue: $395 million

2023 EBITDA: $205 million

2023 eFCF: $130 million

Net Debt: $380 million

EV: $2.05 billion

EV/2023 EBITDA 10x

P/eFCF: 11.2x

2025 Revenue: $620 million

2023 Service Revenue: $535 million

2023 EBITDA: $275 million

2023 eFCF: $200 million

Net Debt: $30 million

EV: $1.7 billion

EV/2025 EBITDA: 6.2x

P/eFCF: 5.7x

A company growing double digits with a deeply entrenched and committed customer base and strong free cash flow should not trade at 6x FCF in 2025. Can it trade at 15 or 20x? Easily.

Summary:

• Business Aviation tailwinds

• Dominant domestic market share in BA

• Secular penetration opportunity (penetrating new and aftermarket)

• Upgrade cycle (customers upgrade from older, slower platforms to higher ARPU faster platforms)

• 5G upgrade expenses and CapEx peaking and will decline in the second half of 2022

• Recurring high-margin service revenue

• Sold out into Q3 leading indicating strong volume growth

• 2023 will bring “capital allocation” optionality as FCF expands

• Concentrated, motivated owner base

• GTCR (private equity firm) largest owner: ~25% FD

• CEO Oakleigh Thorn next largest owner: ~20% FD

• Line of sight on the companies stated long-term goals:

• 2023 FCF: $125 million: 11x FCF

• 2025 FCF: $200 million:

• Ongoing CapEx after the 5G upgrade will be in the $15-20 million range

Following the risk section below, I include an Appendix with detail on:

• Customer base

• Competition and LEO Threat or Opportunity

• 2020 and 2021 Recapitalization

Risks:

• 5G buildout doesn’t go as planned

• Things that are bad for The 1% are bad for Gogo

• LEOs are not an opportunity, but are a threat (see below on LEOs)

• SmartSky takes substantial share (see below on SmartSky)

• SmartSky asserts IP infringement by Gogo

• Takeunder by GTCR. I believe this is very unlikely, but a takeout that shortchanges us of the more fulsome 3 to 5 year opportunity is quite plausible

APPENDIX:

Customer Base:

Concentration:

• Top 10 customers are 20% of revenue. 6,300 planes across 4,000 customers

By Flight Count:

• Fractionals: 15% (e.g. NetJets, WheelsUp) 

• Charter Services: 15%

• 70% Corporate and Owner Operated

Huge demand and growth in fractionals and charters - flight counts for those are +40% over 2019 as of late-2021.

Corporate and owner-operator are coming back from Covid shock, but slower. Global and international corporates weren't flying at in the immediate aftermath of Covid 2020. However, flight hours as of late-2021 were +14% over 2019.

Today, about 35% of eligible domestic BA planes have inflight WiFi. Gogo projects that will be 45% by 2025. At the current pace, that penetration may happen sooner. 

In ten years, I struggle to believe anyone is going to buy a multi-million dollar plane and not install inflight connectivity. Gogo stands to be a primary beneficiary of that trend.

OEMs historically built 600 planes a year. Many of those would go international. Of those in the US - call it half - about 50% of those take a Gogo system. That OEM number is being pushed to capacity, ramping to 800-900 last year (2021) and higher in 2022. WiFi attach rates are growing with it.

Competition:

There are two primary forms of competitor: 

1. Satellite (geosynchronous - big satellites that blanket large areas. Viasat, Intellset, and Inmarsat dominate. 

2. SmartSky (a yet-to-be operational ATG competitor). 

Geosynchronous satellite: 

• Geosynchonous satellites are currently Gogo’s biggest competitors. Practically speaking, they are Gogo’s only competitors. These are the Viasat and Intelsats of the world. They are 22,000 miles into outer space and orbit the earth in “sync” with our spin, such that they stay in position relative to their target area. The combination of distance and the need to leverage a massive satellite investment across millions of customers limits the performance, but they can cover broad swaths of the world. 

• Geosync solutions are much larger antennas and have monthly costs that are multiples of Gogo

• As a result, while Gogo competes with Geosats for some large planes, it is often a dual source solution where Gogo is used domestically and the Geosat for global travel. It actually partners with Inmarsat and Iridium to offer packaged service for global business jets.

• Viasat and Inmarsat agreed to merge in late-2021.While the merger will make a competitor larger, it also reduces competition (and creates operational distractions in the meantime).

SmartSky ATG:

SmartSky has been developing a competing ATG network for years and years, utilizing unlicensed spectrum. It has burned cash (having raised over $400 million since 2012) and missed deadlines repeatedly. However, it just concluded a meaningful private round and claims to be mere months from finally commercially launching its product. It asserts it has dozens of potential clients “ready to go” once it launches. When it launches, it won’t have full nationwide coverage, but expects to fill in the gaps in short order.

SmartSky is advertising its speeds will be 5-15 mbps down. That would be slightly better than Gogo’s existing Avance product, which is 2-8 mbps. However, Gogo is launching 5G, which it expects to average 25 mbps with lower latency and peak speeds near 75 mbps. 

Gogo argues that almost nobody will want to pay a slightly higher price to get nominal speed improvements from a company that has no track record, no support network, no brand, a weak economic profile, no OEM relationships, etc. Further, Gogo’s pending 5G product is dramatically better than SmartSky’s hypothetical product. If you’d pay the extra few hundred dollars a month for SmartSky, you’d almost certainly prefer Gogo 5G.

SmartSky’s rebuttal is (paraphrasing), “we have over 200 patents, including many key patents on how to use ATG with unlicensed spectrum. We haven’t seen the Gogo 5G technology yet, but believe it may have to infringe on our IP to work. In the meantime, we are coming out with a product that is comparable or better than Gogo’s existing 4G product.”

Gogo says its technology does not infringe and SmartSky’s insinuations are confirmation that SS doesn’t have a network product response.

At this point, it’s unknowable. In the meantime, Gogo is full steam ahead with its 5G buildout.

As I discussed above, there are nine different BA OEMs that produce 28 different BA jets - Gogo is line fit on 27 of the 28 as a customer option. SmartSky will have no OEM relationships for at least the next few years.

To be installed in the after-market requires an STC (supplemental type certificate) issued by the FAA. STCs are required to modify the plane. Given antennas impact the exterior of the plane and the inflight system requires the installer to open up the interior and pull wiring and install a box, an STC is required. Each MRO must get an STC on each plane type for each type of Gogo equipment (Classic, Avance, 5G, etc.). This requires time and money. It’s not especially onerous, but it adds friction to the process for would-be competitors. MROs prefer working with Gogo, as the most recognized and established brand in the industry. 

For the moment, SmartSky remains a competitor in name only. Even if we assume SmartSky is quite successful and captures 100 planes per year, the tailwinds in the industry allow Gogo ample opportunity to hit its long-term targets.

LEO - Threat or Opportunity?: 

Low Earth Orbit satellites or LEOs are a renewed phenomenon powered by the reduced cost of satellite launches that SpaceX has ushered in. Those in the Cable/Telco industry will know that Elon Musk’s Starlink (owned by SpaceX) is blanketing the sky with thousands of these small, asynchronous satellites, creating a mesh internet in the sky. Starlink offers internet speeds that compete with the lower end of cable tiers and are generally better to DSL - call it 85 mbps down and 20 up (this is with very low customer density and have been deteriorating gradually, but Musk claims he can double these over time). OneWeb (owned by UK gov’t), Telesat (Canada), Starlink (SpaceX), and Amazon are all planning LEO constellations. Some of the geosynchronous players, like Viasat, are also talking about LEOs down the road. Many of the key opportunities for LEO broadband penetration will be in underdevloped areas outside the US and in rural/underserved areas within the US.

Conceptually, LEOs can also offer internet to airplanes - that type of speed could be very attractive to anyone who has sat watching their Delta Gogo spin and spin. While Business Aviation Gogo is a much better product than its old commercial Gogo, it is inferior to a LEO doing 100 down x 25 up. 

While that may imply LEO is a threat to Gogo, Oakleigh insists LEO is more of an opportunity than a threat. Gogo’s view is it already owns relationships with the dealers, MROs, and end-users. For Gogo, designing, getting approval, attaching a LEO antenna to the plane, and wiring it into Gogo’s existing Avance technology all play to Gogo’s strengths. Adding LEO as an option via Gogo is a simpler, lower-cost solution than someone who needs to stand-up a dedicated LEO BA business. In this way, Gogo could become a MVNO of sorts to LEO providers who compete to sell high margin excess bandwidth to Gogo. 

LEOs will have just completed massive buildout spends. Keep in mind that the BA service revenue TAM is perhaps $500 million per year - a pittance compared to consumer broadband. Setting up a sales and service organization dedicated to private aviation for a small market may not be worth it if you can sell through Gogo. Might a Gogo MVNO relationship provide a rapid get-to-revenue solution? 

Gogo management has indicated it has a roadmap to doubling its 5G speeds to 50 mbps from 25. If a LEO provides similar speeds, it needs to meet Gogo’s cost to the consumer, which will not be easy. Gogo notes that having and ATG and LEO on the same plane provides additive (rather than redundant) bandwidth, if engineered correctly. This would allow a customer to take Gogo’s ATG at 25 or 50 mbps and add LEO of another 50 mbps to simulate a 75 to 100 mbps speed.

Gogo’s big opportunity on LEO is on the 14,000 BA planes that are outside the US. LEO potentially opens that opportunity to Gogo. 

Having a comprehensive LEO network orbiting and operational combined with FAA approved, installed LEO antennas on BAs remains years away.

By the time LEOs are ready for market, Gogo is likely to have 4,000 to 5,000 Avance systems installed, including a proven 5G product. That gives Gogo a “TAM within a TAM” that is a massive competitive advantage, as its Avance system can be LEO-ready with a simple over the air software update (plus satellite antenna equipment and installation).

Intelsat Sale and Capital Structure Refinancing:

When Covid hit, Gogo still owned the Commercial Aviation (CA) business. That business basically went to zero revenue and Gogo was hemorraging cash. Its BA business also slowed dramatically, leading the company to slash costs and consider its future.

Later that year, Gogo sold its CA business to Intelsat, in addition to $400 million cash, it received a long-term minimum revenue guarantee as part of a transitions services agreement. Intelsat also provided Gogo with a $177.5 million “minimum” revenue guarantee (over a 10 year period through ~2031).

By late 2020, the BA market was recovering rapidly, and in certain parts, was posting record growth. Covid was turning into a catalyst for the wealthy to experiment with private. It turns out that once you fly private, you don’t want to go back, and the BA market has been scorching hot ever since.

The combination of Intelsat’s $400 million of cash and a suddenly strong and profitable BA business allowed Gogo to refinance an overlevered capital structure, completed in April of 2021. 

it now is FCF generative and will organically delever, as EBITDA and FCF grow. This will give Gogo capital allocation optionality it has never previously possessed. With GTCR on board at 25% ownership and CEO Oakleigh Thorn at 20%, I expect they'll keep their eyes on the prize.

Catalyst

• Ongoing beat and raise cycle

• 5G launches successfully 2H 2022 and buildout expenses and CapEx begin declining

• Recurring high-margin service revenue grows rapidly

• 2023 will bring “capital allocation” optionality as FCF expands (buyback, etc.)

• Concentrated, motivated owner base - Take private? Hopefully for $30 or more

• Line of sight on the companies stated long-term goals:

• 2023 FCF: $125 million: 11x FCF

• 2025 FCF: $200 million:

• Ongoing CapEx after the 5G upgrade will be in the $15-20 million range