TeraGo Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to TeraGo's Third Quarter 2023 Financial Conference Call. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session with prequalified analysts on the call and instructions will be provided at that time for you to queue up for questions. Results.

Operator

I would like to remind everyone that this conference call is being recorded. TerraGo would like to remind listeners that the company's remarks and answers to your questions today may contain forward looking statements that are based upon management's current expectations. All such statements are made pursuant to the Safe Harbor provisions of and are intended to be forward looking statements under applicable Canadian securities legislation. When relying on forward looking statements to make decisions with respect to the company, you should carefully consider the risks set forth in the Risk Factors section in both the 2022 annual MD and A as well as the MD and A for the 9 months ended September 30, 2023, which is available on www. SEDAR.com, and also consider other uncertainties and potential events.

Operator

Except as may be required by Canadian Securities Laws. The company does not undertake any obligation to update any forward looking statement as a result of new information. We would also like to remind listeners that Terago uses certain non GAAP financial measures to arrive at adjusted results to assess its business and to measure overall performance. Terago believes that these financial measures provide readers with a better understanding of how management views the company's overall performance. I will now turn the conference over to TerraGo's Chief Executive Officer, Daniel Vucinic.

Operator

Daniel, over to you.

Speaker 1

Good morning, everyone, and welcome to our Q3 2023 earnings call. This marks my first full quarter since becoming CEO on June 12. When I joined TerraGo, I saw tremendous to accelerate value for our customers, employees and shareholders under our value creation strategy. Today's financial report contains critical proof points of our ability to execute on this transformation with agility and urgency. Moreover, these early proof points serve as a validation of the hard work and energy the team has put into these early innings of our business transformation.

Speaker 1

These initial improvements result from the implementation of specific actions to support our value creation strategy, including rightsizing our workforce, optimizing capital in a more prudent and efficient manner. We anticipate further proof points in the coming quarters as as we implement dynamic pricing, increasing our customer engagement and proactivity with customer renewals, reenergizing our revenue generation engine, driving further efficiencies and investing in our inherent leadership position in the exciting and emerging area of 5 gs private networks. A couple of key indicators validating our progress is the improvement Adjusted EBITDA and our cash flows. Anyone reading our financial statements and earnings release would not know is that our adjusted EBITDA and cash flow showed progressive month over month improvement in Q3. To provide some incremental color, we achieved the following.

Speaker 1

EBITDA margin was 14% for the quarter. However, EBITDA margin within the quarter was 17% for the month of August and 16% for the month of September compared to in Q2 2023 was 8% and in Q1 was 12%. Q4 is expected to continue in the 16% to 18% range. Positive cash flow was achieved in the month of August, a first for TerraGo in recent results. And overall, Q3 cash consumption was improved from Q2 2023.

Speaker 1

Additionally, Q3 cash from Operating activities was a positive $800,000 versus prior negative quarters. We are confident that these initial strategic steps that have been taken are starting to yield promising results and have begun materializing in our P and L. Our team at TerraGo has We've taken a meticulous approach to streamline our operations and identify areas where we can reduce unnecessary expenditures while maintaining our commitment to quality and innovation. By closely examining our cost and pricing structures, we have been able to make informed decisions that positively impact our bottom line without compromising our ability to meet market demands. These pillars of value creation strategy are essential in reenergizing TerraGo's corporate engine and ensuring our long term success.

Speaker 1

We are only getting started in our transformation, but we are certainly encouraged by the progress in such a short span of time. Moving on, As you are aware, in September 2023, ISED published the spectrum outlook 2023 to 2027 elevating the 24 gigahertz band to priority 1, which is a major tailwind for our organization. Thus, we anticipate, I said we'll be launching a consultation on 24 gigahertz in the near term, which will provide additional clarity towards spectrum certainty. Given the exciting potential, TerraGo uniquely provides considerable value to the Canadian business ecosystem in 3 ways. Terago only focuses on business and primarily the SMB market, which is a vital economic engine for Canada as the SMB market accounts for 88% of the employment and contributes over 50% of Canada's GDP.

Speaker 1

Number 2, TerraGo owns its own wireless spectrum, Largest shareholder of our millimeter wave spectrum owns its own wireless network, owns its own national backbone network. TerraGo is not a reseller. And number 3, TeraGo continues to invest in this business enabling customers to fuel innovation. With that said, there is significant momentum and market growth in private networks as it's a transformative technology trend that enables various customer verticals to differentiate and achieve their business outcomes. TerraGo has actively begun building an ecosystem of vendors, customers, partners to forge a consortium of strategic stakeholders that can collaboratively develop enterprise solutions for our clients.

Speaker 1

TerraGo will be at the heart of this evolution given its spectrum ownership and expertise. Phil, over to you.

Speaker 2

Thanks, Daniel. Starting at Slide 5 of our presentation with our connectivity revenues. Connectivity revenues were $6,500,000 in Q3 2023, flat from both the prior quarter and the same period last year as overall provisioning and onboarding of new customers was on par with customer churn. Turning to Slide 6 Before a look at our connectivity KPIs for the Q3 of 2023 and the prior four quarters, our backlog Monthly recurring revenue or MRR in our connectivity business decreased year over year to 75,000 were $9.63 as of September 30, 2023 compared to $138,893 for the same period in 2022. The decrease in backlog MMR is a result of lower bookings year over year combined with de bookings of orders due to technical geographical and customer landlord limitations preventing fulfillment of the orders.

Speaker 2

This last factor being something that is beyond the control of TerraGo. Next, our average revenue per customer or ARPU for our connectivity business was $11.27 in Q3 2023 compared to $10.99 for the same period in 2022. Current levels of ARPU are the highest the company has achieved in the last eight quarters and have been increasing in each of the last 4 consecutive quarters as a result of both product mix and our ongoing focus of onboarding multi location customers. Finally, Connectivity churn was 1.3% compared to 1.2% in the prior quarter and 0.7% for the same period last year. In regards to customer renewals and retention, we are already seeing early signs of progress in churn post quarter end.

Speaker 2

Turning to Slide 7 to go through our broader Q3 2023 financial highlights. Total revenues for Q3 2023 were $6,500,000 compared to $6,600,000 in the same period in 2020 in Q2. The difference being the results of $100,000 of transaction support revenue earned in 2022 arising from the divestiture transaction. Such services are no longer required or performed in the current year. Net loss for the 3 months ended September 30, 2023 was $3,100,000 compared to a loss of $2,900,000 in the same period in 2022.

Speaker 2

The increased net loss position is a result of the lower revenues of $100,000 and higher interest costs as it relates to the CrowdOut debt financing facility of 800,000 These were partially offset by a decrease in total operating expenses of $700,000 in the current year versus the prior year. Adjusted EBITDA was $900,000 in Q3 2023 compared to 0 point of $5,000,000 in the prior quarter and $600,000 for the same period last year. The increase in adjusted EBITDA being driven by lower SG and A costs as the company continues to optimize its cost structure as well as reaping the rewards of improved operational processes and enhanced operational systems and applications. Adjusted EBITDA margin improved significantly from 9.2% in Q3 of 2022 to 14.1% in Q3 2023 with expected continued improvement coming in the coming quarters. Turning now to Slide 8.

Speaker 2

Capital expenditures totaled $1,000,000 or 15% of our revenue the 2nd consecutive quarter of decreased CapEx spending as the company deploys equipment purchased earlier in the year combined with a and a stronger overview and scrutiny of success based CapEx expenditure to ensure a healthier ROI. Turning to the balance sheet, we ended the Q3 of 2023 with $2,900,000 in cash and $200,000 in short term investments. The company did not require or take any additional draws from its debt facility in Q3 As a result of its improved EBITDA, cash from operations and a reduction of capital expenditures, Total cash consumption has continued to decline. With that said, I'd like to turn the call back over to Dan. Thanks, Phil.

Speaker 1

As we continue to execute on our value creation strategy, we remain dedicated to enhancing our products, reenergizing our revenue engine, improving customer satisfaction, operational efficiencies and overall financial performance. We look forward to the journey ahead and the opportunities it brings as we strive to build a stronger and more resilient TerraGo. Thank you for your trust and support as we work towards a brighter future. That wraps up the prepared remarks for us today and we can now open up the call for questions. Operator, back to you.

Operator

Is coming from David McFadgen of Cormark Securities. David, your line is live.

Speaker 3

Okay, great. Thank you. Couple of questions. Just looking at the connectivity revenues sequentially, looks like it's It's holding in here pretty good. I mean, churn rate is up a little bit, but it seems like from what we can see, it doesn't seem like you guys are being impacted by, say, a For macroeconomic environment, I was wondering if you could provide some comments there.

Speaker 3

And then secondly, just on the I said relooking at the spectrum to maybe reclassify. Can you give us any idea on timing when they're actually going to do that? Thanks.

Speaker 1

So I'll jump in there. Hi, David. It's Daniel here. So on the revenue side, We have seen some economic slowdown when you compare to 2022 because there were less of what we call bigger deals that happen in 2023 compared to 2022. And They haven't gone away, but they seem to get pushed quarter over quarter a little bit further out.

Speaker 1

And as you have noticed as well, a lot of the bookings that we had did get offset by churn and hence the flat revenue portion as part of that. In terms of iCED, we have been meeting with them on a regular basis and having good productive meetings and part of which in September they did publish the update and made 24 gigahertz priority 1, recognizing its importance. And then part of that discussion was also that They were going to commit to a near term consultation submission sometime hopefully within the next few weeks to months. So We're going to follow-up with ISED as well on that.

Speaker 3

So in your discussions with ISED, Assuming they reclassify the spectrum for mobile use, have they given you any indication on how much spectrum they might claw back And then re auction?

Speaker 1

No, they did not give any indication on that just yet.

Speaker 3

Okay. All right. Thanks

Speaker 1

guys. Thank you. Thanks, David.

Operator

Thank you very much. Well, that seems to be the end of our question and answer session. I would now like to turn the call back over to Mr. Vusenik for his closing remarks.

Speaker 1

Thanks again everyone for joining us on our call today. Thank you for your continued support and we look forward to providing an update on our progress on our next quarterly earnings call. Operator?

Operator

Thank you for joining us today for TerraGo's Q3 2023 earnings call. You may now disconnect.

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