Gogo has finally decided to strut its stuff, by filing an S-1 with the SEC in preparation for a potential IPO early next year. However, it needs to put on a very good performance over the next couple of years if this IPO is going to be successful.
The filing reveals some interesting statistics about the company, and highlights just how wrong most analyst forecasts for the passenger communications market have been. Bizarrely, the S-1 quotes Forrester projections that “in-flight internet usage is expected to increase rapidly over the next five years, from approximately 15.6 million North American sessions in 2011 to 96.9 million by 2015″ when the company knows that the 2011 number is simply wrong – Gogo (which had over 90% of usage in 2011) had “provided more than 15 million Gogo sessions” since its inception by the end of September, and previously stated at the beginning of this year that it had reached 10 million sessions, after the success of the free promotion with Google late last year (which itself generated 3 million sessions in 6 weeks). As a result, the total number of sessions in 2011 (when there hasn’t been the same level of promotional activity) across all providers in North America is certainly well below 10 million and more likely close to half the level estimated by Forrester. In fact the total number of sessions (free and paid) might be no higher in 2011 than in 2010 because of the distorting effect of the free promotion last year.
Perhaps one reason for quoting Forrester is that the other widely cited analyst projection (by InStat in October 2011) is even further off the map (one person deeply involved in the industry said to me that he “didn’t know what they had been smoking”), with InStat noting that “take rates have increased significantly, moving from an average of 4% in 2010 up to 7% in 2011” (contradicted by Gogo’s actual numbers showing no more than ~4% take rate in 2011) and that “in-flight Wi-Fi revenue is expected to grow from about $225 million in 2011 to over $1.5 billion in 2015” (again miles away from Gogo’s passenger revenues of $58M in the first 9 months of 2011).
However, now we have the public S-1 filing, perhaps some of these erroneous forecasts will come back down to Earth. The key data in the S-1 shows that current take rates are only about 4%, with users spending an average of $10 to $10.50 per flight, implying a severe (but unsurprising) skew towards laptop use on long flights (charged at $12.95). A survey (strangely citing data from 2009) showed that the average Gogo user had taken 14.2 domestic business flights in the last 12 months, indicating exactly as Connexion-by-Boeing found in 2006, that it is frequent business travelers who pay for in-flight WiFi and rarely anyone else. Of course, only about 10%-15% of airline passengers fly this frequently on business, so it is hardly surprising that current usage levels are so low (especially once very short flights are taken into account). It is also unsurprising that the service is dominated by repeat users (15 million sessions from 4.4 million unique users – and some of these unique users may have only used the service in late 2010, when free access attracted 2 million users in 6 weeks).
What is critical for the future growth of Gogo is therefore its ability to expand usage dramatically amongst leisure travelers and more occasional business travelers. The key statistic to watch is the average revenue per passenger, which has climbed from $0.32 in 2010 to $0.41 in the first 9 months of 2011. It would be useful to see in the roadshow how much of this growth is due to new leisure users (as opposed to growing awareness after major fleetwide rollouts were completed in 2010), e.g. by looking at the trajectory on Virgin America (which had fleetwide availability very early) and by examining more recent data on the average number of annual flights taken by a Gogo user.
If the average revenue per passenger (ARPP) only grows to say $0.50, because paid usage remains limited to frequent business travelers, then it will be hard for Gogo to generate more than about $100M in EBITDA by 2015, but if ARPP grows to say $1.00, then EBITDA could grow to ~$200M, due to the nearly fixed cost base of the ground-based system (airlines receive about a 15% revenue share at present, though this payment might be on a tiered system so could increase in the future if usage is higher). Clearly, to have a successful IPO at a value not less than the $500M invested to date, Gogo therefore needs to demonstrate convincingly how its ARPP can more than double within 2-3 years, which can only happen by achieving much greater take-up amongst leisure and occasional business travelers.