TeraGo Inc. (TGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to TeraGo's 2020 Year-End Financial Results Conference call. [Operator Instructions] I would like to remind everyone that this conference call 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 on 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 each of the annual MD&A for the year ended December 31, 2020, which is available on SEDAR, www.sedar.com. Except as may be required by Canadian security laws, 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 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 better understanding of how management views the company's overall performance. I will now turn the conference over to Mr. David Charron, Interim CEO and Chief Financial Officer of TeraGo. Please go ahead.

Thank you, Denise, and good morning, everyone. Thank you for joining TeraGo's Q4 Earnings Conference Call. After the market closed yesterday, we issued a press release announcing our results for the fourth quarter and full year ended December 31, 2020. That press release, financial statements and MD&A are currently available on SEDAR as well as our website along with the slide deck that are used for this call. Before I provide an operational and financial update, I'd like to turn the call over to Matt Gerber, TeraGo's Board Chairman, to say a few words. Matt?

Thanks, Dave. Good morning, everybody. It's good to be on this call again with you today. I think the last call I was on was last summer, when we announced the change in our leadership. So it's nice to be able to join this call again. First thing I want to do is get ahead of a question that many people have asked me over the past few months and that is about the status of our CEO search. Our team wanted to get through our strategic planning process towards the end of last year and then determine our strategy going forward before searching for a new leader. The Board spent time in the past few months reviewing candidates and I'm happy to say that we're close to announcing a new CEO. And I can assure all of you that the candidate will be aligned with TeraGo's vision and strategy and will be committed to working with this management team to execute it. Now before I turn it back over to Dave to dive deeper into the financials and the key performance indicators, I want to provide a brief overview of the fourth quarter. I think, as all of you know, operating during this pandemic is now the new norm for every company, regardless of the industry or geography. Thankfully, as a provider of essential services, we've been able to sustain our operations even while many of our team worked remotely. We've also leveraged our resilient business model and executed on our near-term initiatives, all of which have positioned us extremely well for long-term success. In the near term, this team has been able to maintain solid customer retention, grow our backlog with new orders and expand our sales pipeline. Thanks to great teamwork and leading around-the-clock customer service, our Net Promoter Score, or NPS, continues to be strong and well ahead of our competition. As we mentioned in the earnings release, our NPS score is now 62 and it's something that we're extremely proud of. And obviously, we remain dedicated to serving our customers. So with that said, I'll pass it back to Dave. And we'll take a quick look at operating metrics for Q4. So Dave, back over to you.

All right. Thanks, Matt. Let's go to Slide 5 and starting first with our backlog monthly recurring revenue, or MRR, in our connectivity business. At year-end, our backlog MRR increased to $130,000 from $92,000 at the end of last year. This significant increase was driven by higher sales volume from both the direct sales team and the channel team. Cloud and colocation backlog MRR for the fourth quarter of 2020 grew to $56,000 from $19,000 a year ago. The increase in backlog MRR was also driven by higher sales that had yet to be positioned. Taking a look at average revenue per customer, or ARPU. In our connectivity business, ARPU for the fourth quarter of 2020 slightly increased to $1,025 compared to $1,019 a year ago. However, our cloud and colocation ARPU for the fourth quarter of 2020 increased to $3,582 from $3,393 last year. The increase is due to strong upgrade activity from existing customers and, as we also saw last quarter, increased demand from more CPU storage and other offerings within our cloud and colocation portfolio. Looking at our third key operating metric, churn, for the fourth quarter of 2020. Churn in both our connectivity business and the cloud and colocation business was relatively flat compared to Q4 last year and compared to last quarter. I'm very pleased to see that churn for both segments of their business remain at a consistent level as a result of improved retention efforts, which also reflects the essential nature of our service to our customers' business. Turning now to the financial performance for the fourth quarter of 2020 on Slide 6. You can see that our total revenue in the fourth quarter declined 9% to $10.9 million compared to $12 million in Q4 of last year. Connectivity revenue in the quarter decreased 11% to $6.5 million compared to $7.3 million in Q4 of 2019. The decrease was mostly attributable to churn exceeding provisioning of new customers and new services. Cloud and colocation revenue decreased 6% to $4.4 million compared to $4.7 million in Q4 of 2019 but increased 1% to the prior quarter. Turning now to EBITDA on Slide 7. In the fourth quarter of 2020, our adjusted EBITDA was $3.7 million compared to $4 million in Q4 of last year. The decrease was primarily due to the decrease in revenue as well as investments we're making in our go-to-market team. Moving down the income statement. Net loss for the fourth quarter of 2020 totaled $2.2 million, which was relatively flat compared to a net loss of $2.1 million in Q4 of 2019. Taking a look at our cash flow on Slide 8. In the fourth quarter, we generated $2.3 million in cash from operating activities, while capital expenditures were $1.5 million or 13.8% of total revenue driven primarily by the strong success CapEx in the connectivity business. Turning now to the balance sheet at quarter ended at $5.9 million in cash, which was down from $8.7 million at the end of 2019. I'd now like to review our progress on executing our multipronged growth strategy, which we think of as our core 3 pillars, on Slide 9. I'll start with the first pillar of maintaining a profitable business and generating positive free cash flow. As I referenced earlier, we've seen our churn stabilizing, which is crucial to moving us closer towards revenue growth and positive free cash flow. In addition, we continue to exercise prudent cost management and we continue to invest carefully. That leads me give a second pillar of accelerated growth through a premier channel and alliance program. And while we've seen solid traction across all facets of our sales organization, which includes inside sales, direct sales and channel sales, our channel team is really starting to contribute and has significantly grown our sales pipeline. Last but not least, I'd like to provide an update on our 5G technical trials. And as we continue to ramp up testing, we've been encouraged by our results thus far. As we've disclosed in our most recent press release, we announced significant advancements from improved throughput speeds to approximately 1.5 gigabits per second. Additionally, we're shifting our technical trials from our head office location to our Mississauga data center to better leverage our network core as well as to enable edge computing options. I anticipate that we'll be moving to 5G customer pilots in 2021, thanks to the excellent progress we've made in our technical trials. I do want to add that while we're waiting for new stand-alone millimeter wave radios and equipment to become available before we can launch a national rollout of 5G services, our engineers are very excited about some new point-to-multi-point equipment that they're testing and that will likely roll out in advance of the stand-alone 5G millimeter wave technology. We'll have more to say about this later this year but both the performance and the economics at this stage look very promising. As well as we're launching new products and services today to leverage our network and our customer base. A great example of this is our recent sales win to deliver managed SD-WAN solution to a prominent national health care provider in Canada. Our offering provides advanced visibility for application and network optimization, leverages TeraGo's fixed wireless internet 50/10 product and will enable our customer to run an intelligent and efficient national network. In conclusion, as a result of our resilient business model, diversified customer base, significant growth in order backlog, stabilization of churn and launch of new products and services, I believe 2021 can become an inflection point for TeraGo. And we look forward to reaping the benefits of our shareholders, employees and our partners. That concludes my prepared remarks. And we can now open the call for questions. Denise?

[Operator Instructions] And your first question comes from Bentley Cross with TD Securities.

First, I wanted to ask a bit of a point of clarification. I know you guys don't disclose connectivity subs, but I can kind of back into it from all the other data points. And the way I calculated connectivity subs are down roughly 125 quarter-over-quarter. So first question is, is that roughly accurate. And then second question to that, because churn was flat, am I correct in assuming maybe in the COVID environment, that just meant less provisioning than we've seen in recent quarters?

Yes. I won't comment on the number of customers that churn. But I think you're generally -- the way you're thinking about the event is generally correct. We have seen some churn and especially in the smaller customer base. And that is -- I'll call that the normal course of churn that we've seen throughout the past few quarters. And with respect to the second part of your question, can you just repeat it?

Because churn in absolute numbers was flat, when I get that implied number of subs that rolled off, it suggests that the gross loading was down. And I assume that's maybe because of the COVID environment and more difficult to provision, but any color you can provide would be appreciated.

Yes. No. That's correct. And so our provisioning activity has been down and really hasn't yet been able to catch up with the sales activity that we've seen. So it's a good point and it's one I want to elaborate on in this section of the call. The provisioning activity has been influenced by a number of factors. I'd say the first thing that I look at is the mix of services that are purchased and whether we need to use third parties to deploy those to the customer. The second point is the desired time line for service activation. And that becomes a bigger factor for customers with multi-site connectivity. And the third thing that we're seeing, Bentley, is the -- and I would say I'd attribute this to COVID is just getting timely access to real estate and to equipment supply and both of those factors have been impacted here. So we've seen great sales activity that's increased our order backlog. And a big focus area for us in 2021 is going to be on provisioning, making sure that the provisioning team can keep up with the go-to-market team.

Okay. And then last clarification question. On the gross margin front, am I correct in assuming that the step-down is somewhat a function of you using partners increasingly, whether that be the channel or selling third-party solutions and you guys selling into your customer base?

Yes. That's partially correct, Bentley. It is due to the mix. So it's not only using partners but there has been some resale. As we look to provision customers with multiple sites, most of the sites or many of the sites are on-net and some of it's off-net. And so there's going to be a mix of margin there in those types of deals.

Okay. And then lastly and a bigger picture question. The press release you put out on these increased throughputs and speeds is nice. But I think a lot of investors and myself included, we're kind of hoping that this ball would get rolling a little bit faster. And I acknowledge that it's a lot easier to do in a spreadsheet than it is in the real world. But what has been the major impediment to putting out a customer solution? I know, obviously, it's hard to get gear when you're a TeraGo and not Verizon. But any other color you can offer would be appreciated.

Yes. No, happy to do that, Bentley. And I think a lot of it does have to do with the fact that we're still using non-standalone 5G equipment. And that equipment also requires the use of 4G LTE radio along with the 5G non-standalone equipment. And so while we're waiting for new equipment, we're doing the testing that we can. We just received some newer, higher-powered customer edge devices. And that's enabled us to get some of those impressive speeds that we've just recently announced. And so as we're waiting for new equipment, we're doing a couple of things, Bentley. First, we're going to be moving our testing to our Mississauga data center, where we can look at potentially seeing how edge competing plays into the overall 5G solution. And second is what I mentioned in my prepared remarks, was around some new equipment, some new point-to-multi-point equipment that is pre-5G but that will enable us to really increase speeds and improve the economics of our delivery to customers. And so we're not standing still. We're also disappointed in the rate of speed of our progress here. But given all the constraints that we have, we're doing the best that we can.

Your next question comes from David McFadgen with Cormark.

A couple of questions. So just on the large customer that you announced this morning, can you tell us who that customer has worked previously? And if you can disclose maybe the annual revenue? Is there anything material from that customer?