Boingo Wireless has been written up previously by hack731 in 2011. Even though I feel the author did a decent job articulating the investment points, I decided to also write up the idea because I feel the stock is even more undervalued now and from my research I believe the market misunderstands the growth potential of the Wi-Fi story. Using conservative assumptions, I value Boingo 32 % more than the current stock price plus investors get a fee call option on other high growth areas of the business.

“We saw significant contributions from our strategic growth opportunities and continue to believe that we've turned the corner and that the headwinds of 2012 and 2013 are behind us.” David Hagan, CEO 1^st 2014 Quarter Conference call

Investment Thesis

As more people use streaming media services like Netflix and Hulu, share their lives on sites like Facebook and Istragram and desire to constantly stay connected to email and text, the growth in data will continue to grow exponentially. Cellular network capacity constraints are forcing major telecom companies to spend hundreds of millions of dollars to increase the capacity of cellular networks. According to Cisco, the growth in data traffic will grow 18x by 2017. Wi-Fi technology is being used to compliment LTE cellular networks in certain areas to relieve network congestion. Further, the capabilities of Hotspot 2.0 will seamlessly allow data traffic to be seamlessly carried via Wi-Fi networks. Boingo Wireless will greatly benefit as more data flows, via roaming and data offloading agreements, through its global network of over 800,000 hotspots including 75 managed and operating airports worldwide as well as 17 venues comprising 7,300 live DAS nodes. In addition, the company will continue to grow its Wi-Fi network through its DAS (digital antenna system) installation business as telecom companies utilize DAS to densify the cellular networks to increase capacity. As these catalysts develop, I see Boingo’s revenue growth accelerating, attracting more growth investors into the stock. Further, the rally can be quick and quite sizable given the illiquidity from the low share count, limited float and the 6% short interest.

Background

Boingo is a busted Venture Capital backed IPO from 2011. The company was taken public by NEA Partners and Mitsui after the company made several airport hotspot acquisitions.  In May 2011, the company was taken public at $13.50 and hasn’t seen that price since and trades at essentially half that price at $6.80. Back then, company sold day passes to travelers so they could log onto the internet since smartphones on 4G cell networks were yet mainstream. This “retail” business is very high margin and there was little competition in the airports it served.

There are 4 main divisions of the company, Retail, Subscriptions, Wholesale and Advertising.

Retail (9% of revenue) The Retail segment is comprised of day passes ($8 per day) sold to travelers or people with a one off need to access the internet. The margins are on this business are roughly 60% so it is a very profitable business for Boingo.

Subscriptions (32% of revenue) Currently, the company has 296,000 subscribers paying $8 a month to access Boingo’s portfolio of 800,000 hotspots. This segment represents 32% of revenue and has 50% margins.

Wholesale (47% of revenue) The wholesale segment is comprised of DAS infrastructure, Wi-Fi networks and roaming agreements from large telecom carriers. DAS is basically a magnifier for areas with low or no cell signal. The Wi-Fi networks are the same as described in the retail section above but the revenue in the whole area is revenue for managing and operating the Wi-Fi network for the venues. Lastly, roaming agreements are deals with national telecom companies to provide usage fees to allow its customers to access the Wi-Fi network.

Advertising (12% of revenue) Boingo generates revenues from running sponsored promotions from clients that want to reach visitors to the landing pages of managed and operated networks.

Data Growth

The excitement around data offloading comes from the telecoms having trouble keeping up with the explosive growth of data traffic due to the popularity of video streaming and use of smartphones/tablets. According to Cisco, global mobile data traffic grew 81 percent in 2013 reaching 1.5 exabytes per month at the end of 2013, up from 820 petabytes per month at the end of 2012. By 2018, monthly traffic is expected to reach 15 exabytes. Over half a billion mobile devices were added in 2013, totaling 7 billion globally, smartphones represented just 21 percent of total mobile devices but 88 percent of mobile data traffic. Further in 2013, the number of mobile-connected tablets increased 220% to 92 million, each tablet generated 2.6x more traffic than the average smartphone. As more and more people carry smartphones and use tablets, increased demand is put onto the cellular network. Complicating the issue is the data demand peaks at various times of the day especially in high traffic areas like airports, stadiums etc. Because the data traffic is not constant, Wi-Fi offers a cheaper way to act as a “reserve tank” to better handle the short bursts of usage. Currently, the 4 major telecos are creating partnerships with major Wi-Fi providers to begin to offload data traffic.

Hotspot 2.0

One drawback from offloading to Wi-Fi is each device needs to be manually configured to join the Wi-Fi network. In 1999, a group of technology companies joined forces to create the Wi-Fi Alliance to help make seamless Wi-Fi connection a reality. The Wi-Fi Alliance created Hotspot 2.0, which is a technology used to seamlessly connect devices to Wi-Fi networks. In 2013, major mobile technology manufacturers incorporated Passpoint enabled capabilities into the latest smartphones to allow the seamless connection to occur. All Apple iPhones and iPad (models iPhone 4 and iPad 2 and newer) come with the capabilities as well as Samsung Galaxy S4s. Further, all users that upgrade to Apple’s IOS 7 operating system will have the technology. The reason why Hotspot 2.0 is so important is it makes offloading virtually seamless to Wi-Fi users. The devices automatically switch from cell network to Wi-Fi automatically without the antiquated manual authentication process. Even your grandparents will be able to access the free Wi-Fi networks at any Next Generation Hotspot (NGH), a hotspot with a Passpoint certified hardware.

Distributed Antenna Systems (DAS)

Text messages use the least amount of bandwidth, voice a little more and data uses the most. For example, one text message is 35KB and a social media post is 250KB while one minute of streaming video or app/song download is 3-4MB, or 100x more data used in a text message. As more apps rely on data and consumers stream, DAS becomes more important. As of late, there is a land grab going on to implement (DAS) into venues like stadiums, college campuses, healthcare facilities and concert halls. Attendees want to share the experience with friends and family at home so they stream video or pictures and send via their cellphones. In addition, die hard sports fans want to record and share plays, stats and other footage while attending live games. This has caught the attention of venue owners and DAS systems are being used to provide the best internet experience while at the event. Boingo is a leader in implementing DAS networks and is using this demand for DAS to further grow its Wi-Fi network. The way the DAS contracts work is the carriers pay for the expensive capital expenditures as well as pay a 8-10 year recurring fee to manage the network. In most contacts, Boingo can also hang a Wi-Fi signal in the venue to increase the size of its hotspot network. Mobile Experts forecasts DAS nodes deployed will double from 2013 to 2016. According to Joe Madden, Principal Analyst at Mobile Experts “Multiple operators in North America are doubling or tripling their DAS spending plans”

Boingo has had great success winning new DAS contracts and the number of DAS nodes has been growing nicely over the past 3 years. As reported by the company, Boingo manages and operates 17 DAS locations comprising 7,300 nodes, up 30% over 2012 (5,600) and 40% over 2012 count (4,600). The number of nodes can be thought of as a proxy for revenue has more data can be passed through a larger number of nodes.

There is still a lot of low hanging fruit for Boingo to capture. In the US, there are 4,100 colleges and universities, 1,100 shopping malls as well as 2,000 Hospitals. For example, the NFL is forcing all 32 teams to meet certain thresholds for Wi-Fi and cellular connection by the end of the 2014 season and only half of the NFL’s stadiums have implemented Wi-Fi capability. On May 1, 2014, Mobile Experts published a report that estimates in-building DAS could be a $10B a year opportunity by 2018. Below is a sample of Boingo’s recently announced contracts:

DAS announcements

• University of Houston (40,000 fans)
• John Wayne Airport (+9 million passengers annually)
• Energy Solutions Arena (20,000 fans)
• Air Force Academy Falcon Stadium (50,000 seating capacity)
• Dubai Airport (66 million passengers annually)
• Village of Rosemont (75,000 daily)
• Sao Paulo (35 million passengers annually)
• University of Arizona stadium (56,000 fans)
• Pinnacle Bank Arena (15,300 fans)
• Dallas Love Field (expanded)

Variable Rate Contracts

Boingo has been updating network usage contracts with its partners to switch from a fixed-user pricing format to a variable, price per megabyte, format. Going forward, Boingo will make less revenue in the short-term as less data is currently being passed through the network but as data usage continues to grow and when the telecos start to offload traffic onto Boingo’s network, revenue from wholesale segment should take off.

Airports

Boingo started in and is most commonly known for being the leader in providing Wi-Fi access in airports. Currently, Boingo provides Wi-Fi capabilities in 75 airports globally, which represent over 40% of global flight passengers. In 2013, the company acquired it largest competitor, Advanced Wireless Group (AWG), adding 17 additional airports. This is material in two ways. First AWG was consistently underpricing new contracts to win deals even if the contract was unprofitable. This was taking away new contracts that Boingo should have won. Second, Boingo has almost half of the world’s largest airport traffic which gives it leverage to win new contracts and also attract new travelers as paying, monthly subscribers. It is important to note the structure of the airport contacts is migrating from a paid service to a tiered pricing format. Tiered pricing means after watching a 30 second commercial, the first 30-45 minutes of internet access is free to check email or “light” internet surfing. The service is subsidized by sponsors in the form of advertising. After the initial free period, the users have to pay to use the service. Obliviously, the announcement to move to tiered pricing was a negative for Boingo’s Retail Single-Use business. The Retail segment has gone from $16m in revenue in 2011 to $10m in 2013 making it Boingo’s smallest reporting segment. As more airports move to a tiered model, the Retail Single-Use revenue should be under pressure. That being said, the segment has held up quite well recently decreasing just $305k or 12% in the first quarter 2014. Further, users are not able to stream content so if they want to watch a movie while waiting for a delayed flight, they have to pay. The user can stream on their cellphone or 3G iPad but it will use up a lot of data on the new capped data plan.

In response to the trend to move to tiered pricing, management decided to bring the advertising business in-house to recoup the lost revenue. Using conservative assumptions, the advertising business should end up contributing in more revenue than was lost.

Advertising

In 2011, the company made a small acquisition of Cloud 9, a Wi-Fi advertising company. Today, the advertising business is generating $12.3m in revenue and growing rapidly, up 80% in 2013. As a number of airports have moved to tiered pricing, the level of connects as exploded. (Boingo discloses the number of users that access the network each period) In 2013, connects were 50.8m, up 107% versus 2012 and 313% over 2011. This bodes well for the advertising business and I expect this trend to continue as more airports move to tiered pricing and venues are added to the network via the DAS business.

Bolt-On Acquisitions

In 2013, Boingo acquired Eudeka, for $16m, a provider of Wi-Fi, VoIP and IPTV on Military bases.

After several contract wins, the relationship has grown to include 300,000 beds for Army, Air Force and Marine bases around the world. The company is heavily investing in the business to get the networks up and operational by the second half of 2014. Boingo has mentioned it plans to invest $200 per bed into the project and it will comprise 35,000 Wi-Fi access points.

It is too early to know the financial results for this investment and the company is slowly giving out more information. I am modeling a revenue run rate of $21m and a payback period of 3-4 years (given by the company), which is roughly 50% gross margins and penetration of 20%. It is too early to tell but I think this business will be a good investment given the high return on investment (ROI) of 36% even assuming low penetration levels (20%).

Possible partnerships

On the recent 4^th quarter earnings call, management hinted at possible further partnerships.

Regarding your other question on Facebook, Google, and others, I think as we talked about in the past, we think there's obviously a lot of interest in the marketplace about Wi-Fi and using it in many different ways. And, we've had a lot of discussions with Internet companies like Facebook and Google, with OEMs, who you could certainly name, we did a deal with Samsung that we announced last quarter. There's a lot of activity in that area, and we remain bullish that there is some interesting partnerships available to us, but obviously nothing to announce today on this call.

Two possible relationships I foresee are with the cable companies (MSOs) and with the aviation in-flight providers. The cable companies are battling increased churn due to “cable cutting” as consumers are canceling cable TV to watch over their broadband connection. The cable MSOs have been silently accumulating a portfolio of Wi-Fi hotspots and offering free access as part of the bundle service. For example, several cable companies have joined forces to share hotspots. The CableWi-Fi Alliance was formed by Time Warner, Xfinity (Comcast) ,Brighthouse, Cox and Optimum to create a portfolio of 100,000 hotspots in major cities. Just recently, the number of hotspots was increased to 200,000 so it is growing fast. I see a possible partnership for Boingo to offer its hotspots (most in very dense and populated areas) to the CableWifi Alliance, creating a new large revenue source.

Cablevision, which is included in the CableWifi Alliance through its Optimum brand, is also dedicating a lot of capital and resources to growing its Wi-Fi hotspot count. In addition to growing through connecting individual subscriber’s home wi-fi units, Cablevision is also competing to obtain large, outdoor contracts like the New Jersey transit stations and New York City Parks.

I also can see Boingo partnering with Gogo to share networks. Access to Boingo’s airport terminal hotspots would allow Gogo customers to stream or use the internet past the free period prior to boarding a flight, creating additional incentive to purchase Gogo’s in-flight service.

Sell-Side Research

The company is well covered by large sell-side firms like Credit Suisse, Deutsche Bank, William Blair, DA Davidson and Ladenburg Thalmann. One would think the company would be properly valued with so many analysts following the stock. In reality, the Analysts that cover Boingo also cover much larger, high profile companies like Facebook, Amazon and Google. For example, Stepehn Ju at Credit Suisse 32 internet names including the FB, AMZN and Google not to mention, EXPE, EBAY and YELP. Rarely are there more than two analysts on an earnings conference call. Boingo gets no attention.

Financial Picture

Currently the stock is trading for $6.80, which is 7.2x Enterprise Value/LTM EBITDA (after adjusting for the military business investment)

Valuation

Since management is investing heavily into the military business resulting in reduced profitability, I used a sum of the parts analysis to value the different segments of the company. I will only give value to the DAS business, Advertising and the monthly subscribers and assume everything else is worth zero. I do not give any value to the possibility of data offload, the newly announced DAS contracts and the military business. From my analysis, Below, I get to $9.40 a share.

• DAS Contracts- $6.08 per share

A lion share of my valuation comes from the DAS contracts the company has. I get to my valuation by using the price per node Crown Castle (CCI) paid for NextG Networks in late 2011. If you’re unfamiliar with the acquisition, CCI paid $1 Billion for NextG, a provider of outdoor DAS systems. At the time of acquisition, NextG had 7,000 nodes mostly in universities, college campus and other outdoor areas like the French Quarters in New Orleans. In addition, there were 1,500 nodes under construction. Using the price per node of $117,647 I value Boingo’s DAS business at $858m. I think that’s a bit aggressive because NextG lays its own fiber and Boingo contacts with the venue owners for long-term (7-10 years) contracts to manage and operate the DAS network. I applied a 75% discount and use a value of $29,411 per node, valuing Boingo’s DAS business at $215m. It is important to note I did not give credit to nodes under construction and Boingo announced it has signed up more DAS venues in Q1 2014 than all of 2013.

• Advertising- $2.08 per share

Boingo’s Advertising business reported $12.4m in Revenue in 2013, up 81% over 2012. I value the business using the total airport traffic Boingo says pass through their 75 managed and operated airports on an annual basis and apply revenues to mobile traffic. Boingo states 1.4B passengers travel through their airports. I’ll assume 15% use the mostly free Wi-Fi access. With Hotspot2.0 this number should increase over time. I also assume Boingo charges advertisers $50 per 1000 video impressions, which is the typical mobile advertising rate. Using these assumptions, I calculate the Advertising business can generate $21m in revenues. If I assume a 35% operating margin and 12x multiple, I value the business at $73m.

• Subscriptions - $.40 per share

A much smaller part of the valuation comes from the monthly subscribers. The valued the subscriptions using a basic customer lifetime value formula. On the 4^thquarter conference call, management stated the churn increased from 10% to 12% because of increased promotional activity. The reason the value of these subscribers is relatively low ($50 per sub) is because the churn is so high (10-12% per month).

• Excess cash- $.85 per share

The company currently has $50m in cash and marketable securities on the balance sheet. I assume $30m in excess cash given the 20+% EBITDA margins but needs some money for working capital to finish the build of the military business. It is important to note, since a lot of Boingo’s business in recurring in nature, the use of leverage could be used to fund capital expenditures.

Conclusion

From my analysis I find Boingo to be a cheap, misunderstood company with a changing business model resulting in an underpriced stock. As telecom companies, tower companies and cable companies continue to investment in DAS and Wi-Fi to better handle the explosive growth in mobile data consumed, I think Boingo has a strong tailwind at its back and is a likely acquisition target.