In the fourth quarter of 2017, Pembroke had the opportunity to get a behind-the-scenes tour of The World Trade Center from the perspective of the telecommunications company responsible for outfitting the New York city landmark with wireless communication capabilities.
Boingo Wireless (“WIFI”) is an investment that Pembroke has held since the end of 2015. Headquartered in Los Angeles, Boingo is a company that many people recognize only as a provider of WiFi access in North American airports. This service proved to be increasingly popular with the proliferation of mobile devices during the latter years of the 2000s. Following the company’s IPO in 2011, however, the environment changed as data costs plummeted and users relied less on WiFi hotspots. Boingo’s stock suffered in the public markets for years as the management team engineered a change in focus and parlayed the expertise they built in their legacy business into network architecture services to wireless-carriers. This transformation went undetected by many investors. The powerful trend that Boingo positioned themselves for was that of mobile data consumption – a trend which has been robust and shows no signs of slowing.
Pembroke spent six months studying the business and the addressable market before buying the stock. At the time, the investment case was not without skeptics: only three brokerage firms published research on the stock, investors did not properly understand the real opportunity for the company, the operating leverage in the business model was under-appreciated and the income statement was difficult to interpret. These circumstances created an excellent buying opportunity for Pembroke. The stock dropped from $9, when we first met the company in the summer of 2015, to below $6 by the end of that year.
During our visit in New York City, we examined maintenance closets and underground bunkers to appreciate and grasp the scale and complexity associated with building a dual WiFi-cellular network for the iconic World Trade Center. Boingo plays a critical role in the supply chain. Event venues and wireless carriers want their visitors and subscribers to have problem-free service experiences. Only a robust network can deliver this level of service. Venues do not have the capabilities and wireless carriers do not have sufficient capital to reach all venues. Boingo provides this architectural expertise, and their independence pleases both venues and wireless carriers who pay much less than they would if they built the network themselves.
The stock increased from $6 to $23 as earnings expanded and the company, now discovered, earned a higher earnings multiple. Pembroke portfolio managers call this powerful combination of earnings growth and earnings multiple expansion a “double play”. That’s what we’re in search of on the road: powerful earnings stories undiscovered or unappreciated by the market. Pembroke has been careful to risk manage the weight – both trimming and adding – during periods of volatility.
Following our Tour of the World Trade Center, we are just as excited about the opportunity for Boingo Wireless today as when we first invested in the stock. With a market capitalization of roughly $1 billion, the company is hitting more investors’ radar screens. The share price increase from two years ago reflects a solid record of fundamental execution. What continues to encourage us is the number of venues still available to Boingo (“total addressable market”), the high returns on capital, high free-cash flow generation and dominant competitive position.