Chit Chat Stocks - GoGo: A Wide Moat Stock At a Free Cash Flow Inflection? (GOGO)

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Starting point is 00:01:32 episode. Welcome to Chitchat Stocks. We have our Wednesday, I guess we're calling these the stock reports. And Brett's got one that it's an unloved internet stock. It's a name a lot of people will recognize, but it's a name that actually misleads people. And we're going to talk about why that is. And I guess I'll just break right into it. We're talking about GoGo. If you've flown anywhere in the United States commercially, I bet you've heard that name before. But before we get into some of the content and some of your research and whether or not you like the stock, how did you find this to begin with? Because this is not – now, it seems like no one cares because it's so trivial. I never hear anyone talk about it, not in a bad way.

Starting point is 00:02:30 Actually, I think that's kind of a good thing for investors. But it seems like this is off everyone's radar. So how on earth did you find this? Well, it's not entirely off everyone's radar. Back in 2022, there was a Business Breakdowns on the episode with, I should say, the CEO. So if you want to go see from the actual source, I'd probably go listen to that one first to understand better what the business actually does because it's a little bit complicated. Then come back and listen to this one. So that was at a time when the stock was a little bit popular. Yeah, go ahead, Ryan. Yeah. And I'll say the good thing about our show versus listening to the CEO speak, we'll give our candid opinions, whereas they have to be generally CEOs have to be sort of spokespeople for the company. And that's not our take care. So we're giving more analysis on the stock. 100%. But yeah, so you listen to that episode. Anything else after that? That was part of my research, for sure, because I was focusing on understanding the product,

Starting point is 00:03:31 why they're going after their certain product markets, and we'll get into what their actual products are later. But I have a tried and true investment strategy, which is looking at Valley Investors Club and seeing if things look slightly interesting, and then researching it. So there's a Valley Investors Club report put out. And then I saw a few interesting people on Twitter that cover it i believe and i forget the full handle but i think it's compound 248 who was the one that did that business breakdowns interview there's rod allsman who has been on the show before the guy that was in gamestop super early and some other things we've did a show on with him on allison transmission and then some other anonymous accounts that i saw were following so

Starting point is 00:04:15 it's like hey let's check this thing out screen's a little bit cheap and here we are okay Okay. So I'm going to need some background on this business because it seems like this was the go-go in-flight internet of the past, and that doesn't really seem to be the case anymore because I haven't really been hearing the name. I've also read your notes, so I know how this story evolves. Yeah. Let's give some financial history. How have we gotten to where we're at today? And then can you actually paint a picture of where the business is at today? Yep, exactly. So I think we're going to go through first the history of the company to understand its financial position, why they made the decisions they did. Then we're going to go into the services they offer, and then we're going to go into the services they plan to offer. So look, I'll say it right away. GoGo is not a sexy stock. We're not covering Palantir here. We're not covering the AI things. I looked, did some searches on YouTube and Spotify because I kind of try to look at what things people are titling for specific companies. And there is absolutely minimal coverage on this

Starting point is 00:05:23 company. So if we're the first time you're getting introduced to it, hopefully we provide some good value here. There's really minimal coverage in traditional financial media and even indie stuff like ourselves. So you might have a perception here that this company, especially because the ticker is still gogo so g-o-g-o for those interested you might have the perception that it's still the gogo in-flight service on commercial airlines and it's you know lackluster let's say maybe frustrating performance sometimes it doesn't work that well you have to pay a lot for it and then the fact that it's pretty easy to see that they're in a weird spot negotiating with these large airliners so it's like okay you're negotiating leverage might be poor here

Starting point is 00:06:06 If you look at the stock chart, which I pulled up, I saw that FinChat made a nice upgrade. So you can make the charts full size now. That's not bad. I was requesting that one. But the stock is down over the last 10 years. So it's been quite poor performance. They've gone through some stumbles. But if you look at that on its face, I think that's where the opportunity is provided.

Starting point is 00:06:28 Because a lot of people have let this one go. A lot of people look at it right away and say, I mean, why would I invest in go-go and flight? that's just not an interesting business and then now today there is the potential starlink competition and a narrative around that um which i think also adds an opportunity here as well because it's not as much of a competitor as people think yeah and i actually find these setups in particular really interesting because i'll be totally honest i do this too but whenever i let's say someone pitches a company to me just in passing you know whether we're over zoom or

Starting point is 00:07:08 whatever and they're like oh you know you should check out this one honestly one of the first things i do is i look up the ticker uh typically on finchat and i see the stock performance over the last five ten years and it's very easy to just omit things because they've had lackluster performance and the thought process is am i going to be different than all the other analysts that have looked at it before. They had lackluster performance. So it's kind of this wear down. People get sick of hearing the story. People get just uninterested because there's a lack of performance in the past. So I like the setup initially here, but can you give a little more background behind the business? Yeah. And for a little tease here,

Starting point is 00:07:47 as we'll get into, I think it's a high moat business. I think it's potentially a high moat business that can expand. I think it's potentially trading at a four double digit a free cash flow yield, and it has a cleaned up balance sheet, which is very important, I think, for downside protection. So let's get right into it. First, we have to discuss three major things that have happened in their history for investors to understand where they got today. So first, back in 2006, Gogo made what I'd either call a combination of smart and lucky decision to buy exclusive spectrum from the FCC for $31 million. Now you might be asking, you've probably heard the term before, what is spectrum? And I'm going to go through a full

Starting point is 00:08:30 quote here to understand this. So quote, spectrum refers to the invisible radio frequencies that wireless signals travel over. Those signals are what enable us to make calls from our mobile devices, tag our friends on Instagram, call an Uber, pull up directions to a destination, and do everything on our mobile devices. The frequencies we use for wireless are only a portion of what is called the electromagnetic spectrum. So essentially there's these different wavelengths

Starting point is 00:08:55 that you can hop on. GoGo, perhaps again, a little bit lucky, but also very fortuitous. They decided to purchase an exclusive spectrum band. So it's their own one that they can use. No one else can hop on it. And it's what internet providers like GoGo use for this. And what's interesting is that the FCC today, as we sit here in 2024, is not going to give out any new licenses for Exclusive Spectrum.

Starting point is 00:09:22 It's just too valuable today as we have the proliferation of mobile devices. So nobody can compete with GoGo directly with an Exclusive Spectrum product. And this is vital to understand because this exclusive network is what gives GoGo much more reliable internet speeds versus any. and again we haven't gotten to the actual product yet but again they're in the business jet uh you know part of the market i will try to put the pieces together in these next two sections but no one can really compete with them with these standard products in north america second thing oak thorn who is the ceo today was brought in to turn around the business in 2018 thorn and his family own over 20 of gogo stock they've owned it for a long time and a private

Starting point is 00:10:06 equity firm called GTCR. I guess the name's not relevant. Owns 25%. I think this is important because the company now has an aligned CEO who also knows the industry extremely well. And as a note, Thorne is fairly old. The PE firm has been here for a little bit. So I wouldn't be surprised if the company is successful with these two new product launches, which we'll get into next 5g and low earth orbit satellites i wouldn't be surprised if they decide to sell if they get successful launches here because this is a ceo thorn who's led two different i believe it's two different public companies in the past you know he's getting near an older age you know maybe he wants to go until you know he passes away but a lot of people would when they get to the you know

Starting point is 00:10:53 their 60s 70s that's kind of when they want to get out of the business i wouldn't be surprised if this happens um it seems like an interesting setup there and then if we go through the history the third most important thing and this is where people get the confusion on the name is back in 2020 they decided to sell their commercial operations so the one that likely all of the listeners you know maybe we have a private jet uh audience but i doubt it i think the vast majority of our listeners are the ones that have interacted with the gogo in-flight service on a commercial airline like American or Delta. They sold that in 2020 for $400 million. In hindsight, I would call this a fantastic decision because one, it infused the company with cash at the right time. Now the

Starting point is 00:11:36 balance sheet got cleaned up. We'll go through this later, but it got cleaned up. It got rid of a low quality business that was hurting them, losing money. They have to negotiate with these large airlines. It's just not a great product. And then it gave GoGo, again, the financial flexibility to invest aggressively to launch its next generation products to you know i wouldn't say catch up to the starlings of the world but prepare for new competition coming down the line and i have two charts you yeah you interject here ryan i'll interrupt here i would imagine most of our audience flies commercial but yeah i think so if you do fly private it feel free to reach out to us because i think that'd be quite valuable for advertisers so

Starting point is 00:12:21 high profile listeners so yeah if you're listening to this using gogo's services which again it might be confusing if you've never heard of this company before but i think the history is important to get out of the way because it's way better context when we go through their product suite give us some anecdotal evidence if for some reason we have a private jet audience i have these in the for the newsletter, there are two charts from our friends at FinChat. Yeah, both are from their friends at FinChat. One is long-term debt and cash and equivalents. Second is shares outstanding. So if we go from kind of the pandemic era down to today, they've taken their long-term debt from over a billion dollars, slightly over a billion down to under 600 million. And they have about

Starting point is 00:13:04 $162 million in cash and they generate pretty good cashflow, which has been lumpy because of these investments, but their EBITDA coverage is quite high. Now, their shares outstanding went up from 92 million to 128 million. So they had to dilute with some convertible notes and other stock issues. We don't have to get into the details there, but to de-lever the balance sheet and basically make the company in less of a dire financial circumstances because they were generating about potentially $100 million in profits and had a billion dollars in debt. I mean, that's super levered. I'm glad they got much, much lower here. But to do that, they had to raise their shares outstanding. But I would note, and we'll come back to this later,

Starting point is 00:13:54 they have gotten to such a comfortable financial position that they feel good buying back stock. I know it's a hard story to piece together, and I'll say that many times here, but I think that's an important history um and now we can go into the products they offer their customers today anything else ryan before we move on here no i'll just summarize because i know we uh i interjected a couple times there basically feel and feel free to correct me if i get anything wrong here bought spectrum in was it late 2000s for 31 million dollars ended up being a very valuable asset. It's impossible to buy exclusive Spectrum now from the FCC. So very valuable asset. They're still leaning on that with their new business, but their old business of commercial internet,

Starting point is 00:14:43 which was bad because there wasn't a lot of negotiating leverage with the big airlines, but it was also, we're going to talk about this here in a little bit, not as reliable of internet service. So bad in a couple of ways. They sold that after a new CEO, Oak Thorn, which sounds like a private equity firm just that name that's true private equity uh but there's a separate private equity firm that also joined so they both own a ton of the business there's a possibility here that gets bought out or something like that but the the whole story here is that they sold the business issued some shares via convertible notes made the balance sheet a little lighter in terms of the debt load and now they have a you're going to talk about it here business

Starting point is 00:15:29 jet private jet business that is really the crux of the thesis here so why don't we get into that what does gogo offer to business jet customers today be you be you sound the alarms we have a new sponsor alert that's firmreturns.com it's a stock research blog our friend runs that and it has covers companies from all around the globe but it leans really more towards the uk as that's home market and it gives him easier access to management and he provides ongoing updates on the companies that he's invested in as well as an archive of longer form write-ups that you can access all for free there is a paid tier but there is tons of free content out there and these reports are very thorough to give you an example of just how thorough some of these are at one

Starting point is 00:16:17 point he was digging into a company's account and for one company he wrote up recently he actually managed to find a material misstatement that had been missed by the auditors and management reached out and confirmed the error to him. And these are companies of all different sizes from all different sectors and all different markets around the globe, both a focus on his home market in the United Kingdom. If you want to check this out, firmreturns.com, like I said, tons of free content on the website. If you're interested in one of the paid plans, you can go to firmreturns.com slash chitchat. That's firmreturns.com slash chitchat, and it'll get you 20% off. okay and one clarification thorn has been on the board of directors or associated with the company

Starting point is 00:17:00 for a long time but then he was made ceo in 2018 so now he's directly leading the business that's the one clarification i'd have and i think it's important for listeners because that's one thing we look at for a 10-year stock chart that's down in the dumps we we're looking for a change in management team because if the same management team is there why should we trust them but yeah let's go through what they offer today. So with this exclusive spectrum, now that they've sold a commercial business, they focus primarily on serving private jets with internet service in North America. So how does this work? They outfit cell towers across North America with antennas that BMX exclusive spectrum into the sky. So it's on, well, I'm sure I'm using the wrong technical

Starting point is 00:17:42 terms, but essentially they're setting up their internet service. And then they make with the legacy product interlocking say cones of connectivity as that's how that's how thorn describes it and when you're a jet you have an antenna on it and then you connect with that spectrum so it's basically like wi-fi but at extremely long distances or i guess it's like cell phone mobile you know mobile data services but for a private jet to a cell tower i think you're doing just fine uh describing these but just so everyone knows brett is our resident engineer here at the chit chat stocks team not electronics but somewhere in the field the uh yeah and we'll have to stop saying that in a few years because i'm gonna forget all my all my

Starting point is 00:18:31 knowledge i learned in college but let's keep moving on i think what's something that people will understand is internet speed so with these existing solutions i'll call them you know there's two sets of customers there's legacy and then there's ones that have what they call avance a-v-a-n-c-e now avance is important as their new equipment software setup so the legacy customers they have a what they call a 3g 4g solution from these cell towers again this is on the exclusive spectrum and they have fairly slow internet let's say 10 megabits per second and below for anyone not fluent in megabits per second which i guess we kind of are because we have to confirm that to record these podcasts remotely you know this would be fine for a phone call messaging sending

Starting point is 00:19:18 email you know possibly doing some other work but you know this call right now that we're doing over video video chatting impossible streaming video impossible streaming something like youtube would be impossible. So it's internet, but not access to the full modern internet. And from an investor perspective, I'd say the legacy products, it's a valuable service for these private jet customers because it's the best that's offered out there today, at least for the majority of them. But it's one that can be greatly enhanced if we can get speeds that are improved to what you can get in your household right now, which would be closer to 100 megabits per second or higher. AVANCE customers just mean ones that have the modern equipment they have on the aircraft

Starting point is 00:20:05 that the company, they call it AVANCE. It just can make better higher speed connections to its existing network. And importantly, AVANCE equipment is what is going to allow an existing customer to upgrade to 5G with minimal additional equipment. So it's more of a flexible system. It's going to connect potentially to their low earth orbit satellite network too um you know since 5g hasn't launched yet i would say the avance customers are not fully how would i say benefiting from this yet but the other thing i'd add here is if you just heard i think maybe people have heard the pitch before like oh once 5g you know once 5g is around it's going to be a huge upsell or there's going to be some value adding. It feels like maybe this is

Starting point is 00:20:56 theoretical that they've got this Avance business that could come down the pipe. Most, well, not most, you're about to get to this. So spoiler alert, but they have a lot of their business jet customers are already equipped with this Avance technology. So it's more a matter of wed not if and it's not like they have this whole upsell that they have to do to their entire customer base they've already got some potential revenue upgrades that they already have there right and again so this is in north america and they have the equipment there they just have to get the 5g network um you know through their partners they have a chip partner they have some manufacturing partners and we'll get to the delays and all that all that stuff later for anyone that

Starting point is 00:21:45 falls to stock but they have to get that network up and running and then they can just hook these people up to that which we're getting a little bit ahead of ourselves but yes that is important note to make at the end of 2023 gogo had 7205 so let's say just over 7000 aircraft using what they call atg you'll see that lingo a lot which is air to ground and that just means air which is their airplane, connecting to the ground system on the cell tower. And that's different than, say, trying to use satellite internet in the sky, which is going to be a plane connecting with a satellite that's much higher. And then within their total ATG customer base, they have just under 4,000 with their AVANCE equipment. So these are important KPIs to track. AVANCE is growing

Starting point is 00:22:36 over time as a percentage of their ATG aircraft and should probably hit 100%. At some point soon, And there is some stuff that we're really not going to get into today around the FCC helping them out because some of the legacy equipment is using Chinese telecom stuff that they don't want used anymore. And they're going to reimburse people to switch all that stuff out, which will hopefully accelerate the growth of Avance. But either way, Avance has a percentage of equipment in the aircraft is growing. It's a majority now. And it's the equipment that can, I won't say seamlessly because you don't have to do just a software update. but give an easy switch to add on to the 5G and the LEO stuff, which we'll get to later. And now I think we should talk about addressable market. It can be dangerous to talk about,

Starting point is 00:23:22 but also insightful for a company like this that is going after such a niche product. According to their Q4 call, there's an estimated 39,000 business jets in the world with just over half of them coming from the United States. Now, right now, the vast majority of their business is in the United States, or I should say North America, so United States and Canada. However, due to, say, long product life cycles and difficulty going into maintenance, where you can be in maintenance if you own a private jet for a long time, and it can cost a lot of money, you're getting actually, even though these are the wealthiest people in the world, it's it's a very slow uptake to add internet connectivity so only a small portion of these

Starting point is 00:24:10 planes actually have internet capabilities and within the market in north america that has internet connectivity gogo has a large large market share is the dominant player here i have some stats that i compiled to show the growth of gogo's private jet business i think i'll actually share these now typically we use our fincheck kpis i can share this they're a young company they got some smart people over there working like ryan that are adding new kpis for companies every day but since this is a small cap even you know on the lower end of the small cap honestly of about a billion dollars you um they don't have the kpis yet but i think uh to spin that, it took me maybe a half

Starting point is 00:24:59 hour to add these manually. But for all the companies that FinChat has, which they have over 500,000 I believe data points now, I mean, it saves me so much time. And once, they'll eventually, you know, I know you guys come out with products, or sorry,

Starting point is 00:25:15 updates like every week. Once those KPIs are there, it's going to save me so much time. And if you're doing this for multiple companies every month and dozens of companies every year, I mean... the the value speaks for itself but yeah we have uh for any of the listeners that aren't on the video i have total atg aircraft online and besides the pandemic which saw a slight down tick it's

Starting point is 00:25:41 been a steady rise up from we call it say in the 5000s to where it is today then we have their average revenue per user i'll just call it that a monthly average revenue per user has been very stable and it did dip during the pandemic i will say it's quite nice to see a test of them going through probably the worst downturn they could ever hit where everyone's like well we're not flying especially for the first few quarters there the pandemic and then the business stayed so resilient i mean their their their margin or what do we call it their high margin you know subscription revenue that they sell to these customers to not really downtick that much and recover quite quickly. And I think that was a good sign to see that this is not

Starting point is 00:26:29 something that's really easily cancelable and there's not many good replacements out there. And for existing customers, they're not like, hey, I'm not flying that much. Let's get rid of this thing. I hate it. They get a lot of value here. And the last thing I'll say when looking at um arpu is that the arpu is just under 3500 a month and once they get the 5g connectivity and the potential to add in the low earth orbit satellites i think there's good potential to raise prices consistently over the long term but we'll get to that in this next section here i mean you just think about the value or think about the customers they're servicing right who who are their typical customer well probably an executive at a big company uh or someone that runs his own

Starting point is 00:27:23 business that's very successful and anyone that's wealthy enough to fly business jets so those people this is a pretty much this is really kind of a small expense for being able to stay connected over long trips, right? And not only stay connected, but that value of being able to video stream versus just send emails is huge for those kinds of people. So I think you're right. I think there's a much higher ceiling

Starting point is 00:27:50 to the average revenue per user for this cohort of customers. And if we can get it up to, you know, from 10 megabits per second to hopefully closer to a hundred, that's a huge difference. And then I will mention, I'm going to talk about this later as well,

Starting point is 00:28:04 but the average, what do they call it, operational costs each year for a private jet is estimated to be about a million dollars. So if they're spending just under $3,500 per month on the internet service, that's a small part of the cost it takes to operate a private jet each year. And that's, again, not the actual purchase of the plane. But yeah, let's get to the next section. I guess we do the fake interview style here. So Ryan, why don't you ask the next one? what does gogo hope to offer business jet customers in the near future you've already alluded to this a bit here so go through the 5g and the low earth orbit which you've already mentioned what are these how valuable can it be okay now i think this will be the third puzzle

Starting point is 00:28:51 piece to connect everything together to understand what they offer today and then why they're going after their existing market in the future and connect all these possible pieces together. So they have two upgrades they're planning at the same time here that are hopefully launch sometime soon, which we'll get into. 5G, so GoGo 5G,

Starting point is 00:29:11 and then a low earth orbit connectivity solution. So first, GoGo 5G is an upgrade to the air to ground service on the exclusive spectrum. Again, it's still gonna be on the air to ground service on the exclusive spectrum. So it's gonna be only in North America. But it will allow customers with AVANs to seamlessly upgrade to faster internet speeds and reach modern capabilities. So this should provide customers of GoGo with a lot more value, which will give GoGo, like we mentioned earlier, room to raise prices.

Starting point is 00:29:42 The problem is, because everything sounds great here. Oh, they're just going to easily upgrade to 5G. And then they're going to raise prices. The value is going to be so much better because they can have modern internet on these jets, blah, blah, blah. But the problem is, I think this is the number one reason the stock is down so much, is that Google originally planned to launch 5G multiple years ago. I'm going to say at least two. I think the first timeline might have been three years ago, but a whole, I think at least

Starting point is 00:30:10 two years ago. So we're two years late now. There were contractor issues with designing stuff. There were chip supply issues. so they have to design a 5g chip and they're not going to be the top of the line you know apple comes first dips right they they don't have that many chips they need and they're a niche product so when there was the chip shortage they're just not going to be the first customer to get out to out the door here and then a lot of the other stuff frankly gets confusing they talk about

Starting point is 00:30:41 you know delays in the supply chain getting the systems up and running a supplier dispute blah blah, blah, blah. And I think investors, analysts, and myself from reading this for the first time got confused, frustrated with management because they just delay, delay, delay. However, and I hope this take doesn't age poorly. It apparently has nothing to do with the technology, but just getting the damn network up and running. And I guess I should say, yeah, you go ahead, Ryan? Earlier in the show, you heard us talk about the investing platform, public.com. That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract. NerdWallet recently gave public five out of five stars for options

Starting point is 00:31:27 trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. U.S. members only. Finchat.io is the complete stock research platform for fundamental investors. They have all the standard financial data on more than 100,000 stocks globally. And beyond that, they have company-specific segment and KPI data on more than 1,500 stocks. So to give some examples here, you want to see Netflix's average revenue per member over the last 10 years? They've got it. You like to track YouTube's advertising revenue? They've got that too. If you want to

Starting point is 00:32:10 see Celsius's revenue that comes from Costco, how much of their revenue comes from Costco. They also have that. So the breadth of FinChat segment and KPI data truly is one of a kind. I use FinChat every day to track and manage all my investments. I also use it to discover new investments. And if you want to get 15% off any paid plan, go to FinChat.io slash chitchat. That's finchat.io slash chitchat to get 15% off any paid plan. The link will also be in our show notes. As you're reading through this, did it feel to you like management was hiding anything? Like there were problems here getting 5G launched that were

Starting point is 00:32:58 maybe harder to solve than they were telling to investors. I think they're honest. And one thing is because Thorne owns, his family owns over 20% of the business. So I don't think they want to be known as liars here. If you go back and read the transcript or listen to the business breakdowns, one from 2022, they talk about planning to launch later that year. And then it ends up that we're going to be two years later than that, hopefully you know hopefully doesn't get delayed more and he was talking about it how like they've already i don't want to say proven it technologically because they actually have to get the system there and then see if it works in real life but i don't think

Starting point is 00:33:40 i think they maybe they were misled by some of their subcontractors and they were frustrated about that but they basically set up their timeline and i think investors should just take it with a grain of salt that it could be delayed again but they're i think they're trying as best they can to get out the door okay follow-up question when 5g is launched is this an instant thing is this something that all right automatically all the customers with avance tech are able to we're able to offer that to them instantly or is it like a gradual rollout okay i hope i get this right but i think there's just a new small wire they have to put in or like a new something to add to some of the advanced equipment now they have been selling pre-selling

Starting point is 00:34:25 i believe the 5g upgrade already on some of these advanced solutions so there's if someone looks at this company there's going to be equipment revenue and service revenue equipment revenue they sell essentially close to cost they're just trying to get the equipment in the door it's kind of expensive for their customers to get it and then they're going to make money selling them subscriptions every year for the for the wireless internet services i wish i had the exact notes for you, but I believe it's a fairly easy fix or not fix, excuse me, upgrade. Some of the customers already have it and they're doing some pre-sales on this here, but it should be much cheaper than either A, putting the original Avance equipment in because that's a big uptake that you're either

Starting point is 00:35:07 only going to do if you're an original equipment manufacturer. So getting a new plan out the door or you have a big maintenance period and you say, okay, I'm spending all this money putting this private jet you know fixing it let's add this internet stuff in as well and let's see what else would you say this is similar to like is there an element of this that's like similar to sirius xm where they're working with the oems or the manufacturers themselves and trying to be yes integrated in that selling to them before they've even sold to a customer kind of thing yes a bit although i think it's different because there's a lot more customization

Starting point is 00:35:52 it's like if you're selling um sirius xm only to ferraris and lamborghinis right and bentley's because of the the premium end of the market but i will say so it's an easier upgrade right and then it's also a much easier upgrade compared to if a competing 5g solution comes out which will one be a non-exclusive spectrum or someone wants to go to their own um or a different low earth orbit thing which we'll talk about here so you can either upgrade to 5g or you can tear everything out and put a whole new solution which will take you way more which is as we'll get to i think means they have a high switching cost but as we move on from 5g we need to talk about go go galileo which is their low earth orbit solution and this one hasn't launched

Starting point is 00:36:44 either i would say that uh it hasn't been delayed maybe yet but they say everything's on track they're not building since that's it's way too expensive for them to do as a smaller company they're not building their own low earth orbit solution they're doing one with the one web constellation and one web is say a starlink type competitor um they're building what they call a low earth orbit satellite and let me just talk about the difference between low earth orbit and high ones so starlink kind of disrupted and one one web are disrupting the market because instead of putting the internet connected satellites the old ones are like 20 000 miles in the air and then they can cover the whole globe with one or maybe even a couple i might be getting the

Starting point is 00:37:33 technical details right but they can cover the whole globe with internet connection but it's super far away so the latency you know it's a little bit buggy you're not going to get just like you are in your home or with a wired solution but these low earth orbit what you might call just even a mesh network that starlink built that amazon's building that one web is built here they allow better connection and they allow global coverage with pretty high speeds so say i think they're shooting for 50 100 megabits per second but we don't know for sure yet and how that works so gogo is going to partner with them one web and then they can offer once this launches high or decently high internet speeds for business jets not just in north america

Starting point is 00:38:19 but everywhere. So this opens up a greenfield opportunity for them to go after the entire 40,000 business jet market around the world. And then as a note here, which I think gives them even a slight advantage versus everyone else, is when customers are flying over North America, they will be able to double up if you have LEO and GoGo 5G and have both at the same time, which gives them extremely strong speeds if you can get their existing customers to add both these on and again like gogo 5g the avance customers with that equipment will be able to as this is what the company says so i want to i want them to prove it you know that's i think part of the skepticism here and why the stock's down so much they need to prove it but they're

Starting point is 00:39:02 supposed to seamlessly upgrade and be able to add on these services and hopefully raise our poo with minimal chance to um get disrupted by by a competitor okay i think that covers the low Earth Orbit, 5G, the new offerings that are coming. Let's talk about the financial situation because we haven't really mentioned that a whole lot today. Where do they sit financially? Just go through whatever you think are the most important numbers to contextualize this for listeners. Okay. I have three charts here. First is GoGo Gross Profit. And if you just look at it on an aggregator like our friends at FinChat, it will show you the numbers they generated, but it's going to be a bit, say, misleading into their current business situation because it

Starting point is 00:39:51 doesn't take into account getting out the commercial operations. So if we look at 2018 to 2023, their gross profit has grown a little bit. And you also have COVID, which gave them, say, one bad year, and they had to kind of reset their growth projections there because a lot of things got paused. But when you look at the gross profit, and you can look at that top line number, you go, they're not really growing that much. But again, remember that they've had these hiccups. They decided to get rid of the commercial aviation business, and they've had COVID. So if you look at the actual cash flow now, they went from before Thorne came into play, and especially after they sold the commercial aviation business and got out of COVID,

Starting point is 00:40:38 They went from, and if I'm looking at the chart correctly here, 2014 free cash flow negative, 2015 free cash flow negative, 2016, 2017, 2018 free cash flow negative. If we go 2021, 2022, 2023, they were generating over $50 million in free cash flow each of those years with slightly higher operating cash flow as well. So I think the business has proven that getting rid of commercial is smart and that the existing go-go business jet business is, I know that's hard to say, but that segment is strong, which is basically the entire business right now. and we can see that with their go-go business service revenue which is again just kind of excluding the equipment revenue and then i went back and just made that you know took that the segment when they also had the commercial operations and i made my own chart and it's grown excluding covid at a steady rate since 2019 it's just ticked up and up and up they've added new jets they've upgraded them to the new way advanced stuff they've raised prices consistently

Starting point is 00:41:53 and what's interesting about this is you have a fixed cost on your network now they're adding more fixed costs with 5g and with the leo stuff but you have a fixed cost and then the every customer you add here or every incremental incremental dollar of business service revenue is going to be very high margin so they're adding 70 75 80 gross margin so i think that's going to really help with the cashflow inflection here. Anything else I wanted to add here? Okay. Yeah. From the balance sheet today, they basically just have one term loan. It's coming down as a number, or excuse me, as a nominal amount. It went from 2022 to from 714 million to the end of 2023, they had 607 million outstanding on their term loan facility. That is a variable rate loan.

Starting point is 00:42:44 They have some hedges in place, but they have $140 million in cash in the balance sheet. The current interest expense is about $33 million, and the term loan, I think, is not due until 2028. I don't really have any concerns about this balance sheet anymore, and I would expect them to keep continuing paying down debt, because that's what they've done. They're generating positive cash flow now and they're doing so much, or I wouldn't say it's that much, but they're generating a positive cash flow now

Starting point is 00:43:24 where they can pay back debt and repurchase stocks. So they're going to lower that interest expense, de-lever the balance sheet every more and hopefully start reducing shares outstanding. Okay, I think that covers it pretty well. Let's talk about the competition Because you mentioned that this new business, the business jet business, which from here on out, let's simplify it. Let's call it the private jet business, so it sounds a little better.

Starting point is 00:43:51 Private jet business. Do you think this is a good business? Do you think they have a moat here? Yeah, I think if you look at the competitive positioning and you look at that and how they've been able to spend themselves, their giant market share, and also the fact, you know, where they sit in the value chain. I think it's a perfect example of what, and a lot of investors talk about this, but who I learned it from is John Hempton, I believe it's a hedge fund, but either way, investment fund manager, about having a highly valuable service

Starting point is 00:44:27 that's a low part or low cost of the total outcome. But if you take it out, people would be very upset. So that gives you a lot of pricing power. So to reiterate, they have virtually zero competition, and specifically, they can't have any competition for an exclusive ATG network competitor in North America because nobody else has access to exclusive spectrum. And I would expect this to continue as long as they're using this network. Now, there is a risk that maybe the FCC says, sorry, we changed the rules.

Starting point is 00:44:58 We're taking this away. But I don't think they would do that without reimbursing them in some way. You know, some companies have tried to go out with unlicensed spectrum, but that will inherently have a worse product because when you're over a big city, there's just a ton of interference and it just makes the product quality much, much worse. Now, the competition, I don't think there's any worry about a copycat, right? But the competition that I think investors are worried about today are the other satellite providers, most notably Starlink. So that's the narrative out there. and it it's it's a bit of a competition competition and potentially a decent competitive threat uh if starlink tries to focus on this market but i'm gonna go through some reasons why

Starting point is 00:45:47 i think gogo can defend itself and why it doesn't really matter if starlink goes after this market because there's room for both players to win and why starlink probably won't even choose to go after this niche market. Historically, we had the long-range satellites that were competing with GoGo. Now, these are satellites that, as I mentioned, are 20,000 miles away from Earth

Starting point is 00:46:10 and they blast internet connectivity all around the world. They require very expensive equipment, both on the satellite front, so the satellite's very expensive, and then sizable equipment on your plane. It's only usable for larger jets, which have huge budgets, and

Starting point is 00:46:27 you could be paying $15,000, $20,000 a month here. So it's only going to be the ones that have the global jet setters that have the giant, I don't know what it's called, the biggest Gulf streams, whatever you would call it. Now, a low Earth orbit constellation like Starlink, and the one that, again, the GoGo is making with OneWeb, solves some of these issues. It has better latency, it has better global coverage. We've even seen Musk himself, the CEO of SpaceX, which owns Starlink. He set up a prototype on his own private jet, which apparently works. But the problem is these low Earth orbit networks at the moment still require typically a Starlink, a larger piece

Starting point is 00:47:13 of equipment on the aircraft, which is only going to work for the bigger private jets. So that's the way Starlink is set up today. That's like what they can sell to a customer. so that's not going to work with a lot of what gogo targets with its existing customers with you know kind of the smaller antennas and the way starlink is prospecting it is i think it's going to cost at least ten thousand dollars a month rumored to maybe be twenty five thousand dollars a month so much more expensive than gogo for a reason so gogo wins out on price versus starlink and then you add on that they're going to have basically the same product from a low earth orbit perspective when they launch on one web and get the you know the

Starting point is 00:47:57 avance connectivity up so if you add on you know in north america um i know it gets a little bit confusing here but you have essentially the same product from starlink from a connectivity perspective you have how would you call it um you know worse equipment costs and when you look at avance with the existing equipment that gogo has within the planes there's not if they were going to switch to a starlink or any other competitor that hops up like a kuiper that would take such a large switching cost to get the equivalent product and then if you're in north america you're probably going to have a worse product because no one can connect with the air-to-ground solution that, excuse me, the air-to-ground and LEO combination that GoGo will potentially have.

Starting point is 00:48:52 So I think that gives them major competitive advantage, major cost switching, and they have the regulation stuff as well. So I really find it hard to believe that many customers outside of the largest jets that don't have AVANs already will choose Starlink instead of GoGo. Because if you're an existing avian user it doesn't make any sense from a time spent perspective cost or speed to switch however however this is if and perhaps the only if any investor needs to ask 5g and leo um the low earth orbit one web stuff launches smoothly they get these out the door i i would also note that i doubt spacex really cares about a few hundred million dollars in revenue from a small niche of this industry either. They're going after the broad market audience. They're

Starting point is 00:49:42 actually going after commercial airlines now, which is probably great that GoGo sold that business today. So I think they will succeed in defending this moat and will likely expand it in the future. Anything to add on there, Ryan? No, I think it makes a lot of sense that GoGo is somewhat insulated from competition here. It doesn't seem like it'd be worthwhile for Starlink to go after this market. They'd have to steal a lot of customers that already have technology and a good service from GoGo, and they'd probably have to win on price.

Starting point is 00:50:14 So I think it'd be a difficult business for them to enter given that they have so many other opportunities in their wheelhouse. So I think they're fairly insulated. And this isn't like... Yes, part of the thesis here is that 5G rollout is successful. but this is already a successful business at some level right they are the leading market

Starting point is 00:50:41 share provider i believe in north america for private jet internet connectivity so they're winning this market it's just the potential to improve the business here with the rollout of 5g and it's already a business that does i think you had the numbers there at like 300 million in gross profit and pretty much 60 to 70 million dollars in free cash flow every year for the last three years so i think they're in a good spot yeah and we'll talk about free cash flow this year we'll be it's going to be low if 5g rolls out but those are some one-time expenses and these last few years there have also been some one-time startup expenses uh or maybe not even one time but just some some expenses around 5g and the leo stuff that is not getting

Starting point is 00:51:24 any revenue today just because they're putting in those development costs. And I will say with Starlink and other competitors for these low-Earth orbit networks is that there is plenty of green field opportunity on a global basis to go after new private jet customers with these, and both can win. But the key is, is I think GoGo is in a highly defensible position from its existing North American core. Now, the other thing that attracts me and makes me think this is a high quality business is that this is a business that is a relatively low cost product in the value chain with strong negotiating leverage. So this is how I think it adds up. Gogo is the best and only product, or excuse me, only reliable product in North America. Operational costs on a private

Starting point is 00:52:09 jet can be estimated to be around $1 million a year. I guess that's depending on how much you fly. Now a customer's annual budget, let's say whether they're a business or an individual, is going to be in the millions of dollars per year. These are the highest spenders in the world. Now, GoGo today costs around $3,000 a month. So it's not something that these spenders, these customers are going to notice if they went, okay, now we have 5G. We're going to raise your price to $5,000 a month. I don't think they would care. They probably won't even notice, at least most of them. And unlike with the commercial business, they're negotiating with each customer instead of an entire airline, which gives them better pricing power.

Starting point is 00:52:54 Now, one note I should make is, yeah, they are negotiating with the NetJets of the world, and people might be like, hey, well, how do they relate here? But these companies are not going to go to anyone else except GoGo because they have clearly the best and really only product that works seamlessly across North America. And importantly, NetJets has worked with GoGo for 20 years and just signed a 10-year contract extension that will keep them with GoGo and bring on 5G and LEO upgrades over time. So I think that was really nice to know because that's not a huge portion of the private jet market, but a sizable one and one that's growing. So long story short, as a small piece of a customer's budget, now it would be a big piece

Starting point is 00:53:41 for me, it'd be a big piece for Ryan, but a small piece of the private jet customer's budget, GoGo's internet services have strong pricing power. And I think if they launch 5G and LEO successfully, I think they could raise prices at 5% indefinitely and see minimal churn from the existing customers. Because what are they going to do? Are they going to switch and spend all that money on these switching costs to go to a competing solution that's probably not going to be even better?

Starting point is 00:54:08 I don't see why they would do that. No, no, I understand that. Let's talk about the cash flow inflection here that you think could happen um obviously if things go well i imagine this is a more profitable business so why don't you just speak to the uh upside potential here yeah so you know building two new products at the same time is expensive revenue growth is also slowed down because you know customers are waiting for the upgrades but you know you also have the combination of kind of these one-time startup expenses that are, you know, where we have slowing revenue growth,

Starting point is 00:54:45 rising expenses. So that's because we're about to get these new products out the door. So in 2024, the company is expecting to generate just $20 million to $40 million in free cash flow if their 5G timeline works out. However, in 2025, they expect to generate $150 million to $200 million in free cash flow if both products launch on time. This will couple with steady double-digit revenue growth for the next five years. And again, that's what management is saying. So you have to be maybe a little bit cynical, put your own spin on it, put your own analysis on it. But let me read a quote from the recent commerce call. So we recently updated our long-term model, which reflects the launch of GoGo 5G and Galileo in the fourth quarter of 2024

Starting point is 00:55:28 and the build-out of the LTE network and associated customer conversion related to the FCC reimbursement. We expect revenue growth at a compound annual growth rate of approximately 15% to 17% from 2023 through 2028. And Galileo contributing to revenue beginning in 2025, we expect to free cash flow in the range of $150 million to $200 million in 2025. So to add things up, and we're not talking about FCC reimbursements today, which they might get, they might not, don't want to talk about it. they're expecting cash flow to convert to $150 to $200 million. And at our current market cap

Starting point is 00:56:05 at about a billion, EV is about 1.6. I mean, you can clearly see how that looks cheap. A few things attract me here though. The company's legacy business is still strong, generates positive free cash flow, and is virtually impossible to disrupt. And then on top of this, we have a potential for cash flow to inflect higher, which I really don't think is priced into the stock. And I think there's just a potential to expand the moat here. If you have the 5G in North America, plus the LEO stuff that goes around the world, I think the moat would be quite strong, especially if they can get more and more people onto the Avant system. And I don't really see why they won't because they already have the best product in North America, which

Starting point is 00:56:49 is the core private jet market sorry i was on mute there the i the valuation certainly seems attractive if things if they really are generating 150 million to 200 million dollars free cash flow on a 1.6 billion dollar enterprise value i think you can make the math pretty simple there you've a free cashflow of like eight times, there's a lot they can do with that money, right? However, a lot of the thesis here is management and whether or not you trust them. So what are your overall thoughts? Do you think this is a management team that not only is honest, but can actually execute on everything that they're talking about? Yeah. So I will say to remind listeners that we have, at least me and I think Ryan too,

Starting point is 00:57:42 have three criteria for looking at business. One, it has to be cheap. Two, we have to trust management. Three, you have to think the business is decently high quality. I like this management team. Thor knows this business well. He's been there a long time. I don't think he's a consultant robot. He has a lot of skin in the game with his family office. He's aligned with shareholder interest. Now, this part's qualitative, but I think he cares about creating shareholder value over the long term and getting this thing right. I think he cares about that, which at the end of the game is important because there's some people I think are just in there as mercenaries in some companies and some that they're actually in it to try to be successful and not just make money and

Starting point is 00:58:25 then get out of there. Now, one benefit, I think, or maybe a downside if you think there's much more upside here is that Thorne has sold companies in the past. There is a large PE firm here, private equity, and I think they could decide to sell the business if the stock goes up by a good amount and if they get things right with 5g and low earth orbit you know that would be good for a nice 2x 3x gain no complaints there but that could cap some further upside and i also like i mean i like that they sold commercial aviation that i think that was a smart move but i also like recently that they decided to repurchase stock i mean you have i want to use the term outsider it's a cliche but i think they're showing that they're sharp operators and understand

Starting point is 00:59:05 and are smart about the capital allocation part of the business. Okay. I think we've touched on pretty much everything. Do you want to give any more numbers as to the valuation and why you think shares are cheap? Yeah. And I have the question here, will I buy shares? Which I don't know if we're going to toss that in the title, but I always want to put that at the end here because the point isn't about whether Ryan and I are adding something to our portfolio. It's about doing the analysis and then you make the decision for yourself. I will clarify there are some technical stuff to this business that I may or may not have gotten wrong here. If you're someone that follows

Starting point is 00:59:44 the company for a long, long time, let me know if I got anything wrong. But I think I generally got everything right here. But is the stock cheap? I haven't done it yet. And I'm going to wait until a couple of days after this episode releases because we just want to follow standard trading guidelines, but I think I will be buying shares of GoGo stock. Like Ryan mentioned, $1.6 billion EV could generate $200 million in free cash flow. I think free cash flow can grow from there because of the incremental margins of the service business. That would be a 12.5% free cash flow yield on the enterprise value and probably close to 20% or higher on the market cap. Now, what this means is, with the fact that they're repurchasing stock, is that either they're going to retire their entire shares outstanding, or the stock will eventually rip higher. I like these situations. And I also think there's a nice secular growth story here. Business jet usage should continue to grow. And then even if business jet usage stalls out at its current rate, I think it is highly likely and almost guaranteed that in 10 years, most jets will have internet connectivity.

Starting point is 01:00:57 And I can also, I wouldn't guarantee it, but a higher portion will have connectivity in 10 years than they will today. And I think that's a nice secular tailwind that they'll benefit over the long term. And then the downside, I think is somewhat limited. I mean, the existing operations generate cash, they can pay down debt, they can still return cash to shareholders. And this thing doesn't blow up if they don't watch 5G and LEO on this proper timeline. If it takes maybe a quarter or two more, they'll still be okay. What attracts me compared to, say, a couple years ago, even though the stock hasn't gone up that much,

Starting point is 01:01:36 is that we've eliminated a lot of permanent loss risk because they've cleaned up this balance sheet. Okay. What do you think could go wrong here? What are the risks you're watching out for? Yeah, so the two things... that i'm looking at are that one there's a technological innovation piece that i think creates some you know level of uncertainty you have a lot of people researching

Starting point is 01:02:10 you know satellite internet providers starlink amazon i don't know how to quantify this i don't know how risky it is to have some new technological breakthrough but it's in a business where there's a ton of r&d or excuse me a sector that has a ton of r&d i think if someone makes some sort of breakthrough it makes it much easier to get internet onto planes hey you know their product offering is not it's just not you know the value proposition is not there anymore now i don't think that's going to happen anytime soon but that would you know open it up to competitive pressures road pricing power all that good stuff then the second one is that 5g keeps getting delayed i mean leo uh hasn't been delayed yet maybe it will but if

Starting point is 01:02:59 5g hasn't launched yet maybe they can't get it right maybe they don't have it that that could happen here but that's all i have and we're closing right in on an hour so then we can wrap things up ryan unless you have anything else no i think judging by your research i would guess that 5g delays kind of feel like the biggest risk here again and just maybe increased capex or something like that which might end up hurting the free cash flow here in the short term but i think that is going to do it so i haven't done the disclosure in a while so i hope this goes well but this is the chit chat stocks podcast anything we say here on chit chat stocks is not formal advice or recommendation we may be buying selling trading stocks that are discussed on this podcast

Starting point is 01:03:50 today or some point in the future. So please don't take anything as financial advice. Did I miss anything there, Brett? I don't think so. Yeah. We might hold them right now as you're listening and we might buy them or sell them in the future. With that, that's going to do it. I think we're talking about, do we have a stock decided for next week? We don't have a specific stock, but we'll figure it out. We got a fun schedule coming up we have a confirmed interview at tobacco nicotine update with devin lasar over at invariant so that'll be a fun one uh but besides that nothing nothing confirmed all right well that's gonna do it see you guys next time i gotta pee

Starting point is 01:04:49 Thank you.

Chit Chat Stocks - GoGo: A Wide Moat Stock At a Free Cash Flow Inflection? (GOGO)

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