Guestlogix (GXI.V) continues to make progress

Earlier today, Guestlogix announced a contract with KLM, representing 39 million passenger trips in Europe. It is part of the Air France/KLM group.

This is the most recent of a string of announcements that includes a contract with Continental Airlines in the US, a new in-flight ticketing agreement with Heathrow Express, along with an extension of its In-Flight Box Office solution to include a major theme park operator. Although the Company has not disclosed the operator, there is a possibility that it may be Disney (DIS).

After trading as low as $0.30 as late as April 6, 2009, the shareprice has shot to $0.50 over the past week. With seven analysts covering the story, investors may be taking notice of the progress. As the Company continues to rollout its contracted backlog, quarterly revenue should continue to be lumpy. Sales and earnings were below expectations for Q4, 2008 because a couple of expected roll-outs slipped into Q1, 2009. When the Company reports Q1, 2009, the slippage from Q4 may be reflected in good performance for the quarter. Quarterly performance should continue to show volatility throughout 2009 as the Company continues to deploy major airlines. Once major rollouts are completed, revenue should be easier to forecast because most revenue (starting in FY 2010) should be recurring.

With respect to the full-year, the variance among analyst forecasts is high for 2009. However, the mean forecast for sales appears to indicate more than a doubling of sales over 2008 to around $19.5 million (adjusted). EBITDA forecasts infer a mean of approximately $5.8 million, with similar high variance in estimates. With the current shareprice at $0.50, the FYE mean EV/EBITDA multiple calculates to approximately 3.8x, which is 47% below the current of the mean for the Canadian technology sector. For a high growth Company with a near regional monopoly in North America, this multiple may seem low to some investors.

Based on its current trajectory, the Company may be generating cash and net income by H2 of FY 2009. The amount of free cashflow generated would depend upon how much is re-invested by Management to extend its retail offerings, and expand its European footprint both in airlines and rail. Investors should expect Management to continue to add retail and service offerings in order to position itself as a defacto on-board retailing platform for the airline industry, starting with North America. Incredible leverage can be gained by becoming a primary gateway to airline passengers for retailers, and the primary way to do that is to deliver more retail services through the platform.

Guestlogix has willing partners among airlines because an airplane is a closed system. By controlling access to retail services through the GXI gateway, airlines should benefit from new, previously unattainable revenue streams related to entertainment, retailing, and destination services. An analogous relationship would be between mobile app stores and mobile carriers. The app stores are the gateway for developers, and the mobile carrier networks are the closed system. All parties benefit as long as the offerings are perceived as valuable by consumers.

Investors may be reticent to invest in a stock closely related to the airline industry. There is a pervasive investor fear of bankruptcy associated GXI's client base. However, most of the major American carriers have restructured through bankruptcy in the past and have maintained and even expanded operations during restructuring periods. As a result, the probability that GXI's large global carriers will cease to operate any time soon are low. Notwithstanding, GXI owns all components of its network, which means that it can reallocate assets to other deploying clients if an airline shuts down. The Company has already done this in the past.

The lowest analyst target is nearly a double from the current price and the mean is $1.26, which suggests that there is potential strong upside to the stock price according to analysts. Although there may be still be a couple of minor executional stumbles as the Company scales, Management continues to make significant progress in a tough market. Guestlogix could ultimately become to airline carriers what mobile app stores are to mobile carriers.

I do not own shares of GXI, DIS, or any airline.

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