Friday, March 2, 2012

Boingo Wireless ( Nasdaq - WIFI ) -- Captain Data Crunch

Boingo Wireless (WIFI $9.50) reported excellent Q4 results, higher than what we estimated.  Earnings (excluding the customary non cash charges) increased 5x to $.10 a share.  Sales widened by 21% to $25.9 million.  Boingo is the leading provider of private WIFI networks.  The company also sells subscriptions to individuals so they can access the company's affiliates around the world.  Those deals price out around $8-$10 a month and let mobile phone, tablet, and laptop users access more than 425,000 WIFI hotspots that otherwise would be off-limits because they required a password.  Revenues are divided about 50%-50%.  The private network market is growing faster at the moment.  Boingo is building WIFI networks for restaurant chains, arenas, shopping malls, and other consumer oriented facilities.  Every deal is different.  Boingo itself collects income based on traffic volume.  Sometimes the facility pays the freight, allowing its customers to use the WIFI without charge.  Other times users have to pay a fee of some kind.

Growth is accelerating because the cell phone companies can't keep up with demand.  Back in the old days most operators thought they were minting money by selling unlimited data access at $25 a month.  Now that video downloads are becoming more widespread, that equation no longer solves.  Limits are being applied, driving customers to free non-cell WIFI networks.  Those networks aren't actually free, of course.  Starbucks or whatever provider it is has to pay Boingo for the cost of delivering the goods, plus a profit.  But the incremental cost is acceptable and the trend is likely to continue.

Bigger gains are possible if the mobile carriers sign explicit deals with Boingo.  Up to this point it's all been pretty loosey goosey.  But most cell phone companies are getting swamped with data traffic.  Deep packet inspection companies like Allot Communications are enabling them to implement more profitable pricing models.  Boingo is likely to benefit, as well, by keeping the networks going.

We estimate 2012 fully taxed income will reach $.35-$.40 a share.  After that, it will be interesting to see.  Further gains of some magnitude are virtually certain.  But the company still has some cards to play before it hits the big time.  Boingo is the industry leader, so the potential looks good.  In 2-3 years income could attain $.75 a share. Applying a P/E multiple of 20x suggest a target price of $15 a share.  Boingo is a small company with a key position in a gigantic industry.  A substantially higher result is possible.

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