SEA Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Teraco's Q1 2023 Earnings Call. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session with 3 qualified analysts on the call and instructions will be provided at the time for you to queue up for questions. I would like to remind everyone that this conference call is being recorded.

Operator

Tereco 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 off 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 forward in the Risk Factors section in the annual MD and A for the quarter ended December 30, 2022, which is available on www.sedar.com and also consider other uncertainties and potential events, except as may be required by Canadian Securities and Exchange Commission, will be issued by the company's SEC filings. The company does not undertake any obligation to update any forward looking statements As a result of new information, we would also like to remind listeners that Terego uses certain non GAAP financial measures to arrive at adjusted results to assess its risks and to measure overall performance. These financial measures provide readers Chief Officer, Macie Gerber.

Operator

Sir, please go ahead.

Speaker 1

Thank you, Ina. Good morning, everybody, and welcome to our 2023 Q1 earnings Call. Our team is pleased with our operational performance this past quarter and the financial results that Phil will take you through shortly. Our revenues, gross margins, Operating expenses, adjusted EBITDA and capital expenses were all within our expected ranges. We are also able to again deliver positive results with our key leading indicators, namely net monthly recurring revenue, which is the difference between bookings and churn and net provision monthly recurring revenue, which is the difference between provision monthly recurring revenue and churn.

Speaker 1

These indicators reflect Whether or not we are booking more business than we are churning and whether or not we are provisioning more business than we are churning. Both indicators We're positive in Q1 and reflect our team's ability to add customers. We have also seen a rise in our average revenue per customer as our customers continue to request increased levels of service at our higher end products. Since we did a fairly extensive update in 2022 Q4 and full year's earnings call 2 months ago. I don't have much more to offer in terms of additional information to share with you before turning the call over to Phil to take you through the Q1 numbers.

Speaker 1

So I will do that now. Phil, over to you.

Speaker 2

Thanks, Matt. Starting on Slide 5 with connectivity revenues. Connect revenues totaled $6,500,000 in Q1 2023 compared to $6,400,000 for the same period in the prior year. The revenue improvement was a result of increased customer count And increased connectivity ARPU compared to the same period in 2022. Furthermore, The prior year results included connectivity revenue that was subsequently sold as part of the divestiture transaction.

Speaker 2

Moving to Slide 6 for a look at our connectivity KPIs for the Q1 of 2023 and the prior four quarters. Our backlog of monthly recurring revenue or MRR in our connectivity business increased year over year to 132,929 as of March 31, 2023 compared to 126 is a result of strong sales performance throughout the last four quarters in signing up new customers, particularly through our channel partners. Backlog has decreased when compared to the year end balance of 178,948 to $132,000,000 $929 as a result of both provisioning results having exceeded sales bookings, But also the result of having to de book some customer orders within our backlog. The majority of the de bookings were due to technical issues, Such as not having a direct line of sight to the customer's facility, therefore preventing us from servicing the customer. Next, our average revenue per customer or ARPU for our connectivity business was $1101 in Q1 2023 compared to $10.63 in Q4 2022 and compared to $10.61 for the same period in 2022.

Speaker 2

The increase in ARPU was a result of our ongoing focus to attract mid market and large scale, predominantly multi location customers requiring higher end products to meet their needs. Finally, connectivity churn was 0.9% compared to 0.9% in the prior quarter and 0.7% for the same period last year. The increase in customer churn from the prior year was due to a continued execution of our strategy to focus on mid market and large scale customers. We will continue to focus our service and support activities on customer retention and keeping churns low. Turning to Slide 7 to go through our broader Q1 2023 financial highlights.

Speaker 2

Total revenue decreased to $6,500,000 for Q1 2023 compared to CAD7.9 million for the same period in 2022. The decrease in revenue was driven by the divestiture transaction of the cloud and colocation business and some associated connectivity revenue. Again, when looking at just our connectivity revenues, results totaled $6,500,000 in Q1 2023 compared to $6,400,000 for the prior year period. Net loss decreased to $2,500,000 In Q1 2023 compared to a net loss of $3,100,000 in the same period in the prior year, The improved net loss position was a result of higher gross margins combined with year over year reduction of operating expenses as a result of the divestiture and the new operating structure of the business. Adjusted EBITDA was $800,000 in Q1 2023 compared to $1,100,000 for the same period last year.

Speaker 2

The decrease was a result of lower revenues and lower gross profit in the current year and the add back of restructuring and divestiture costs in the prior year. Now turning to Slide 8. Capital expenditures totaled CAD2.0 million or 32 CapEx expenditure continues to be predominantly success based spend associated with the onboarding of new customers. Spend increased in the quarter as a result of purchase timing as we took advantage of available discounts, while still aligning our purchases with our backlog and our pipeline opportunities. Turning to the balance sheet, we ended the first Quarter of 2023 with $1,800,000 in cash and $1,100,000 in short term investments.

Speaker 2

The company is also fully compliant with the covenants under its long term debt facility. With that said, I would like to turn the call back over to Matt. Matt, over to you.

Speaker 1

Thanks, Phil. So before we close this call, I do want to reiterate the points I made about our near term focus during our call a couple of months ago and also touch on a couple of other topics, including the news that we Just released about our leadership change. As we look into Q2, our team remains focused on the 2 initiatives that I spoke about on the last call. The first area of focus for us remains our fixed wireless access business. We continue to see increasing interest from our enterprise and mid market customers for fixed wireless access connections.

Speaker 1

There are a few reasons why we see growing interest in fixed wireless access. The first reason is the success of fixed wireless access as a connectivity option Continues to grow internationally. If you look just south of us, Verizon and T Mobile reported record fixed wireless access growth in 2022 And both expect growth like that to continue. The second reason is that enterprises and mid market companies continue to look for ways to bolster network redundancy And fixed wireless access is a logical choice for that. The third reason is that SD WAN continues to gain share in our customer base And pairing a fixed wireless access circuit with a fiber connection for SD WAN connectivity is a logical choice, and we're seeing more of our customers doing just that.

Speaker 1

The second area of focus for us remains 5 gs millimeter wave private networks. At this point, the information we have from our vendor ecosystem Similar to what we shared with you during our last call, we expect to see standalone 5 gs millimeter wave equipment that operates in Canada On our 24 gigahertz and 38 gigahertz spectrum become available in the next 3 to 6 months. At that point, We can begin engaging customers with pilots and trials, which are a necessary step to take before taking orders. You may also remember session on the benefits of 5 gs fiber networks for Canadian businesses. Some of you may have also caught the webcast that The Globe and Mail did on April 27 on the benefits of 5 gs for Canadian businesses.

Speaker 1

We were invited alongside TELUS and Ericsson to lead a panel discussion and were put forward as experts on private network applications for Manufacturing and Warehousing. It's great to see this type of interest building. We continue to remain very excited about where the market for 5 gs Private Networks is heading and our ability to provide these types of innovative solutions to our existing company base. Now one other point I want to make Is that while we continue to see healthy demand for our products and services as evidenced by our strong bookings and churn performance over the past year, We also recognize that recent overall market conditions are changing and influencing customer decision making, which can impact our business. We will continue to watch these trends closely and make any necessary adjustments if there is an impact.

Speaker 1

Lastly, as you may have seen in the earnings release, We announced that there will be a transition to a new CEO. Effective June 12, 2023, Dan Vucinic We'll be appointed as TURGO's Chief Executive Officer. I'm truly excited about the opportunity to pass the leadership role to Dan as he brings a wealth of relevant operating experience Dan and I will be working together in lockstep over the next few weeks to ensure a smooth transition for our customers, our partners and our team members. So that wraps up the prepared remarks for us today, and we can now open the call for questions. So, Ina, back over to you.

Operator

One moment please for your first question. Your first question comes from the line of Maji Li from Canaccord. Please go ahead.

Speaker 3

Hey, good morning guys. Thanks for taking my call. Maybe we can start with ARPU, nice acceleration in the quarter at 4% year over year. Can you maybe help us understand the sustainability of that number for

Speaker 1

the remainder of the year? So I'll take a shot at that, Matt, and thanks for Posing the question and then Fili, you can chime in if you felt I missed anything or want to add more context. We see that continuing, Matt, When you look at the strategic focus we've been executing on, it's to move up market. And As we see the as we gain mid market and enterprise customers, They tend to buy higher speed services. And so we've step up the ladder in service speeds and service prices that we're delivering to these customers.

Speaker 1

And so we think that that is sustainable.

Speaker 3

Okay, that's helpful. And then maybe we can talk about the success CapEx you've been deploying. When do you think the Timings and returns on that investment and can you maybe frame how you think about spending from an ROI perspective?

Speaker 1

So, when you look at our business, our business is very typical of what you'd see With a capital intensive communications company like we are and the infrastructure type of business we have. And we typically expect to start seeing returns on any investment we make on average at about 18 months. So on a cash on cash payback, it takes about 18 months. And for us, that's a great thing because most of our customers will Sign 3 year contracts or longer. So we lock them in for 3 or 4 or 5 years.

Speaker 1

So after 18 months, any investment we make to service that customer We'll start generating cash for us as a company. Phil, did I miss anything that you want to add to that?

Speaker 2

No, that is Correct. Yes, it's 18 months payback. And the timing of our expenditures is really based Upon the backlog, the pipeline and then in some cases, we have advantages to take purchases a little early for beneficial pricing, but again, it's equipment we know that we need to deploy to our customer sites.

Speaker 1

All right. Thank you. I'll pass it on. Thanks, Mac.

Operator

Thank you. And your next question comes from the line of David McFadgen from Cormark Securities. Please proceed.

Speaker 4

Hi. Yes, a couple of questions. Just on the cost structure, the revenue was Pretty much in line with what we look forward, but EBITDA was a bit light. So just wondering, is this a new level of cost that you would expect Going forward or is there some one time items in there that maybe made the cost a little bit higher in the quarter?

Speaker 1

Phil, you want to comment on it?

Speaker 2

Yes, yes. We do expect the cost structure to be fairly consistent. Any Really changing the structure will be driven by new customers and things like that requiring perhaps Scaling up support as the number of customers scales up, but it has stabilized in terms of what we expect our recurring run rate to be.

Speaker 4

Okay. And then, are you seeing any slowdown, let's say, in the sales funnel or sales bookings In light of, say, a more difficult macroeconomic environment that we're all facing here?

Speaker 1

That's a great question, David. And I alluded to seeing signals. We haven't been impacted by those signals yet, but we certainly have Heard from our customers that they are paying more attention to how they're spending their money. We see that in the form of them scrutinizing What they're paying us for services, we also see it in the form of we've heard from a number of our bigger customers that budgets are on hold And that could potentially impact project timing. So we're keeping a close eye on those signals, But we are certainly hearing much more of that and have heard much more of that over the past quarter or so.

Speaker 4

Okay. And then just lastly, I was just wondering what precipitated the CEO change?

Speaker 1

Great question. We've been discussing or having discussions like this For me personally, for going on 7 ish years, and I joined the Tereco board 7 years ago and I I've stepped into the chair's role as you remember 6 years ago. And I've stepped into this role as an operator Recognizing that the company needed to make a significant strategic change, we as a business have a Great team of people. We have a blue chip list of customers and the customer base is a who's who of Canadian businesses for us. We have a unique position in the marketplace as the only provider of fixed wireless access connectivity for businesses across the country.

Speaker 1

And as you know, we have this amazing spectrum asset. And so my mandate from the Board was to create a play connectivity services company for Canadian businesses That could not only build a fixed wireless access product line, but also step into 5 gs private networks when it's appropriate. And I have delivered on that mandate and the time had come to bring in somebody who could Take the business to the next level. And so we as a Board look for an operator, a Canadian operator And somebody who has a lot of experience in working within telecommunications, understood fixed wireless access, Understood how to deploy private networks and Dan is the right guy to do that. He's got a much better fit for the skill sets that are required going forward than I do.

Speaker 1

So my work at TeraGo is done and I'm really happy to pass the baton to him. Does that give you some context, David?

Speaker 4

Yes. No, that was great. Okay. Thanks. Thank you.

Speaker 1

Thanks.

Operator

Thank you, Mr. Gerber. There are no further questions at this time. Please proceed.

Speaker 1

Okay. Well, I don't have any other closing remarks Beyond saying thank you to all of you for supporting the business and it's been a really great Run for me as an operator and we have a terrific team, terrific group of customers and it's been very enjoyable. So appreciate it. Appreciate your time today. So thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.

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Earnings Conference Call
SEA Q1 2023
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