TeraGo Inc. (TGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to TeraGo's Fourth Quarter and Full Year 2021 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 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 the annual MD&A for the quarter ended December 31, 2021, 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. And I would now like to turn the call over to TeraGo's Chief Executive Officer, Matthew Gerber. Sir, please proceed.

Thank you, Ludy, and good morning, everybody. We hope your day is off to a great start, and thanks for joining our Q4 and year-end conference call. After the markets closed yesterday, we issued a press release announcing our results for the fourth quarter and full year ended December 31, 2021. The press release, financial statements and MD&A are currently available on SEDAR as well as our company website, along with the slide deck that we'll use for this call. The fourth quarter of last year and the start of this year have been a pivotal period for TeraGo as we made encouraging operational progress and repositioned our company to better capitalize on the growing industry tailwinds we're all seeing with 5G adoption. From a high level, our strategic divestiture of our cloud and colocation business segment at the end of January marked TeraGo's return to our roots, which is as a pure-play wireless company. In our view, the timing of this transaction and the move to a pure-play wireless company occurred at an ideal time as we witnessed an encouraging trend within our connectivity business, which we think indicates an inflection point. This inflection point, coupled with the market's recent acknowledgment of the value of 5G private networks, seems to us to be a perfect jumping-off point for the next phase of our business. Given the opportunity in front of us, I'll spend more time later on the call discussing the growing tailwinds in the 5G millimeter wave ecosystem and the beneficial impact that has to our 5G private networking strategy. We have noticed that the push for 5G private networks has been scaling on an international level, more so in this past year, and we are primed to ride that wave here in the Canadian markets. It is certainly exciting times here at TeraGo, and we look forward to providing you all a broader update. Before I do that, though, I'd like to hand it over to Andy for a review of our financials for Q4 and the full year of 2021. So Andy, over to you.

Thanks, Matt. Before I begin, I'd like to preface that our fourth quarter financial results aren't apples-to-apples in certain areas when compared to the prior quarter or to 2020 due to onetime expenses incurred from the divestiture of our cloud and colocation business. With that said, I'd like to turn your attention to the slide deck, starting on Slide 5. Connectivity revenues stabilized quarter-over-quarter with connectivity revenue totaling $6.5 million for Q4 2021, consistent with the prior quarter. The stabilization of our connectivity revenue was driven by favorable customer churn results and provisioning of new customers. Connectivity revenue for the full year 2021 decreased 8.7% to $26.3 million compared to $28.8 million in 2020. The decrease was attributable to customer churn exceeding customer provisioning throughout 2020 and in the first half of 2021. Moving to Slide 6 to highlight our connectivity KPIs for the fourth quarter and fiscal year 2021. Our backlog monthly recurring revenue or MRR in our connectivity business decreased to $110,000 from $130,000 at the end of Q4 last year. The decrease in backlog was driven primarily by the timing of sales bookings and customer provisioning. Next, our average revenue per customer or ARPU for our connectivity business in Q4 2021 decreased slightly to $1,043 compared to $1,057 for the same period in 2020. Connectivity ARPU for the full year 2021 was $1,035 compared to $1,061 last year. The decrease in ARPU was driven by customer renewals at lower rates. Finally, for the fourth quarter of 2021, connectivity churn was 0.7% compared to 1.4% for the same period last year. Similarly, connectivity churn decreased for the full year 2021, down to 1.1% compared to 1.5% for the full year in 2020. The decrease in connectivity churn was driven by our retention initiatives to upgrade and retain our customers with new service offerings. Turning to Slide 7 to go through our broader full year 2021 financial results. Total revenue for the full year 2021 decreased 4.6% to $43.3 million compared to $45.4 million in 2020. The decrease in total revenue was driven by lower connectivity revenue. Net loss for the full year 2021 totaled $15.2 million compared to a net loss of $8.3 million in 2020. The higher net loss was driven by a $4.5 million impairment loss on cloud and colocation assets held for sale, a $1.6 million impairment loss on intangible assets and a decline in total revenue. Adjusted EBITDA for the full year 2021 was $12 million compared to $15.9 million in 2020. The lower adjusted EBITDA was driven primarily by a decline in gross profit, onetime operating expenses incurred in Q4 2021 and lower government grants. Turning now to Slide 8. For the full year 2021, we generated $9.3 million in cash from operating activities, while capital expenditures were $7.4 million or 17% of our revenue. Turning to the balance sheet. We ended the fiscal year 2021 with $5.5 million in cash on a pro forma basis following the divestiture of our cloud and colo business. On January 31, 2022, we had a total of approximately $10.8 million in cash. This follows the repayment of our term debt facility of $20 million, repayment of capital leases of approximately $1 million, all transaction costs related to the deal. And this pro forma cash balance excludes an additional amount held in escrow to be released over the next 18 months. With that said, I'd like to turn the call back over to Matt, who will provide an update on the encouraging trends we're seeing in the business. Matt?

Thanks, Andy. So let me start by providing some additional color beyond the asset sale that took place earlier this year. As many of you know, in late January, we officially closed the deal with Hut 8 Mining to sell our cloud and colocation business lines for $30 million in cash. As I mentioned earlier, with this divestiture, TeraGo becomes a completely different entity. We've now shifted our focus to solely providing fixed wireless access connectivity and 5G private wireless network services to businesses across Canada. Not only has the transaction allowed us to focus more of our time, resources and mindshare into expanding our connectivity business, it enables us to focus on executing our strategy to become Canada's leading wireless services company for business customers. As part of the strategy, we will provide the best customer service in the business and do that on top of offering secure, private, high-speed and low-latency connectivity products. We are uniquely positioned to be able to do these things for our business customers thanks to our extensive holdings of licensed millimeter wave spectrum. As I mentioned at the start of the call, we also think that the timing of this divestiture is ideal as we feel we're at an inflection point in our connectivity business thanks to our team's focus on meeting the needs of our fixed wireless access connectivity customers, coupled with the evolving market for 5G private networking taking shape day by day. From an operational execution standpoint, there are 2 things that the team at TeraGo is delivering on that are simultaneously contributing to this inflection point. It's kind of stating the obvious, but those 2 things are improving bookings while, at the same time, reducing churn. For bookings, we have seen a consistent year-on-year double-digit percentage increase in 2019, 2020 and 2021. The reason behind this growth is due to our teams delivering on this promise of superior services and products for our mid-market and enterprise business customers and focusing on the needs of these specific customers. As I mentioned on our last call, with the shift in our focus towards the mid-market and small enterprise customer segments and meeting the needs of these specific customers, we've been able to reduce the churn rates we previously experienced. Fast forward to today, and we're now at a point where churn within this segment has drastically improved. For context, even though our customer count is now at half of what it was 5 years ago, we've been able to cut our revenue churn by more than half. As a key part of our strategy to hone in on the mid-market and enterprise customer segment, we have proactively instituted a focused effort to upgrade service capabilities at market-based prices, which has been effective in keeping retention and ARPU high and has contributed to significantly reducing churn. What's also been encouraging is this churn reduction trend has continued into the first quarter of 2022, and we don't see any signs of this slowing down going forward, which, coupled with our improved bookings, causes us to believe we have truly hit an inflection point in our fixed wireless access connectivity business. Between improved bookings and reduced churn, we have for the first time in 10 years seen what we call annual positive net monthly recurring revenue or net MRR, which is the difference between new customer revenue we add and customer revenue that churned off. So I want to now move to our partnership with Intracom Telecom and their WiBAS G5 platform. Towards the end of last year, we engaged Intracom with the goal of aggressively scaling and commercializing point-to-multipoint technologies for our fixed wireless access customers. With the adoption of the Intracom platform, we're able to streamline operations as point-to-multipoint technology improves deployment capabilities and reduces our cost to provide service. Thanks to the work in this area from our operations and engineering teams to get us up and running on the Intracom platform, we've already begun to see the benefits from this partnership, which is a bit sooner than we anticipated. More specifically, as of last week, we officially launched a new product in the WiBAS G5 platform called TeraGo Internet 100/20. TeraGo Internet 100/20 is a dedicated, business-grade internet service for Canadian business customers that is specifically designed to provide a superior experience to similar DSL and cable-based broadband Internet offerings. The first 2 hubs featuring this product are currently available now in Markham in Ottawa with the second pair deploying in Mississauga and Toronto in the next few months. As we mentioned before, a cornerstone to our strategy and a competitive position going forward is our capability to provide our customers with the best service in the business. We have instilled in our team an ethic that includes a customer-first, high-touch personal service, quick response and rapid deployment mindset. Evidence of our success at institutionalizing this ethic is our consistently high Net Promoter or NPS score. This past quarter, given the shift in our strategy to divest the cloud and colo segments and focus on the connectivity business, we'll now be reporting just the connectivity NPS score and no longer a blended one. That said, we've achieved an NPS of 48, which, and I say this only partly in jest, is about 48 points better than our competition. Kidding aside, our team is truly proud of this score as the majority of our competitors have scores that range in the single digits and even all the way down to the negative numbers. This metric time and time again speaks volumes to the way we hold ourselves to a higher standard when we service our customers. I'd like now to shift to the third major theme for the quarter, which is, of course, 5G. To begin with, there have been a number of encouraging newsworthy trends and events with blue-chip companies in the industry that are pointing to 2022 as the year of 5G millimeter wave private networks taking their place on the international stage. The first piece of very positive news has been equipment availability. Qualcomm announced last month its support for stand-alone 5G millimeter wave, or in other words, a chipset that is key to our deployment of private networks. In essence, these chipsets are a vital component that we need to scale our 5G millimeter wave private networks business. The benefit for us from this news -- Qualcomm's announcement is Qualcomm's supportive push signals to the rest of the companies within the space and the customers contemplating 5G millimeter wave private network installations the importance of this equipment being available now. The second piece of extremely positive news has been the market acceptance of millimeter wave as a core part of the 5G ecosystem. A great example of this was Verizon's recent millimeter wave announcements. If you look at Verizon's 2022 Investor Day presentation, Verizon goes through its comprehensive stance and positioning on 5G millimeter wave and its overall corporate strategy for the year. The slide in that deck that's most applicable and pertinent to those of us operating connectivity businesses with millimeter wave spectrum is Slide 25, where Verizon illustrates an increase in millimeter wave usage of 856% from January 2021 to January of this year, so 856% in 12 months. The third piece of positive news has been 5G private networks customers talking about their deployments. Customers ranging from Lufthansa with flight line maintenance to Corning Glass with advanced manufacturing, to the Port of Seattle with logistics improvements have all stood up this year talking about the benefits of secure, reliable, fast and low-latency private network installations and how those installations are delivering on the promise of next-generation connectivity for applications ranging from advanced manufacturing to transportation to mining and agriculture. Speaking of applications and use cases for 5G millimeter wave, I'd like to talk about the latest press release we issued around launching the first 5G millimeter wave connected multi-dwelling units or MDUs in Ontario. The key thing I want to highlight here is that this is a prime example of the use cases we have hinted at during previous earnings calls. Thanks to the capabilities of our 5G millimeter wave spectrum, MDU operators across Canada now have options to support customer demands for high-speed Internet. Furthermore, this high-speed 5G connectivity solution allows Internet service providers, our customers in this case, to provide high-speed Internet services to previously hard-to-service buildings and residences. Finally, I want to mention that the progress we're seeing with our 5G millimeter wave installation at McMaster University and the automation partnership we have with IKIN are both going as planned. So to wrap up my commentary, I think you can tell that our team is extremely excited about where we are today as a company and the opportunity we have in front of us. With our ability to focus on wireless connectivity services and products for our business customers, we are ideally positioned to execute on the strategy we've outlined. Our strategic focus will continue to be delivering the best fixed wireless access connectivity experience to our business customers and to build a line of business providing 5G millimeter wave private networks and exceptional service on top of these private network products to customers operating manufacturing and distribution operations across Canada. That concludes the prepared remarks. So we can now open the call up for questions. So Ludy, back over to you.

[Operator Instructions] And our first question comes from the line of Matthew Lee from Canaccord.

Congrats on the colocation divestiture. I think it makes a lot of sense. Maybe to help us model, can you kind of give us some color into the gross margin, EBITDA margins associated with the connectivity business as a stand-alone maybe just to help us determine our run rate for F '22?

Andy, you got that one?

Yes. Yes, happy to. So if you look at our EBITDA for the full year fiscal year 2021, about 65% of that EBITDA was related to the sort of this contribution from the cloud and colocation business. So that will give you a sense of, on a stand-alone basis, what EBITDA from the connectivity business as a stand-alone will look like.

Great. That's helpful. And maybe kind of thinking about salaries and cost of service, do those also kind of flow in that same fashion?

Yes. I mean, approximately -- I mean, just focused on EBITDA, yes, those would flow through on a similar fashion. But yes, I mean, I think the key point is that the EBITDA contribution from cloud and colo was about 65% of that fiscal year 2021 number.

Great. And then maybe a larger picture question. Are you kind of happy with the organic growth trajectory for your 5G rollout? Or is there some potential to use M&A to accelerate that given your cash balance?

Yes. That's a great question, Matt. I would say we're really happy at this point for the verticals and the use cases that we're pursuing, and I think we talked about this on the last call. It's relatively nascent. But in the past 6 months, as I mentioned earlier in the remarks, we have seen a lot of end-user customers step forward. In fact, I'm looking at Blake, who is on the call as well, I think as you know, he -- one of his responsibilities is the revenue-generating team at the company. And I think we've probably had 5 to 10 conversations in the last month on potential use cases for private networks. So I think we're pleased with how the market is taking shape. We're really pleased with the fact that Qualcomm stepped up and said equipment is going to be available in the second half of the year. And in terms of deploying, we really haven't changed our stance. And we're a customer, market-driven company, and we're going to deploy in advance of the market adopting but do it in a very measured way. And so I would say if there's M&A that makes sense for us as a company, we would certainly look at doing it.

Right. And can you remind us what the rollout schedule, so to speak, is?

Well, we really haven't given any guidance in the past on rollout. And what we said is we have spent last year bolstering our network so that we have capacity in the core network to handle installations. We're going to continue doing that this year, and we would expect to have a handful of sites up and running by the end of this year. And that's our target.

Great. And then maybe just one last one from me. In terms of connectivity churn, really excellent result this quarter. Do you think you can maintain a sub-1% churn level going forward? Or is there maybe some onetime maybe COVID-related impacts baked into that?

Well, we wouldn't want to give you guidance going forward, but we are really happy with the trajectory the business is on. And when you look at the trajectory we've seen churn on, we certainly think we can maintain that going forward. And I'm looking at Blake when I say this, I really can't see -- we had some COVID impacts, but they were relatively minor, and they happened very early on in -- during the pandemic. And we really saw those happen in probably the first 3 to 5 months of the pandemic. And after that, the business has been stable. And I think the -- what you've seen with churn and the reduction in churn overall has been really due to the efforts the team has undertaken to retain those customers specifically and upgrade their service, move them to the new platform. So yes, we're very encouraged by the trend, and we think it's going to continue.

And your next question comes from the line of David McFadgen from Cormark.

So just, yes, a couple of questions. Just on the cash, so you said a $10.8 million post-sale. That assumes all the debt is completely retired, right? Like there's no debt, right?

That's correct.

That's correct. Yes.

And then you talked about some onetime expenses in the quarter. I was just wondering if you could quantify what those are just so we can get a kind of a clean number for the quarter with EBITDA.

Yes. I can take that one.

Andy, do you want to take that one? Do you want me to -- yes.

Yes. I'll go ahead. Yes. So we had about $500,000 in onetime expenses that impacted the Q4 EBITDA number that are not recurring.

Okay. Okay. And then when you talk about your 100/20 product, I'm just wondering, have you guys -- do you have an idea for the total addressable market for that product? Because when you look at the other telecoms, they're -- particularly Bell and Telus, they're particularly aggressive with rolling out fiber. Telus will be -- complete its fiber rollout by the end of this year. And so just in their footprints, there's going to be -- well, Bell is going to take longer, but there's not going to be a lot of DSL-type Internet products that they're going to be offering in the next few years. So I'm just wondering, if you look at the 100/20, if that is going after a DSL product, I'm just wondering what the total addressable market would be as these guys continue to roll out fiber?

Yes. So Dave, we wouldn't publish any of our view on total addressable market. What I can tell you is we are seeing strong demand for that product right now. And when you look at how our customers use fixed wireless access, we really see 2 predominant uses. It's either a primary service or it's a backup service. And in the case of it being a backup service, and again, we don't publish the mix of our base for primary and backup, but when it's a backup service, they're using that as a backup circuit. And they test it. They exercise it. And typically, it might back up a service that is a higher speed. For a primary connection, they're coming to us because they're not happy with the current service provider availability. Or more importantly, they value the service we provide. And so the 100/20 is adequate for the bulk of the needs of the businesses we provide service to, and they come to us because they want the personal touch. We're able to provision a service in weeks rather than months. They call us. They get a body on the other end of the line, one of our customer experience reps, and they're on a first-name basis with those individuals in many cases. And so we don't sell just on commodity speeds and feeds. It's very much a solution sell. And for the customers that are approaching us and want that solution, it's a better fit than what's available with the big incumbents.

Okay. And then just on the MDUs, you announced that you're going to -- you're rolling out 5G millimeter wave service in MDUs. I was just wondering if you could give us a little more color on that initiative and how many MDUs you think you might actually light up, say, this year and just kind of an idea on the potential for that in the short term.

Yes. We think it's significant. Again, we don't want to publish any kind of forward look and/or market guidance on that. But it is very much a strategic initiative for us. We're working with a handful of partners that do that and have heard feedback that it's of very high value from either the reasons I described to you before, where they value the ability to have the level of service that we can provide or quite simply, it's more economical to light up a certain MDU because of the costs of getting fiber to that MDU. So there's a big enough market for TeraGo as a company to be extremely attractive and make it something that is strategically important to us.

Thank you, ladies and gentlemen. This concludes our question-and-answer session. Thank you for joining us today for TeraGo's Fourth Quarter and Full Year 2021 Earnings Call. You may now disconnect.