All really great flying adventures begin at dawn.”― Stephen Coonts.
Today, we put Gogo Inc. (NASDAQ:GOGO) in the spotlight as the shares are reeling after the company delivered its second quarter earnings report and significantly reduced forward guidance for FY2023. Is the selloff overdone? An analysis follows in the paragraphs below.
Company Overview:
Gogo Inc. is headquartered just outside of Denver in Broomfield, CO. The company has a simple operational model as it provides broadband connectivity services to the aviation industry in the United States and internationally. The platform the company operates to enable this connectivity includes networks, antennas, and airborne equipment and software. Gogo, Inc. is the largest provider of broadband connectivity services for the business aviation market it should be noted. With the post-earnings pullback, the stock trades under $13.00 a share and has an approximate market capitalization of $1.8 billion.
Second Quarter Results:
The company reported second quarter numbers early Monday. Revenues rose 5.5% on a year-over-year basis to $103.2 million, which was in line with the consensus. GAAP earnings per share came in at 67 cents a share, more than 50 cents a share above expectations. However, 48 cents a share of this “beat” was due to a one-time income tax benefit.
Most revenue growth came from services that were up eight percent to $79.1 million while equipment revenue went up only two percent to $24.2 million. Planes in service increase six percent to 7,064 from the same period a year ago.
Management then updated its forward guidance for FY2023. Leadership still sees adjusted EBITDA of $150 million to $160 million for the year, which remain unchanged. However, they reduced their projection of free cash flow to $60 million to $70 million from $80 million to $90 million previously. Total revenue is now seen in the $410 million to $420 million from prior estimates of $440 million to $455 million. The midpoint of the new range was nearly $25 million below the consensus that existed prior to today’s revised guidance. This was a key driver in the selloff in the stock following the earnings announcement.
Longer term, management sees revenue growing 15% to 17% on average annually through FY2027. It did slash its estimation of free cash flow in FY2025 from $200 million to $150 million, without the effect of the FCC program.
Analyst Commentary & Balance Sheet:
After the company’s first quarter report, Raymond James, Northland Securities ($16 price target) and Morgan Stanley ($15 price target) all reissued Hold/Neutral ratings on the stock. Roth MKM was the lone analyst firm in the bullish camp, reiterating a Buy rating and $22 price target.
There has been no insider activity in the shares for more than a year now. Just under eight percent of the outstanding float in the shares are currently held short. The company ended the second quarter with just over $95 million in cash and marketable securities on its balance sheet. While second quarter EPS beat expectations, cash flow metrics were concerning. The company generated cash from operations of $15.6 million, a steep fall from the $26.4 million GoGo generated in 2Q2022. Free cash flow also fell from $15.5 million the same period a year ago to $13.3 million. The company had just under $700 million worth of long-term debt as of the end of the first quarter.
Verdict:
Gogo Inc. made 71 cents a share of profit in FY2022 on just under $405 million of sales. Prior to its recent quarterly reports, the analyst firm consensus was calling for 59 cents a share in earnings in FY2023 on revenue growth in the high single digits and 73 cents a share of earnings on just 10% sales growth in FY2024.
The company’s key priorities are to “take advantage of new technologies like 5G, LEO satellite and LTE to deliver order-of-magnitude improvements in network speed and coverage for GoGo’s customers, grow their addressable market by 50%, and strengthen our competitive position.”
Unfortunately, this is going to require a two-year investment cycle and these investments will not start to pay off until FY2025. The company also just announced it is delaying its 5G launch plans at the end of July due “to a design error in a non-5G component of its chip that was designed by a third-party subcontractor.” This will push back the rollout of its GoGo 5G network to the middle of next year.
Many investors are not known for their patience, and with recurring earnings likely to be down in the low to mid-teens this year and as the stock trades at over 18 times trailing earnings, further downside could lie ahead. I would expect some Hold reiterations this week from analyst firms based on management’s reduced guidance for FY2023. If the shares pulled back to the $10 to $11 range, that seems a more appropriate time to start to accumulate shares in GoGo. The company does seem to have some solid longer-term growth opportunities and is profitable.
Some might claim that like the secret of flying is missing the ground, the secret to immortality is simply not dying.“― Christina Engela.
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