Can Investors Go Far with Boingo?

By Tom Gibbs - June 7, 2012 | Tickers: AAPL, T, WIFI, KO, HPQ | 0 Comments

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The Problem

Alongside the rise in popularity of mobile consumer electronic devices including smartphones, tablets, e-readers, and laptops has also come the surge in the use of data intensive applications.  Consumers are now playing more games, streaming more high-resolution videos, downloading more apps, and sending more emails than ever before, and as such mobile data consumption is expected to increase exponentially (27x) over the next three years (source: Cisco Visual Networking Index). 

The continued adoption, growth, and advancements of smartphones, especially from popular models including the iPhone, will continue to be catalysts for the acceleration of high speed and high bandwidth mobile Internet usage.  To put things into perspective, not only does the average smartphone user generate ten times the amount of data traffic as the average non-smartphone user, but the average Apple (NASDAQ: AAPL) iPhone user utilizes five to ten times more data per month than the average smartphone user (source: Nielsen).  With Apple increasing the rate that it pushes these phones out – it sold more than 72 million over the past half year – it will be increasingly difficult for consumers to enjoy higher speed and higher bandwidth service in high-density locations.

The Solution

Network operators like AT&T (NYSE: T) have rapidly expanded their capacity and have invested in technologies including 3G and 4G cell networks in anticipation for the 35% CAGR growth in the number of phone-based mobile broadband subscribers (1.1 billion by 2014, source: Infonetics). 

Although the investment is necessary to handle the surge in data usage over the short run, it is not a long-term strategy that is capable of meeting the long-term data usage demand.  To ease the strain, network operators have also invested in Wi-Fi and other technologies to offload users from the cell network.  The strategy works best in dense areas including high-traffic facilities (i.e. airports, etc.). 

AT&T, for instance, is working with and investing heavily in the Dallas/Fort Worth International Airport to give customers a free option for Wi-Fi usage.  By this September, domestic and international travelers routed through the airport will have the opportunity to access 40 minutes of free Wi-Fi in exchange for viewing a 30 second advertisement.  Such sponsored Wi-Fi service is sprouting up everywhere, and half of the nation’s busiest airports – including Denver, Las Vegas, San Francisco, Phoenix, and Houston – have already initiated such programs.

As service providers and venue management teams increasingly realize that Wi-Fi not only provides higher speed and higher bandwidth per user in high-density locations, but is also simpler and less expensive to deploy than additional network capacity. Therefore such Wi-Fi services will surge in popularity. 

The Opportunity

There is no better tangible evidence of such a statement than the historical financial performance of Boingo Wireless (NASDAQ: WIFI).  Boingo, which manages and operates Wi-Fi networks in airports, stadiums, malls, quick-serve restaurants, and other retail spaces, currently has more than 500,000 strategic Wi-Fi locations in over 100 countries worldwide.  The corporation generates revenue from several different sources:

• Individual Users: Comprise around half of Boingo’s revenues through the purchase of month-to-month subscription plans that automatically renew, or hotspot specific single-use access networks.  Such a subscription fee runs for less than $8 per month, and users can find available hotspots via Boingo’s downloadable app. 
• Partners: Pay usage-based network access and software licensing fees to allow customers access to the network.  Likewise, telecom operators pay build-out and access fees so that their cell customers may use Boingo’s distributed antenna system at locations where the corporation manages and operates Wi-Fi networks.
• Advertising: Boingo also sells display advertising on its website and on the front page of its downloadable app.   The corporation has many blue-chip advertising partners including Coca-Cola (NYSE: KO), Hewlett-Packard (NYSE: HPQ), and 3M.

This multi-pronged revenue approach has proved to be accretive to the growth of Boingo’s business.  Between 2008 and 2011, the corporation grew revenues at a 18.6% CAGR while simultaneously expanding EBITDA margins by large degree.

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The Expectations

Boingo is growing at a swift rate, and has recently announced several new projects that should lift the spirits of the market (the stock has fallen nearly 30% since its March $13+/share high).

• Agreement with Denver International Airport to provide Wi-Fi services for passengers
• Agreement to manage and operate public Wi-Fi access at U.S. Cellular Field, the home of the Chicago White Sox
• Agreement with transit wireless for the company to manage and operate Wi-Fi networks for the NYC subway system
• Agreement for launch of Wi-Fi services at Phuket International Airport, one of the busiest airports in the region and one that is currently undergoing a huge expansion and renovation to handle more traffic throughout the 2010s. 

Due to the corporation’s multi-pronged revenue-generating strategy, Boingo has several different effective ways to continue its growth in the future.  As such, the recent pull back in shares may present a purchase opportunity when looking closer at analyst expectations for the corporation.  Average analyst revenue growth projections call for near 20% increases for both 2012 and 2013, and the average price target for Boingo is back near its March high of around $13.  Credit Suisse has an “Outperform” rating on the company, with a $14/share price target.  Such price targets imply a very attractive 37% - 48% potential upside.

Boingo, which has $2.64 per diluted share in cash/equivalents (~30% of purchase price), also has reconfirmed its 2012 outlook for $110.5 -$114.5 million in revenues and $35.5 - $38.5 million EBITDA.  Subtracting out the corporation’s large cash pile, its enterprise multiple based on 2012’s expected EBITDA is 6.5x on the low end.  Not too expensive for a company that will continue to grow revenues at close to 20% per year for the foreseeable future. 

Boingo is not without its faults, however.  Potential investors interested in looking further into the corporation’s performance should be aware of several key points.

1. The rate of subscriber growth is slowing.  Total subscriber growth grew at a 51.4% CAGR between 2008 and 2011, and the growth rate in the latest year (2011 vs. 2010) was only 28.5%. 
2. As Boingo grows, it is attracting fewer core customers – i.e. those who will use the service faithfully and are willing to pay attractive subscription-based fees (as opposed to single use).  The corporation announced 8 million individual service connects in 2011, for 31 connects per subscriber.  This compares with 66 connects per subscriber in 2008.  This reconfirms the single use theory.
3. Boingo customer churn is rather high.  Although churn has fallen from 10.7% per month in 2008 to 9.2% per month in 2011, the corporation still needs to replace a large portion of its customer base to keep top line growth strong.  This, once again, brings up the question of the type of customers Boingo is attracting.  It appears that an increasing number of single-use, as opposed to subscription-based customers, are using the service.  Although these customers still provide top line growth, they are not as profitable as monthly subscribers because it costs more per user to attract them to the service.
4. The corporation’s advertising revenues, although they are only a small piece of its total pie, are falling fast.  Q1 2012 advertising revenues of $726,000 (3% of total revenues) compare with $1,050,000 (5% of revenues) for the same quarter in 2011.  The precipitous 30+% drop may imply an inherent weakness in the consumer demand for the system that advertisers have uncovered.

Despite the potential weaknesses in Boingo’s operations (which any interested investor should undoubtedly study in greater detail), there can be no question that the corporation offers a potentially lucrative investment opportunity.  The recent pull back in shares may present an attractive entry point for a corporation that is addressing, solving, and monetizing a legitimate issue that is directly tied to the sales volume of some of the world’s most popular consumer electronics today.   

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