TeraGo Inc. (TGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to TeraGo's Second Quarter 2022 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 June 30, 2022, which is available on www.sedar.com, and along 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. I will now turn the conference over to TeraGo's Chief Executive Officer, Matthew Gerber. Sir, please proceed.

Thanks, Sara, and good morning, everybody. With me on this call today is Phil Jones, our CFO; and Blake Wetzel, our Chief Revenue Officer. We have very day is off to a great start, and thanks for joining our Q2 2022 conference call. . After the markets closed yesterday, we issued a press release announcing our results for the second quarter ended June 30, 2022. 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 months following the divestiture of our cloud and colocation business lines have been encouraging as we've generated solid momentum and growth with our core fixed wireless access business. The second quarter was the first full quarter where we operated as a pure-play wireless company, and we experienced encouraging quarter-over-quarter results as displayed through improved bookings, backlog and revenues. Our timing for the divestiture was ideal as we are now able to focus our time and resources on a core fixed wireless access business that is supported by strong tailwinds. Additionally, we've continued to make progress with our 5G initiatives, something I'll dive into later this call. Before I turn the call over to Phil, we want to share our new mission statement with you as we think it now clearly reflects what we are trying to do for our customers and what makes us as a company different. Our new mission is, we provide business customers and partners with secure, reliable and innovative fixed wireless access and 5G private network services and do so with speed, flexibility and service levels that are unmatched by our competition. We think this also reflects the values of our company and team in that we will always go above and beyond our customers, which is why we continue to expand our relationships with existing customers as well as acquiring new customers at a steady rate for the first time in many years. So with that, I will turn the call over to Phil. Phil, over to you.

Thanks, Matt. I'd like to commence my remarks beginning on Slide 5 with connectivity revenues. Connectivity revenues totaled $6.6 million in Q2 2022, an increase of 3% quarter-over-quarter due to our ability to execute on our sales and marketing strategies, deliver quality customer service, which continues to keep churn levels low, combined with increased operational performance and provisioning for the launching of new customers. . Moving to Slide 6 for a look at our connectivity KPIs for the second quarter of 2022. Our backlog monthly recurring revenue or MRR in our connectivity business increased to $133,436 as of June 30, 2022, compared to just over $126,000 in the prior quarter and compared to just under $127,000 in the prior year. The increase in backlog MRR for both periods was driven primarily by a strong sales performance and signing up new customers, particularly through our channel partners. Next, our average revenue per customer, or ARPU, for our connectivity business increased to $1,118 in Q2 2022, compared to $1,061 in the prior quarter and $1,032 in the same period in 2021. The increase for both periods was primarily due to a growth in channel sales into mid-market and enterprise customers. Finally, the second quarter of 2022, connectivity churn was 0.9% compared to 1.4% in the same period last year. The decrease in churn is the result of increased levels of customer service and support that we provide in comparison to the competition. Turning to Slide 7. We look at some of our broader Q2 2022 financial highlights. Total revenue decreased to $6.7 million for Q2 2022, compared to $10.9 million for the same period in 2021. The decrease in revenue was driven by the divestiture of the Cloud and colocation lines of business that took place earlier this year. Net loss for the second quarter was $3.1 million compared to a loss of $1.8 million in the same period in 2021. The higher net loss, again, driven by onetime restructuring expenses and lower gross profit due to the divestiture transaction. Adjusted EBITDA for the period was $1.0 million for Q2 2022, compared to $3.4 million for the same period last year. The decrease, again, driven by the impact of the divestiture transaction. Turning now to Slide 8. Capital expenditures totaled $1.9 million or 28.2% of our revenue as we continue to provision equipment for new customers in support of growing connectivity revenues. Turning to the balance sheet. We ended the second quarter of 2022 with $4.2 million in cash and an additional $1.1 million in short-term investments. With that said, I'd like to turn the call back over to Matt, who will provide an update on the encouraging trends we've been seeing in the business. Matt, over to you.

Thanks, Phil. So again, this past quarter was the first full quarter where we operated as a pure-play wireless company and comes at a time we're seeing an inflection point with our business. The timing could not be better for us as the pivot away from cloud and colocation allows us to focus all of our efforts in areas that show great promise for growth. Before we cover how we're doing with our wireless connectivity business, I do want to say a few words about how the transition of cloud and colocation business lines that Hut 8 has done so far. We've continued to deliver on all of our responsibilities under the transition services agreement with Hut 8 and expect to be fully completed with the transition by calendar year-end. Hut 8 also remains a valued partner as we jointly work on accounts and are beginning to see some of those accounts come to formation. So now let's move on to our core connectivity business. As we were hoping when we discussed this topic during our last earnings call, we had seen momentum in our fixed wireless access business and our performance this past quarter, is showing that the momentum was not transitory. With another quarter of revenue growth, we feel more confident that we're seeing a trend that is sustainable as we deliver stable, consistent and predictable revenue and growth. To further reinforce our thinking, we've experienced an overall quarter-over-quarter revenue growth rate of 3%, which is what Phil had mentioned, and that was again fueled by continuing to deliver net positive monthly recurring revenue or net MRR. As I explained last quarter, net MRR is the difference between new revenue we book and revenue that churns. So sustaining positive net MRR for this year has so far created a positive trajectory for our revenues and overall outlook. Next, I want to introduce a concept that we'll be talking about going forward to indicate how well we are doing in our efforts to grow our business. What we want to do going forward is give you a sense of how well we are growing our core connectivity services, which are the monthly recurring revenues for our point-to-point fixed wireless access products and services. And going forward, monthly recurring revenues for private networks and associated private network services. With the transition services agreement with Hut 8 still in place, we have another component of our revenues that both varies from month to month and is short term and is not part of our core connectivity services offering. Additionally, these revenues will taper off during the rest of this calendar year. So when you look at just our core connectivity revenues, those increased to $6.46 million in Q2, up from $6.19 million in Q1, which represents a quarter-on-quarter growth rate for our core business of 4.3%. I'm also proud to share that from a churn perspective, we have only seen a small increase in churn this quarter, as Phil had mentioned. We feel that the slight increase in customer churn was mainly due to the continued execution of our strategy to focus on mid-market and enterprise customers as the customers we lost this past quarter were primarily smaller customers with single locations. One interesting development that has unfolded over the past couple of quarters, that is worth mentioning is that the enterprise market is starting to recognize that fixed wireless is a solid alternative technology to traditional terrestrial services. The best evidence we can give you of this is to look south of the border at what Verizon and T-Mobile teams have done with fixed wireless axis. Verizon currently has 2 million business customers on its fixed wireless access service, and expect that to grow to 14 million by 2025. T-Mobile is seeing the same type of market interest and growth. These are remarkable growth numbers for fixed wireless access. Our team has also discovered that with recent outages happening around traditional terrestrial services, some customers are pivoting to fixed wireless as a more safe and reliable alternative. Another way we saw evidence of this momentum is that we keep mentioning was the increased quote volumes we saw this past quarter, which were up 200% for us year-over-year. As a result of this increase in interest, we've augmented our sales efforts and are expanding our footprint on both the domestic direct and channel sales team and an international level with our channel sales organization. With our current go-to-market approach, we're having conversations with companies that range from mid-market local organizations to large multinationals that have hundreds of locations across Canada. We're confident, as we've already seen successful case studies with this play out that once our sales team is able to get a customer's foot in the door with us, they're able to see that we not only help grow their entire network beyond just 1 or 2 locations but that we also do a phenomenal job of servicing them. Basin point, we once again earned an impressive Net Promoter Score of 58, which is several multiples above our competitors. Simply put, our team provides a white glove approach that truly caters to the needs of our business customers in a way that these customers cannot get from any other connectivity provider. Another encouraging point, which our customers give us feedback on is our ability to be more nimble and flexible in our competition. This key competitive advantage has helped us win multisite deals with bigger customers as our team is able to provide a level of service that the big incumbents just can't match. We ensure that we're quick to respond and cater to the customers' time lines and needs. So lastly, I'd like to provide an update on our 5G strategy in the broader industry as a whole. One interesting thing that we've seen recently is the dichotomy between provider organizations in Canada, believing in the benefits of 5G private networks and those providers that have taken a wait-and-see approach. As providers of this groundbreaking technology, TeraGo is fully confident in the capabilities 5G private networks will provide to customers. And we're not just talking to ourselves. Over the past quarter, we've engaged with over 10 enterprise customers that have specific needs and applications for 5G private networks. These customers have use cases, planned applications and expected quantifiable benefits. So while we see a disparity in how some of the service providers view the opportunity for 5G private networks, our customers are starting to unequivocally ask for this service. As mentioned on our previous calls, our radio suppliers are still maintaining that the equipment for Canadian millimeter wave [ with ] 5G private networks will be available towards the end of this year. We remain committed to continue building out our 5G ecosystem and deploying 5G private networks as soon as the equipment becomes available to us. I think you can get a sense from both our remarks and our numbers that our team is very excited about what we see happening with our business. We're starting to string together a series of growth quarters in a business that has not seen growth for many, many years. And we have a very large opportunity in front of us with private networks that will further add to the growth that we're driving in our fixed wireless access business. That wraps up our prepared remarks. And so we can now open up the call for questions. So operator, back over to you.

[Operator Instructions] Your first question comes from the line of Matthew Lee with Canaccord.

Really happy to see revenue growth in terms of the connectivity business. Based on our math on our side, if you kind of look at the customer base, it's still kind of shrinking year-over-year, really offset by strength in ARPU. So maybe can you first talk about the sustainability of that high single-digit ARPU growth year-over-year? And then maybe touch on how soon we will be able to see a stabilization of total users.

Yes. Great question. I think we've been fairly consistent, Matt, in that when we changed strategy deliberately several years ago, we decided to focus on mid-market and enterprise, whether we're selling directly to them or selling through channels. . And so as a good example of that, since I've been with the company, we have seen our customer base reduced now from about 4,000 customers to about 2,000 customers. However, when you look at who we're selling to and what we're selling, and as I mentioned in my comments, we're selling more to fewer organizations and they're much bigger organizations. So a lot of the, we call them, mom-and-pop shops, whether it's a daily with a single location or a petrol or gas station with a single location, we're seeing those customers churn off yet they're being replaced by names that we're all familiar with when we go shopping on the weekends. And we continue to provide more and more locations and service more and more locations for these customers. So we think we should see the number of customers continue to reduce, but that will taper off over the next year. And we also see very strong sustainability in executing the strategy and continuing to see ARPU growth and number of sites per customer grow as well, which is a stat we don't publish.

So I guess maybe asked a different way. Would you say that year-over-year, the number of locations that TeraGo Services is up?

Let us get back to you on that. I believe the answer is yes. But Phil and I can get back to you on that one.

Right. And then maybe just a follow-up to that as well. I mean you kind of mentioned the various pieces of ARPU that go into driving those strong numbers. Is it mostly an increase in the number of services that's driving that ARPU growth? Or is there some rate inflation in there as well?

I think it's a little bit of both because when you look at another macro trend that we see happening is customers are buying higher-speed services. As an example, I can't tell you who it is, but we just had a nationwide chain approach us as an existing customer, and they're doing a wholesale upgrade of their services from, let's say, 20 meg services to 100 meg services. And so we're seeing -- I think we're just seeing the -- we're riding on the backs of the general trend that people are using more bandwidth. And so in using more bandwidth, they want higher speed services.