TeraGo Q2 2023 Earnings Report

TeraGo EPS Results

• Actual EPS: -C$0.20
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

TeraGo Revenue Results

• Actual Revenue: $6.52 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

TeraGo Announcement Details

• Quarter: Q2 2023
• Date: 8/9/2023
• Time: N/A
• Conference Call Date: Thursday, August 10, 2023
• Conference Call Time: 10:00AM ET

TeraGo (TSE:TGO), together with its subsidiaries, provides connectivity services for businesses primarily in Canada. It owns and operates a carrier-grade multi-protocol label switching enabled wireline and fixed wireless, and Internet protocol communications network that provide Internet access, private interconnection, and data connectivity services. The company also offers data connectivity services that allow businesses to connect their various sites within a city or across the company's geographic footprint through a private virtual local area network; and a range of diverse Ethernet-based services over a wireless connection to customer locations. It provides its services through direct and indirect sales channels. TeraGo Inc. was incorporated in 2000 and is headquartered in Thornhill, Canada.

TeraGo Q2 2023 Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to Terago's Second Quarter 2023 Financial Results 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. Followed by 0 for operator assistance at any time. I would like to remind everyone that this conference is being recorded.

[Operator]

Turaga 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 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 6 months ended June 30, 2023, which is available on www. Sedar.com, that's www.sedar.com, and also consider other uncertainties and potential events, 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 Terrado uses certain non GAAP final measures to arrive at adjusted results to assess its business and to measure the overall performance. Turova believes that these I will now turn the conference over to Tarrago's Chief Executive Officer, Daniel Vucinic.

[Operator]

Sir, please proceed.

[Speaker 1]

Good morning, everyone, and welcome to our Q2 2023 earnings call. This is my first earnings call as TeraGo, CEO, and I am pleased to be here with you all. As I enter my near 2 month anniversary as CEO, I become more and more excited after each passing day as a result of the amazing team members here and the immense amount of potential we can Capitalize on. I come to Terego with over 25 years of telecom experience at various companies driving enterprise value creation Through organic and inorganic growth and operational excellence, I've been on the side of the smaller competitor driving innovation, Competition and differentiated customer experience, all of which are applicable to TeraGo today. Additionally, I've had the privilege to hold senior positions in all departments, including product, sales, technology, customer experience And operations, enabling a holistic understanding of the telecom landscape.

[Speaker 1]

My prior tenure has provided me with the experience, business insights and learnings that I will leverage here at TeraGo. Starting from day 1 on a job that hit the ground running after a meticulous initial assessment of the business and much collaboration with the executive team And employees, TeraGo will be implementing a shareholder value strategy, which is a pivot from TeraGo's former corporate plan and a step towards a new and refined direction. The prior game plan for the company was one of hyper focused top line revenue growth, which resulted in inflated OpEx and CapEx figures. In our assessment, we found that there was a lack of strategic focus And concentration, as our hold sounds, we're trying to beat everything to everyone in every market and every customer segment. The numbers don't lie as this was clearly reflected in relatively lower cash flow and adjusted EBITDA margins.

[Speaker 1]

Our shareholder value strategy is still in the works of being memorialized, but we have a pretty good sense of the trajectory as our end goal is to drive shareholder value creation. One of the vital suspects to our strategy is what we call smart growth, Which is positioning fixed wireless as a premium product in the right place at the right price and with the right customer segment. This combined with the optimization of operational expenses and stronger returns on capital investments We'll ensure revenue and adjusted EBITDA growth, ultimately leading us towards a path to bottom line profitability and positive cash flow. And of course, lastly, we want to be sure to capitalize on TeraGo's unique and robust wireless spectrum for both fixed wireless and 5 gs Private Networks. Our organization has a competitive advantage relative to our peers, Thanks to these assets and it is part of our revamp strategy to make sure we maximize the full value.

[Speaker 1]

That said, as I'm sure you could have guessed, this plan is a long term one and not something that can happen overnight. Our team will remain laser focused in manifesting our refined plan, but it will take some time. Taking a step back, Prior management was predominantly focused on the divestiture, which was completed successfully. However, with TeraGo ready for its next phase within its corporate time line, the Board of Directors felt that now is the time for new leadership with a proven track record to grow this business combined with a more operational mindset. I look forward to updating you all in the near future as our shareholder value strategy unfolds.

[Speaker 1]

Phil, over to you.

[Speaker 2]

Thanks, Dan. Starting on Slide 5 with connectivity revenues. Connectivity revenues totaled CAD 6,500,000 in Q2 2023 compared to $6,600,000 for the same period in the prior year, the year over year decrease being the result of the churn of customers that were associated with the 2022 divestiture transaction. When comparing the current quarter revenues to immediately prior quarter q1 2023, our revenue was flat as provisioning and onboarding of new customers was on par with customer churn. Moving to Slide 6 for a look at our connectivity KPIs for the Q2 of 2023 and the prior four quarters.

[Speaker 2]

Our backlog of monthly recurring revenue, or MRR, in our connectivity business decreased year over year to $85,471 as of June 30, 2023 compared to $133,436 for the same period in 20 The decrease in backlog MRR is a result of lower bookings year over year, Combined with de bookings and previously signed orders resulting from technical, geographical And customer landlord limitations preventing fulfillment of the orders, all of these factors being beyond the control of TeraGo. Next, our average revenue per customer, or ARPU, for our high activity business was $11.04 in Q2 2020 3, compared to $1101 in Q1 2023 and compared to $1118 in the same period in 2022. ARPU at the end of Q2 2022 was a historic high point due to the customer and product mix in effect at that time. Terrigo continues to be successful in expanding its customer base to larger, multilocation customers. However, some of these recent orders have been a large volume of our lower revenue products, resulting in the year over year ARPU decrease.

[Speaker 2]

Despite the year over year decline in ARPU, the metric has been increasing each of the last 3 consecutive quarters. Finally, connectivity churn was 1.2% compared to 0.9% in the prior quarter and 0.9% for the same period last The increase in churn in the current quarter was largely the result of a single multi location customer It was at the end of the contract term and required by their foreign parent company to switch to a fiber based connectivity solution. We continue to focus on mid market and large scale customers and have begun implementing new strategies and policies and procedures to more proactively engage with existing customers, increasing our contract renewals, customer retention and long term revenue. Turning to Slide 7 to go through our broader Q2222023 financial highlights. Total revenues for Q2 of 2023 were $6,500,000 compared to $6,700,000 for the same period in 2022.

[Speaker 2]

The difference again being results of the divestiture transaction and completion of the corresponding transaction services agreement. Net loss increased to $4,000,000 in Q2 2023 compared to a net loss of $3,100,000 in the Same period last year. The increased net loss being the result of both lower revenues and higher salary and operating costs As a result of the CEO change that took place in Q2 2023, adjusted EBITDA It was $500,000 in Q2 2023 compared to $1,000,000 for the same period last year. The decrease was a result of lower revenues and gross profit compared to the prior year, combined with higher SG and A, net of restructuring costs. However, adjusted EBITDA in the prior quarter was 800,000 which we feel is the more accurate benchmark since the prior year comparable quarter contained both costs and revenues associated with the divestiture transaction service agreements.

[Speaker 2]

Turning now to Slide 8. Capital expenditures totaled $1,500,000 or 23 percent of our revenue. CapEx expenditure continues to be predominantly success based spend associated with the onboarding of new customers. Turning to the balance sheet. We ended Q2 of 2023 with $4,800,000 in cash and $200,000 in short term investments For a combined position of approximately $5,000,000 despite severance and related costs paid as a result of the CEO transition, The company continues to focus on cash management.

[Speaker 2]

And although the quarter did lack revenue and EBITDA growth, the company is ahead of its own internally Budgeted cash balance. The company is fully compliant with the covenants under its long term debt facility, With Dan now at the helm and the activation of our shareholder value strategy, we've continued to downward optimize our cost structure, Our headcount, our salary cost net of the CEO transition compared to the prior quarter and the same 3 6 months periods in the prior year. With that said, I'd like to turn the call back over to Dan.

[Speaker 1]

Thanks, Phil. The current results are the results, But there is significant potential to create more value with customers, shareholders and employees leveraging our unique assets in fixed wireless And Private 5 gs. With respect to 5 gs, TeraGo plans to leverage our millimeter wave assets for customers that require ultra low latency And higher data consumption as well as leveraging the mid bang spectrum through ISED's noncompetitive local licensing process To drive the power of 5 gs networks, to really fuel the industry as it relates to innovation and significantly improving productivity, quality, safety and cost savings for our customers. In conclusion, as I've shared already, this is a long term manifestation of the shareholder value strategy. We are still a ways to go, but we are hyper focused in ensuring that we will get to our goal of generating Revenue and EBITDA growth in our business, optimizing operational expenses and mitigating churn.

[Speaker 1]

All in all, I'm very excited for the times ahead and appreciate your continued support for our organization. That wraps up the prepared remarks for us today, and we can now open up the call for questions. Operator, over to you.

[Operator]

Thank you very much. We are now opening the floor for questions. Thank you. Your first question is coming from Sid Dhillawari of Cormark Securities. Sir, please proceed.

[Speaker 3]

Hey, guys. Thanks for taking my question. Firstly, just on the backlog MRR decline, you flagged Few external factors that resulted in lower bookings and de bookings. Can you help us sort of unpack that and maybe just also elaborate a little bit on there's any potential in the near term to recoup some of this lost revenue in subsequent quarters?

[Speaker 2]

Yes. Thanks for your questions, Sid. Appreciate it. Yes, in terms of the backlog, none of this had resulted in revenue yet. As we book an order, it fits in our backlog, becomes revenue once we provision.

[Speaker 2]

So the decrease year over year, again, Part of it is, obviously, as we onboard new customers, brings the balance down. Our bookings have been lower than they were a year ago. And then in the case of the D books, there won't be an opportunity to try and re up that customer. The reason for the deep up was due to technical issues, whether it be geography, could be the customer landlord, therefore, Making the deal economics not work and then other technical challenges that just can't be overcome

[Speaker 1]

for that customer or potential customer.

[Speaker 3]

Sorry. So when you say geography, does that mean it's not serviceable where it's located? Or

[Speaker 2]

No. Because Our equipment requires a clear line of sight. So it simply means we couldn't get a line of sight from the hub to the customer's location.

[Speaker 3]

Okay. And then just secondly on the SG and A expense, it continues to creep up and this quarter was 94% of your top line versus 78% last year. Can you talk about what's leading to that ongoing spike in SG and A? And when can we sort of start to see that stabilize a little bit more And see some of your gross margin dollars flowing more into EBITDA.

[Speaker 2]

Sure. Yes, in Q2, we have a large Expenses related to the CEO change. And had we netted all of those costs out, Then our SG and A would have been flat or slightly below where it was in Q1, and that trend is continuing forward. We've had some Natural attrition. At the company, we have chosen not to backfill those roles as we continue to optimize the head Out of the company, back to what's appropriate for the current level of activity.

[Speaker 3]

Okay. So Yes. On a normalized basis, it should be around somewhere where it was last year going forward?

[Speaker 1]

Or lower.

[Speaker 3]

Okay. Okay. That's really helpful. And then just one last one for me. Just on the ARPU design, it was marginal.

[Speaker 3]

And you obviously highlighted last Q2 being sort of the peak in terms of ARPU. So should we be expecting to sort of see ARPU stabilize in the current range or the Q1 'twenty three range going forward?

[Speaker 2]

Yes. Where we are now, we've had 3 straight quarters of growth. It was just down compared to where we were a year ago. So Q4, Q1 and then Q2 of this here have all been trending upwards, and we certainly expect it to stay within that range, if not to continue to slightly increase upward.

[Speaker 3]

Okay. Okay, that's helpful. That's all for me. Thanks guys.

[Speaker 2]

Thanks,

[Operator]

Okay. We don't appear to have any further questions in the queue. And that concludes our question and answer session. And that concludes today's conference call. Thank you very much everybody for your participation.

[Operator]

You may disconnect your phone lines at this time and have a wonderful day.