TeraGo Inc. (TGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to TeraGo's Q2 2021 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone 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. 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 risk set forth in the Risk Factors section in each of the annual MD&A for the year ended December 31, 2020, and the Q2 2021 and MD&A, which are available on 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 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 very much, operator. Good morning, everybody, and a big thanks to all of you for joining our Q2 2021 earnings call. After the market closed yesterday, we issued a press release announcing our results for the second quarter ended June 30, 2021. The press release, financial statements and MD&A are currently available on SEDAR as well as on our company website along with the slide deck that we'll use for this call. Our team is encouraged by what we achieved this past quarter, and I'm pleased to be able to share those achievements with you today. What you'll hear from us today is that we've continued to focus on executing our growth strategy and, as a result, witnessed successes in adding net new customers, delivering additional managed services to our existing customer base and acquiring our new customers via both our direct sales team and our expanding channel partner network. We were also able to once again achieve a stellar Net Promoter Score of 79, which provides further evidence that our team delivers a level of service that none of our competition can match. In addition to customer and partner wins, we were also successful in bolstering and securing our balance sheet. We completed an equity raise early in the quarter and closed the quarter with an extended credit agreement, which provides us with ample capital to continue operating the business and execute our growth strategy. These successes again translated into us booking more business and customer churn this past quarter. As we mentioned on last quarter's earnings call, we expected the momentum we were seeing with improving sales and reducing churn would eventually translate into revenue growth, and we finally did see that top line growth in Q2. While our team is encouraged by this positive momentum, we also realized that we need to sustain this trend if growth is going to continue for the long term. As you can imagine, all of us are intensely focused on execution and driving the business forward in order to build on the successes we saw in Q2. So before I dive deeper into the more detailed updates, I'd like to pass the call to Dave to discuss our financials and key performance indicators for the second quarter. Dave, over to you.

Thanks, Matt. I'll kick things off by starting on Slide 7 with backlog monthly recurring revenue, or MRR, in our connectivity business. And as of June 30, 2021, backlog MRR increased to $127,000 from $87,000 in Q2 last year. The significant increase in backlog MRR was driven primarily by higher sales volume compared to the prior year period. Cloud and colocation backlog MRR for the second quarter of 2021 decreased to $15,000 from $19,000 in the same year ago period. The decrease in backlog MRR was driven by the timing of sales bookings and increased provisioning activities in the quarter. Taking a look at average revenue per customer, or ARPU. In our connectivity business, ARPU for the second quarter of 2021 decreased slightly to $1,032 compared to $1,069 in the same period last year. The slight decrease in ARPU was due to the customer contract renewals at lower rates. I'm pleased to report that our cloud and colocation ARPU for the second quarter of 2021 increased to $3,722 from $3,108 in the same period last year. The increase in ARPU was due to new customer acquisitions, upgrades from existing customers and some churn of lower ARPU customers. Now looking at our third key operating metric, churn, for the second quarter of 2021. Churn in the connectivity business was 1.4%, which compares favorably to the 1.7% in Q2 of last year. If you recall, we saw an elevated level of customer churn in the prior year period due to some customer closures and restructuring related to the COVID-19 pandemic. Churn in our cloud and colocation business was steady at 1.1% in the second quarter of 2021, consistent with the result in Q2 of last year. Moving on to revenue on Slide 8. You can see that our total revenue in the second quarter slightly increased to $10.9 million compared to $10.8 million from the prior quarter, but declined 6% from the $11.6 million in Q2 of last year. Connectivity revenue in the quarter decreased slightly to $6.6 million from $6.7 million in the prior quarter and decreased 11% from $7.4 million in Q2 of 2020. The declines in both periods were attributable to churn exceeding customer provisioning. Cloud and colocation revenue increased to $4.3 million compared to $4.1 million in the prior quarter and increased from $4.2 million in Q2 of 2020. The growth in both periods was driven by new customer acquisition and upgrades from existing customers. Turning now to EBITDA on Slide 9. In the second quarter of 2021, our adjusted EBITDA slightly increased to $3.4 million from $3.2 million in the prior quarter but decreased from $4.8 million in the same period in 2020. The reduction in EBITDA was driven primarily by a decrease in revenue, higher cost of services due to the mix of services sold and a smaller amount of government grants received. Moving down the income statement, net loss for the second quarter of 2021 decreased to $1.8 million from $2.2 million in the prior quarter but increased from $0.7 million in the same period last year. Turning to our cash flow on Slide 10. In the second quarter, we generated $2.2 million in cash from operating activities while capital expenditures were $2.2 million or 20.6% of total revenue, driven primarily by success CapEx in both the connectivity and the cloud and colo businesses. On the balance sheet in Q2, we significantly improved our liquidity with the closing of a $14.7 million private placement as well as an extension to our existing credit facility. The proceeds from the private placement will support the ongoing execution of our strategic plan, and a portion of the proceeds were used to repay our term debt in Q2. In total, we repaid $5.25 million towards our long-term debt, which reduced our total debt outstanding to $22 million at quarter end. The credit agreement has been extended to June 2023, and the ongoing quarterly payments have been reduced to $562,500 per quarter, down from $750,000 per quarter. The net effect of these changes was quarter end cash balance of $9.9 million, which was up from $5.9 million at year-end December 31. Our improved cash position and access to our revolving facility provides us with ample working capital to execute on our near-term plans. And with that said, I'd like to turn the call back to Matt, who will provide an update on our encouraging trends that we're seeing in addition to our multipronged growth strategy. Matt?

Thanks for that, Dave. So I'd like to take a few minutes now and share some thoughts with you on how we're doing with the growth strategy. If you have the slide deck shown on Slide 11 of that presentation, I'll start with the first element of the strategy, which is maintaining a profitable business and generating positive free cash flow. We're driving this element of the strategy by growing our customer base and expanding the managed services that we provide to our customers on top of our connectivity, cloud and colocation products. A couple of good examples of the customer wins contributed to the success in this area during the past quarter are the projects we currently have underway with Ducks Unlimited and Compusense. As a world-leading registered charity dedicated to the conservation of water, wetlands and wildlife, Ducks Unlimited was in need of a robust networking system to enhance its operational efforts. After an extensive vetting process, Ducks ended up proceeding with us due to the comprehensive SD-WAN solution we're now offering, our network and wireless coverage across the entire country and also our ability to deliver exceptional levels of service. We're now in the process of working with Ducks to install software-defined wide area network services at their locations nationwide. Next, Compusense is a world-renowned industry leader that creates consumer sensory testing solutions and Software-as-a-Service platforms for businesses and countries. The Compusense team needed a managed service provider that could migrate their data to a secure Canadian cloud environment and provide a full-proof backup solution, and we were the chosen candidate. With the success of our initial implementation for Compusense, our team has expanded the partnership and we're now in the process of jointly working to stand up the new VMware private cloud environment for them at our Kelowna data center. In addition to adding customers last quarter, we also launched several new managed services that have been positively received by both our new and existing customers. In March, we launched Managed Network Services, which is a service that provides our connectivity customers with peace of mind, knowing that we're monitoring their networks 24/7 to ensure everything is working properly. In July, we expanded our Microsoft product portfolio by adding Microsoft 365, managed Microsoft Azure and managed disaster recovery, which means our customers can now rely on us to deal with the complexity associated with implementing and managing these Microsoft products. We plan to continue adding services like these that make it easier for customers to consume our network and infrastructure products. So next, I'd like to shift gears and talk about the second element of the strategy, which is building a premier channel and alliance partner program. Overall, we've been encouraged by the number of new partner wins and engagements that our team delivered this past quarter. A good example of this is our expanded relationship with Pure Storage. Pure Storage is a technology company that develops all-flash data storage hardware and software products and helps customers put data to use while reducing the complexity and expense of managing the infrastructure behind it. In the second quarter, we announced that TeraGo was the first Pure Storage partner to achieve Canadian Elite Managed Service Provider partner status. Our initial engagement, which started with Pure last year, was to provide customers with state-of-the-art cloud storage bundled with TeraGo's managed cloud, backup and disaster recovery service. We've seen strong synergies working hand-in-hand with the Pure Storage team so far and look forward to expanding the partnership with them. In addition to technology partners like Pure that enable us to bring additional services to our customers, we continue to expand our relationships with reseller partners that bring us new connectivity, cloud and colocation customers. Between the technology and reseller partners, we've been able to drive significant growth in our channel sales and saw a 173% growth in channel sales over the same period last year. Our team feels strongly that the reason we've been able to continue winning new business and expand our existing customer relationships is due to our track record of delivering exceptional service for our mid-market and enterprise customers. In the vertical markets we focus on more often than not, internal teams are wearing many hats and, as a result, have a limited time to focus on strategically important systems work. When we come into the equation, we supplement the customers' IT teams as the expert in wireless network, cloud, colocation and connectivity to provide an experienced TeraGo team and our managed services that deliver 24/7 support for our customers. So I think it's safe to say that our employees go the extra mile to give our customers peace of mind and let them focus and let their IT teams focus on running their businesses. As I previously mentioned, the best evidence we can show you that supports these sentiments and claims is our Net Promoter Score, or NPS, which is a fairly widely utilized industry metric of consumer loyalty and relationships. We think NPS is a great measure of success or failure within the services industry as the scores are provided by customers after they interact with the company. We recorded an NPS score of 79 for Q2, which to put that in perspective is many multiples ahead of our competitors, which we think average in the single digits and, in some cases, into the negatives. So we are far and away ahead of our competition when it comes to service levels and quality. As I mentioned in last earnings call, all the things I just described to you are contributing to the momentum we're starting to see with the business. We continue to see a positive difference between our sales performance and customer churn, which means you're growing our customer base and associated revenues. This past quarter is positive evidence of this momentum as we saw revenue and EBITDA growth. If we continue to build this type of momentum, we'll continue to see this corresponding type of growth in our business. Then the last thing I want to mention is how we're doing with the third element of the growth strategy, which is moving to offer 5G services. As we described on the last call, we continue to test different equipment at different TeraGo locations and continue to see positive results. We also continue discussions with several customers on potential pilot installations. These would be for private networks at various sites, and those discussions are ongoing. And we're targeting at this point a similar schedule to what we described for you last -- on the last call, which is having these installations up and running by the end of the year. So in conclusion, it's been an encouraging first half of the year for us and our team. We continue to be very well positioned as a company given our national wireless footprint, our unique millimeter wave spectrum assets, our cloud and colocation infrastructure and the ability to deliver a host of managed services on top of our network and infrastructure products. Our team will maintain its focus on the 3 key strategic elements and continue to drive new customer additions and expanding services portfolio, building our basic channel partners and positioning the company to leverage our 24-gigahertz and 38-gigahertz spectrum assets as 5G applications for business gain traction across Canada. So that concludes the prepared remarks. I think we can now open the call up for questions. So over to you, operator.

[Operator Instructions] We'll take a question from Matthew Lee with Canaccord.

Yes. So on the colocation side, glad to see continued strength on the ARPU front. Are there any onetime items in there? Or is that kind of the $3,700 number to be expected to continue going forward?

Dave, I'll let you fill him in.

Yes. Yes. I don't think there's any one-timers in there, Matt. We're seeing very good traction, and we expect to continue that growth.

Great. And then maybe if we think about connectivity, this is the fourth straight quarter of $100,000-plus backlog. Is that just incoming demand? Or are you seeing any delays in provisioning that might be driving some of that?

So it is some increase in incoming demand. And while we'd like to provision faster, we have certain things we need to go through in order to provision that connectivity like real estate approvals. And so we're maintaining a case that draining that backlog and would anticipate that backlog starting to come down a little bit. And Dave, I don't know if you have any more color you wanted to share on that?

Yes. No, that's right, Matt. I think there's a number of factors that go into the backlog. Connectivity-type business that we've been booking tends to be the multi-site deals that we talked about in previous quarters, and those take a little longer to provision. So in addition to getting sites prepared, making sure that customers are ready for those services to be provisioned and then just managing our own teams across the country, we're seeing improved provisioning, but we're very focused on making sure we can continue to improve that.

Great. And then last for me, in terms of stabilization of revenue, are we still on track to kind of reach that year-over-year revenue growth level by Q4 '21?

I think I'll start. You can -- go ahead.

Well, I was just about to say, Matt, I think we all know we don't typically provide forward guidance. And I'd say we're really encouraged by the momentum we're seeing. And if we can continue that momentum, we would expect to see growth and continued growth throughout the rest of the year. Yes, Dave, I don't know if you want to add anything to that?

No, that's everything. Thanks.

Your next question comes from the line of Sid Dilawari with Cormark Securities.