TeraGo Q1 2024 Earnings Call Transcript

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May 15, 2024

There are 4 speakers on the call.

Operator

I would like to remind everyone that this conference is being recorded. TeraGo 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.

Operator

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 the 2023 Annual MD and A, which is available on 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 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.

Operator

I will now turn the conference over to TeraGo's Chief Executive Officer, Daniel Vucinic. Sir, please proceed.

Speaker 1

Thank you, operator. Good evening, everyone, and welcome to our Q1 2024 earnings call. Today, we are excited to share how we are further accelerating our value creation strategy as well as sharing yesterday's significant ISED decision. I am proud to report our progress in my Q3 of my tenure as CEO, which commenced on June 12, 2023. Our comprehensive strategy aimed at enhancing value for our customers, employees and shareholders continues to drive results.

Speaker 1

The improvements during these three quarters compared to the prior three quarters have resulted in increased cumulative adjusted EBITDA by $547,000 improved cumulative positive cash flow from operations by $3,800,000 and decreased use of debt facility by $10,000,000 As we revitalize sales efforts on our Smart Growth strategy, maintain focus on churn mitigation and further optimize costs, we anticipate favorable improvements in adjusted EBITDA and cash flow from operations. This progress underscores our commitment to efficient resource allocation and we aim to maintain this trajectory in the upcoming quarters. Moving on from financials, like any wireless business, Spectrum is our lifeblood. ISED's decision yesterday reiterated the Minister's objectives for licenses in the 24 gigahertz band and 38 Gigahertz band are to foster investment and the evolution of wireless networks by enabling the development of high quality 5 gs networks and technology and support sustained competition in the provision of wireless services so that all consumers and businesses benefit from greater choice and competitive prices. The decision provides certainty and clarity on our spectrum licenses, allowing TeraGo to continue to drive innovation and increase investments in its next generation wireless connectivity offerings for Canadian businesses.

Speaker 1

These next generation offerings foster a growing, competitive and knowledge based Canadian economy. As a significant owner of 24 gigahertz and 38 gigahertz millimeter wave spectrum, this decision provides increased visibility on the long term, ensuring fair usage of our wireless spectrum and driving our ability to invest in a diverse and competitive offering for Canadian business customers. There are 2 parts to the ISED decision. 1st part is license renewals and the second part is the potential for repurposing the 24 gigahertz band prior to finalizing the millimeter wave auction framework. For the license renewals, existing 24 gigahertz and 38 gigahertz spectrum licensees must demonstrate to Icen's satisfaction that they have met all conditions of license indicated in the 2014 renewal decision.

Speaker 1

Also these licenses will be issued annually and will be renewed annually until a new license process is established for 24 gigahertz and a future transition to flexible use can occur for 38 gigahertz bands. This is significant as TeraGo will continue to hold all existing licenses, ensuring no disruption of services, no additional costs, no changes, no restrictions and no spectrum clawback until a new framework and millimeter wave auction occurs. Most of all, it provides additional certainty and clarity to TeraGo's clients, employees and shareholders. For the 24 gigahertz band, ISED received a number of comments requesting it to be repurposed and auctioned with the proposed 26, 28 and 38 gigahertz millimeter wave bands. I said recognize that understanding the full range of spectrum that will be made available for the auction in millimeter wave bands will allow stakeholders to better determine their valuation for millimeter wave licenses and the potential use case for millimeter wave spectrum, including the amount of spectrum they need that is still being developed.

Speaker 1

As such, ISED plans to consult on the potential for repurposing the 24 gigahertz band prior to deciding on the timing and structure of the proposed millimeter wave auction. Furthermore, iCED recognizes that 24 gigahertz licensees need the need for certainty regarding the future of their licenses in order to continue to provide service and invest in infrastructure. ICED also recognizes that a future flexible use license process would enable the continuation of existing 24 Gigahertz band services and support the growing demand for next generation wireless services. The 3rd generation partnership project 3 gsPP has standardized 24 gigahertz band as part of the global band for 5 gs. I think continues to work towards that direction as they upgraded the 24 gigahertz to Priority 1 back in August 2023 and is now on its way to consulting on repurposing of it prior to deciding for the millimeter wave auction.

Speaker 1

SoteraGo is extremely well positioned as a nimble carrier grade managed service provider of choice with differentiated frequencies, deep capabilities and a delivery track record in emerging growth areas. I look forward to reacquainting the investor community with TeraGo and the value creation strategy in the second half of twenty twenty four. Now, I will hand over to TeraGo's CFO, Raj Sapra.

Speaker 2

Thanks, Dan. Welcome, everyone, on the call. Just a look at our KPIs for the Q1 of 2024, our average revenue per customer or ARPU for our business was $11.58 in Q1 of this year compared to $11.01 for the same period in 2023. Our ARPU levels continue to improve as a result of profitable growth coupled with changes in customer base and product mix. Our customer churn was 0.8% compared to 0.9% for the same period last year.

Speaker 2

Customer churn continues to show downward trend over the last few quarters due to continued execution of the company's strategy to focus on mid market and large scale customers as well as implementing new strategies with respect to customer renewals and retention. To go through our broader Q1 2024 financial highlights, total revenue for Q1 were flat at $6,500,000 from same period in 2023. Adjusted EBITDA was $900,000 in Q1 2024 compared to $800,000 for the same period last year. The company continues to strive for profitable growth and continues to drive efficiencies in the business. That's an ongoing process.

Speaker 2

Since the beginning of Q3 of last year, as a result of these initiatives undertaken, the company has increased the cumulative adjusted EBITDA by $547,000 as compared to the 3 quarters prior to that period. Net loss for Q1 2024 was $3,500,000 compared to a net loss of $2,400,000 for the same period in 2023. The increase in net loss was driven primarily by higher interest costs as a result of 3 additional drawdowns on the existing debt facility, which were made in the first half of twenty twenty three prior to this executive management coming into play in the company. And the other aspect of the increased loss was restructuring undertaken by the company to further optimize the cost structure and gain benefits for the upcoming quarters. Turning to the balance sheet, we ended the Q1 of 2024 with $2,700,000 in cash and cash equivalents and short term investments.

Speaker 2

In the Q1 of 2024, we generated $1,500,000 in cash flow from operations as compared to $163,000 of cash flows, which were used in operation in the same period in 2023. That is a significant improvement of $1,700,000 dollars period over period. Since the beginning of Q3 of last year, with a focus on managing the operations effectively, the company has generated a cumulative increase in cash flow from operations by $3,800,000 as compared to the 3 quarters prior to that period. With that said, I would like to turn the call back over to Dan. Dan?

Speaker 2

Thanks, Raj. Our value creation strategy continues to

Speaker 1

build significant momentum in the business combined with IZED's spectrum decisions uniquely positions TeraGo to drive innovation and increase investments in its next generation offerings for businesses. This wraps up the prepared remarks for us today, and we can now open up the call for questions. Operator, back to you.

Operator

Thank you. At this time, we will be conducting a question and answer Your first question for today is from Sid Dellowari with Cormark Securities.

Speaker 3

Yes. Hi, Daniel. Firstly, just on gross margin, acknowledging the one time adjustment related to the dispersion of the cloud and colocation business, gross margin was still down 100 bps. Can you maybe talk about some of the moving parts that are contributing to that decline? Just looking at your ARPU, it was up 5%.

Speaker 3

So just wondering what sort of contributed to that 100 basis points decline?

Speaker 2

Basically, the gross margin in the business, we think a consistent gross margin is around 73%, which we are reporting in Q1 results. And some of that is also driving from the fact that we have introduced churn mitigation strategies to retain customers, some customer discounts as well. So they are kind of factoring in a little bit on that as well. Last year Q1, there was a one time adjustment and that was basically a cleanup of the colocation business, which was sold over to Hut 8. We think the gross margin is pretty consistent and as revenue grows and we grow the momentum, revitalize our sales force, I mean, we expect this to go up.

Speaker 3

Okay. And then just on the adjusted SG and A and OpEx costs, it's obviously trending in the right direction. Since the new management came in, it was down about 500 basis points as a percent of revenue. But if we sort of look back to 2021, which was the last full year of the cloud and colocation business, it was close to 50% range. Obviously, being cognizant of the margin profile of that business, I'm just wondering if you still feel that there's more room here to right size the SG and A and OpEx line further?

Speaker 2

Absolutely. There is more room on the SG and A and operating expenses, especially around the discretionary spend of the business. As you would know that I've recently joined the company, working with Dan in tandem and the management team, we are looking for opportunities to further optimize our cost structure, and there is absolutely more room in our OpEx to get rightsized in the future quarters.

Speaker 1

And that's also in terms of And that's also in terms of Aircraft and software and OpEx, yes.

Speaker 2

Yes.

Speaker 3

Sorry, I guess just digging a little bit deeper into that, would it be more on the SG and A side just given that you're obviously focusing on growing the top line or would it be more on the corporate OpEx?

Speaker 2

You could say that in the short term, our focus is on the corporate OpEx lines. So we're looking at all of that discretionary non people cost. I think the company is in the right spot with the complements of headcount and the people we have to drive the business growth at this point. So obviously, we're looking at non people costs closely, but we're looking at cost in general all around.

Speaker 3

Okay. That's helpful. Thank you. And then one more high level question just on the operating metrics. ARPU was up, churn was down, but your connectivity revenues still declined modestly.

Speaker 3

Based on my math here, it seems like gross adds were down versus last year. So can you maybe just sort of talk a bit more about the operating environment and then your plans to sort of maybe expand your maybe if it's a TAM or what you're essentially doing to sort of spike up that gross margin line sorry, gross adds line?

Speaker 1

Yes. So as you see, our revenue has been flattish for the last five quarters or so. And you'll recall that in the first half of twenty twenty three, we had very high churn bookings. And those bookings take the next couple of quarters kind of work its way through the system and so forth. So as we were generating new sales and new installs, that was offset by the high bookings in the first half of twenty twenty three.

Speaker 1

And then the other part is implementing our Smart Growth strategy. We're not chasing any kind of unprofitable revenue as part of that. So we're now at the point where churn is much lower where it needs to be and we still have more work to do in that area. And we have been reenergizing sales with a new leadership and so forth. So over the next couple of quarters, you should see some uptick as we move forward.

Speaker 1

And back to kind of the SG and A and so forth is we're at a point where we really need to scale and continue building on this business momentum. And part of which I referred to in the remarks is reacquainting ourselves with the investor community to really double down and build upon that scale faster.

Speaker 3

Okay. And then just one last one for Raj, maybe obviously just without any official numbers or guidance, how should we think about working capital for the year versus last year? So last year, I think we saw an off about $1,000,000 in 2023. How should we think about that for 2024?

Speaker 2

Well, I mean, as you know, we can't give guidance. What I would say here is that we are absolutely laser focused on working capital management. You can clearly see from the numbers for last year, even from our debt facility, in order to run our business, before Dan came into the business, we have taken a significant amount of drawdown on the debt versus what we have taken in the last 9 to 10 months. So we continue to look at our optimization and continue to reduce our need for short term cash while we scale and grow the business. So, I think I would just leave it at that.

Speaker 3

Okay. All right. I guess that's it for me. Thanks.

Speaker 1

Thanks, Ed.

Operator

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Rusinik for closing remarks.

Speaker 1

Thanks again everyone for joining us on our call today. I'd like to thank our customers, shareholders who continue to support the company and I'd also like to thank everyone at Terrego who continues to do an outstanding job. We look forward to providing an update on our progress on the next quarterly earnings call. Operator?

Operator

Thank you for joining us today for TeraGo's Q1 2024 earnings call. You may now disconnect.

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TeraGo Q1 2024
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