TeraGo Inc. (TGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to TeraGo's Q1 2021 Financial Results Conference Call. [Operator Instructions] 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. 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 and the Q1 2021 MD&A, which are available on www.sedar.com. Except as may be required by Canadian securities 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 a better understanding of how management views the company's overall performance. I will now turn the conference over to Mr. Matthew Gerber, CEO of TeraGo. Please go ahead.

Thanks, operator. Good morning, everybody. Hope your day is off to a great start, and thanks for joining our Q1 2021 earnings call. After the market closed yesterday, we issued a press release announcing our results for the first quarter ended March 31, 2021. As the operator mentioned, the press release, financial statements and the MD&A currently available on SEDAR as well as our company website, along with a slide deck that we'll use for this call. Although I have been on this call a few times in the past, I am absolutely thrilled to join you today for the first time as a company CEO. As Dave mentioned on our last call, our entire team believes that TeraGo's reaching a critical inflection point and we're seeing many leading indicators affirming our belief. These leading indicators are showing us that we're building momentum, and you'll see evidence of that as sales volume and velocity and improved management of our existing customer base are reflected in the financial. Dave is going to take you through in a few minutes. I'll then talk more about these indicators and the operating momentum we're seeing in the latter part of this call. I suspect all of you have seen last month's announcement, about the $14.7 million investment we received, which is led by Cymbria Corporation and EdgePoint Investment Group. This infusion of capital gives us additional flexibility and enables us to accelerate many of our key growth initiatives, including upgrading our core network infrastructure, expanding our current product and services offerings, and continuing to test and pilot 5G services. Additionally, we believe participation from the high quality institutional investors in this recent capital raise further validates TeraGo's mission and goal of becoming one of the first operators to launch commercial 5G fixed wireless services in Canada. With that said, before I provide additional updates, I'll pass the call to Dave to discuss our financials and key performance indicators for the first quarter. Dave, over to you.

Thanks, Matt. I'll kick things off by starting on Slide 7 with backlog's monthly recurring revenue or MRR in our connectivity business. And as of March 31, 2021, backlog MRR increased to $131,000 from $89,300 in Q1 last year. The significant increase in backlog MRR was driven by higher sales volumes in both our direct sales team and channel partners. Cloud and colocation backlog MRR for the first quarter of 2021 grew to $35,000 from $18,000 in the same year-ago period. And when compared to Q4 2020, cloud and colocation backlog MRR is down from $56,000 due to very strong provisioning activity at the end of Q1. I expect we'll see the full benefit of this provisioning in our second quarter revenue results. Taking a look at average revenue per customer or ARPU, in our connectivity business, ARPU for the first quarter of 2021 decreased slightly to $1,008 compared to $1,033 in the same period last year. The slight decrease in ARPU was due to customer contract renewals at lower rates. Our cloud and colocation ARPU for the first quarter of 2021 increased to $3,623 from $3,240 in the same period last year. The increase in ARPU was due to customer upgrade and cross-selling activities as well as some churn of lower ARPU customers. And looking at our third key operating metric, churn for the first quarter of 2021, churn in our connectivity business was 1.3%, which compared to 1.5% in Q1 of last year. The decrease was due to ongoing customer retention initiatives and a increasing mix of mid-market enterprise customers and our customer base, which tend to be stickier than SMB customers. Churn in our cloud and colocation business increased to 1.6% in the first quarter of 2021 compared to 1% in Q1 of last year. The increase was due to higher churn of some low ARPU, small business customers that were proactively reducing their costs due to the current economic environment. Excluding churn from these small business customers, the cloud and colocation churn rate would have been 0.6% in Q1, which is in line with prior quarters. And I want to emphasize here that the churn at small business customers did not materially impact our revenues in Q1. You can see evidence of this in a relatively flat cloud and colocation revenues and growth in ARPU this quarter. Moving on to Slide 8, you can see that our total revenue in the first quarter declined 1% to $10.8 million compared to $10.9 million from the prior quarter and declined 6.9% from $11.6 million in Q1 of last year. Connectivity revenue in the quarter was $6.5 million, a decrease of 11% from $7.3 million in Q1 of 2020. The year-over-year decrease was attributable to churn exceeding customer provisioning. I would note, however, that connectivity revenue in Q1 of 2021 is flat compared to the $6.5 million in the prior quarter. Cloud and colocation revenue decreased slightly to $4.3 million compared to $4.4 million in the prior quarter and was consistent with the $4.3 million we reported in Q1 of last year. Turning now to EBITDA on Slide 9. In the first quarter of 2021, our adjusted EBITDA was $3.2 million compared to $3.6 million in the same period in 2020. The reduction in EBITDA is a result of the decrease in revenue. Moving down to the income statement, net loss for the first quarter of 2021 totaled $2.2 million, which was consistent with the prior quarter and Q1 of last year. Net loss was flat despite the decline in revenues due to lower operating expenses, lower finance costs. Turning now to cash flow on Slide 10. In the first quarter, we generated $2 million in cash from operating activities, while capital expenditures were $2.3 million or 21% of total revenue, driven primarily by success CapEx in the connectivity and cloud businesses. Turning to the balance sheet, at quarter end, we had $2.9 million of cash, which was down from $5.9 million at year-end December 31, and as Matt mentioned earlier, on April 21, we strengthened our balance sheet by raising approximately $14.7 million of capital. So, on a pro forma basis, we have approximately $17 million of cash on our balance sheet. Our strong liquidity position allows us to invest in the 5G fixed wireless business and will facilitate our growth plan of becoming one of Canada's first 5G fixed wireless operators. And with that said, I'll turn the call back over to Matt to provide some additional updates. Matt?

Thanks, Dave. So I want to share a few brief thoughts with you now on how we're doing with our growth strategy, which if you have the slide deck is, shown as the 3 growth pillars. I think they're on Slide 11. I'll start with the first pillar of, maintaining a profitable business and generating positive free cash flow. In conjunction with the KPIs Dave just shared with you, we want to give you some insight into how we track momentum with the business. To do this, we monitor the difference between our sales volume and churn. When this difference is positive, it means we're growing our business by selling more than we're losing in churn and when it's negative, it means our business is shrinking because we're losing more in churn than we're adding the new sales. We don't report on this metric, but thought would help you understand why we feel like we're hitting an inflection point. Historically, our management team relied on this metric to track our company's forward-looking progress, as it's typically a strong leading performance indicator. As a result of the strategic initiatives gaining traction, we've seen a positive difference between sales volume and churn for the past few quarters. These positive indicators are why we feel like things are working for us and if we maintain this positive momentum, we expect this to be reflected in our reported financials in the coming quarters. So next I'd like to move to our second pillar, which is building a premier channel and alliance partner program. We're really pleased with how we've seen results form in this area. Our partner network continues to expand. We're seeing sales traction from Canadian partners and from partners outside of Canada that have customers that need a connectivity and cloud and colocation. When you look at the numbers year-on-year, partner sales have increased over 400% in the first quarter, and we expect this trend to continue, as we expand our partner base and get existing partners position to improve productivity. We feel a key contributor to our success in these 2 strategic areas is, how we continue to add value for our customers with products and services, layered on top of our infrastructure that make it easier for them to consume and manage connectivity, cloud and colocation. As an example, we recently expanded our product portfolio with a managed network service offering. This service provided on top of any of our connectivity infrastructure products, enables business customers to hand off the complex task of running their networks to us, which in turn lets our customers focus on running their business, which is much more important to them. Speaking of our team of network and infrastructure experts, we continue to receive an extremely high Net Promoter Score or NPS, which is a widely utilized industry measurement of customer loyalty and relationships. In Q1, we achieved an NPS of 74, which is a 19% increase compared to the prior quarter. This is a testament to the attention to detail, our team puts into supporting our customers and the quality of service we provide. We expect to continue emphasizing the importance of customer service and customer intimacy, and believe that this facet of our business gives us a true competitive edge. Another example of our focus on delivering infrastructure-powered services is our partnership with Pure Storage to become their first Canadian elite managed service provider partner. The strategic alliance reinforces our commitment to collaborating with industry leading brands, and enhancing their core technology and infrastructure, to deliver products that are best fit for our customers' data storage needs. The last element of our strategy and strategic progress I want to mention is, our 5G technical trials. We continue to see improved performance with our technical testing, including improvements in range and speeds. We've also begun discussions with several project teams that are evaluating different sites and different use cases for pilot installations, and expect to start deploying in some of these locations in the second half of this year. Examples of these use cases include things like, the lighting up a [ cork ], a university campus, a large manufacturing facility, a mine or an area of a city all for high speed device connectivity and device interconnection. So in conclusion, we're really pleased to share with you that we're encouraged by the progress in the traction we're starting to see across every facet of our business. On top of this, our operating momentum and growth outlook is being affirmed by several leading indicators and we expect this trend to continue. That concludes the prepared remarks. Operator, we can now open up the call for questions.

[Operator Instructions] And your first question comes from Matthew Lee with Canaccord.

So I just wanted to ask you about the -- a turnaround on the connectivity business. I mean it looks like backlog and sales are continuing to be strong, but revenue really isn't improving year-over-year from a quarterly basis. Can you maybe help me understand if that's just challenges on provisioning and if so, what type of growth you are expecting into Q2 and then into FY '21 et cetera.

Dave, do you want to take that or you want me to take a lead for that?

I'll start, Matt. And then you can provide some additional color. So Matt, you would have noticed in our prepared remarks that the connectivity revenue actually saw a slight uptick from the previous quarter. So, yes, it is down, I think it's 11% year-over-year, but quarter-over-quarter, we saw some growth. And so this is why we feel we are at that tipping point of turning the corner. The other aspect here and you mentioned that that was provisioning. We've seen some very good progress from our team in provisioning on the connectivity side for a number of reasons, 1 is improved processes, 2, there are some new products that we've introduced on the connectivity portfolio that, especially our Internet 50 10 product, which is a point to multi-point solution, which is -- results in faster times to a provision. And so there are couple of elements there as well with the improvement in the channel on sales of across Canada of multi-site deals, and we feel very optimistic about the connectivity business. I don't know Matt, you have anything you might add?

I think you hit most of it, Dave. I think Matt, the only other thing that Dave alluded to it is, we are seeing traction in the mid-market with these additional services on top of infrastructure and the accounts are getting larger, and the deployments are getting a bit more complex. So there is a little bit more lag in terms of when we book the business and when we ship the business in some of these accounts. And as Dave mentioned, we're starting to see the growth and we're expecting that if we maintain this momentum to continue through the rest of the year.

That's great. So I mean, in your view, we should be seeing acceleration quarter-over-quarter going into Q2, Q3 and then, arguably Q4?

Yes, that's if we can maintain this bookings momentum and we'll certainly see that.

Right okay. And then maybe -- I actually had a question on 5G. I know you guys are really focused on deploying and trialing 5G's especially with customers. But are you seeing a demand from your current customer base for our 5G level service?

That's a great question, and it's really interesting to see what's happening right now. I mentioned in our Board yesterday, this reminds me of when I lived through the early '90s and the initial wave of adoption with packet data radios, right, when we saw the first packet data radios at the market. There is a lot of, call it, uncertainty and noise about various use cases, and what the right use case was and the economics around use cases. And one of the really neat things that's happened over the past 6 months is, we've seen, and this is typical of early stage in these technology shifts in markets, we've seen a formation and, call it a coming together of customers, solidifying their view on certain use cases. And it's those use cases that I mentioned. We're having active discussions with university, as an example of doing 1 of our first pilots to light their campus up. There is interest and you may have seen other deployment news around lighting up a port. So we're having discussions there. A wide area network for a mine. We're having discussions there. So we've seen a definite coming together of specific use cases that customers are asking us to help them deploy. And as I mentioned, we should start seeing those deployments in the second half of this year.

Your next question comes from Bentley Cross with TD Securities.

First, a point of clarification on Matt's point of questioning. Am I correct in assuming that the majority of the provisioning activity is going to happen in Q2, such that, if we assume that backlog gets converted to revenues, net of churn, we could see a sequential step up of, call it $300,000 or somewhere in that ballpark?

Dave, you'll take that?

Yes, let me take that. So the thing about provisioning is that it bounces around, Bentley, depending on the type of products that are in our backlog, and frankly, even customer readiness. And so the point that we made here is that, and especially in the cloud and colo side, it was a decrease in the backlog due to very, very strong provision at the end of the quarter in Q1, and provisioning activity is improving, there is no doubt about it, and again as I mentioned because of processes and because of new products that we've brought into the portfolio. And so we are very encouraged by the provisioning improvement that we've seen. That being said, it does bounce around, and I don't want to predict a very specific kind of turnaround, other than just a general optimism that you've heard from both me and Matt, on the fact that these elements that are critical to getting revenue books are improving.

Okay. Related to that, so I -- my math, it seems like connectivity subs were actually positive in terms of net adds in the quarter for the first time and quite frankly, I don't know how long. Is that true? And then an extension of that, can we expect that going forward as well?

I'll start answering and you can chip in. So I think the answer -- I think your math is correct, Bentley, I think we are seeing great momentum on the connectivity side. Again, our focus on the mid-market and the enterprise space, we're seeing activity coming through both direct sales and channel, so larger multi-site deals on connectivity, and that's where we're seeing these larger number of sites being to play in provisions. So it is encouraging, and as Matt said, as long as we continue to see that momentum, it's going to bode very well for the business.

Great, that's helpful. And taking a step back, a bigger picture question for Matt. You highlighted in the multi-pronged strategy update and outlook that you want to have the proper business with positive free cash flow generation. This quarter, the cash flow was slightly negative, but that's really not the norm for you guys. Am I correct in assuming that you're going to balance the desire to step on the gas pedal with making positive free cash flow throughout 2021?

I think that's a fair assumption, Bentley, that's the balance we have to watch, and obviously we have debt that we have to service and covenants we have to comply with. And so we're going to walk the line and we will put as much fuel on the fire as we possibly can. And if it makes sense to get more aggressive as we see market demand, we certainly have the option with the liquidity we have on the balance sheet to be able to do that.

Okay. And then you last one from me, speaking of liquidity and the debt. Given all that's happened with the private placement, but then the debt that is outstanding and coming due in 2022, can you give us an update of how you're thinking about sustaining that and it was just if you need another 1 year rollover or how you guys expect...

Dave you got that one?

Yes, I got that one. Good question, Bentley, and I think what I will say is, that we're already engaged and in discussions with the lenders for the extension. I'm very pleased with how the discussions are going so far and I fully expect that the extension will be in place before Q2. And I think credit markets are not as tight as they were a year ago which they were, say in the first few months of the pandemic. And so again, I'm very confident that we'll be announcing something surely on that debt.

[Operator Instructions] And your next question comes from David McFadgen with Cormark.

Couple of questions. Do you have any idea when ISED put a rule on the 24 gigahertz spectrum as whether we're allowed to use for...

So it's a great, great question, David. Specifically, no, I think we all have a general sense that ISED is stepping through looking at mid-band this summer. And then looking at the 38, 39 range following that and then the 24. And we'd be guessing if we told you what we thought that schedule is at this point. We do talk very frequently to ISED about these issues and obviously are active with the consultations and, I think the best guidance I can give you there is to look to see what they've recently said about their current schedule.

Okay. And then just on the fixed wireless, 5G fixed wireless. Are you in discussions with anyone about a -- some sort collaboration and JV to be able to offer year 6G sorry, 5G fixed wireless service on a retail basis or B2C?

So at this point, there is a tremendous interest in 5G across the board. And I can't disclose specifics about who we are having discussions with, but I mentioned before, it really feels like the Wild West early days of the early '90s in the first packet data radios. And so there is a lot of interest across the board and we are engaged across the board with discussions on various use cases. And what we're going to want to focus on as a business is, our core value proposition and something that we're driving is the ability to service businesses with infrastructure-powered services, and providing a level of service that our competition can't do. So I think that's the best guide we can give you on where you will see us starting to focus. And if it makes sense for us to look at partnering or teaming with somebody to further drive value in returns for shareholders with other use cases, and that's certainly something we would look at.

Your next question comes from Bentley Cross with TD Securities.

One more if I may. Dave, a while ago, you highlighted that you saw kind of a ballpark $3 billion TAM for the fixed wireless business within your footprint. I mean that's a huge number. If we step back a little bit and think about kind of what you have access to, from the existing rooftops whether that be team building or immediately adjacent, can you parse that down, and talk about the potential opportunity as we power with the network for what is immediately available and not just the entire end.

Yes, that's a very good question. Bentley, it's a difficult 1 for me to do kind of on the slide here, and on that, if you've got a view, just given your previous comments on all the activity we're seeing there.

Yes, I think it's hard to give you specifics Bentley, because when you look at the opportunity in front of us, you can bucket it in a few different ways, right. There is -- we have an existing base that we will plan to offer 5G infrastructure and services on top of that too. And so there is a TAM available with that. Then there are these new use cases that we talked about that have a market size and the only use cases, right. So it's hard -- it's actually hard when you're looking at a brand new market to say what's -- what is the value of that market because we're still working through what the operating and financial models would look like there. But it is -- we know it's big and then there is that third bucket that David alluded to, which is, there is a whole host of B2C kind of opportunities. So it's big and it's really hard to parse it right now. But we are going through that process and we're going through a strategic planning process right now, and we are starting to put numbers to those various opportunities, and starting to look at the requirements for us to be able to deploy in those different areas.

At this time there are no further questions. I will now hand the call back to Matthew Gerber for closing remarks.

Okay. So I think we are wrapped up. So again, thanks everybody. Hope your day's off to a great start. Stay safe out there. Thanks for joining us for this Q1 2021 earnings call and we'll end the call at this point. Have a great day.

That concludes today's conference. Thank you for your participation. You may now disconnect.