TeraGo Inc. (TGO) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to TeraGo's Q1 2023 Earnings 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 forward in the Risk Factors section in the annual MD&A for the quarter ended December 31, 2022, which is available on www.sedar.com. And also consider other uncertainties and potential events, except as maybe 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 risks 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'll now turn the conference over to TeraGo's Chief Executive Officer, Matthew Gerber. Sir, please go ahead.

Thank you, Ina. Good morning, everybody, and welcome to our 2023 Q1 earnings call. Our team is pleased with our operational performance this past quarter and the financial results that Phil will take you through shortly. Our revenues, gross margins, operating expenses, adjusted EBITDA and capital expenses were all within our expected ranges. We're also able to again deliver positive results with our key leading indicators, namely net monthly recurring revenue, which is the difference between bookings and churn, and net provision monthly recurring revenue, which is the difference between provision monthly recurring revenue and churn. These indicators reflect whether or not we are booking more business than we are churning and whether or not we are provisioning more business than we are churning. Both indicators were positive in Q1 and reflect our team's ability to add customers in. We have also seen a rise in our average revenue per customer as our customers continue to request increased levels of service and higher end products. Since we did a fairly extensive update in our 2022 Q4 and full year's earnings call 2 months ago, I don't have much more to offer in terms of additional information to share with you before turning the call over to Phil to take you through the Q1 numbers. So I will do that now. Phil over to you.

Thanks, Matt. Starting on Slide 5 with connectivity revenues. Connectivity revenues totaled $6.5 million in Q1 2023, compared to $6.4 million for the same period in the prior year. The revenue improvement was a result of increased customer count and increased connectivity ARPU compared to the same period in 2022. Furthermore, the prior-year results included connectivity revenue that was subsequently sold as part of the divestiture transaction. Moving to Slide 6 for a look at our connectivity KPIs for the first quarter of 2023 and the prior 4 quarters. Our backlog of monthly recurring revenue, or MRR, in our connectivity business increased year-over-year to $132,929 as of March 31, 2023, compared to $126,631 for the same period in 2022. The increase in backlog MRR is a result of a strong sales performance throughout the last 4 quarters in signing up new customers, particularly through our channel partners. Backlog has decreased when compared to the year-end balance of $178,948 to $132,929, as a result of both provisioning results having exceeded sales bookings, but also results of having to debook some customer orders within our backlog. The majority of the debookings were due to technical issues such as not having a direct line of sight to the customer's facility, therefore, preventing us from servicing the customer. Next, our average revenue per customer, or ARPU, for our connectivity business was $1,101 in Q1 2023, compared to $1,063 in Q4 2022 and compared to $1,061 for the same period in 2022. The increase in ARPU was a result of our ongoing focus to attract mid-market and large scale, predominantly multi-location customers requiring higher end products to meet their needs. Finally, connectivity churn was 0.9%, compared to 0.9% in the prior quarter and 0.7% for the same period last year. The increase in customer churn from the prior year was due to a continued execution of our strategy to focus on mid-market and large-scale customers. We will continue to focus our service and support activities on customer retention and keeping churn low. Turning to Slide 7 to go through our broader Q1 2023 financial highlights. Total revenue decreased to $6.5 million for Q1 2023, compared to $7.9 million for the same period in 2022. The decrease in revenue was driven by the divestiture transaction of the cloud and colocation business and some associated connectivity revenue. Again, when looking at just our connectivity revenues, results totaled $6.5 million in Q1 2023, compared to $6.4 million for the prior-year period. Net loss decreased to $2.5 million in Q1 2023, compared to a net loss of $3.1 million in the same period in the prior year. The improved net loss position was a result of higher gross margins combined with year-over-year reduction of operating expenses as a result of the divestiture and the new operating structure of the business. Adjusted EBITDA was $0.8 million in Q1 2023, compared to $1.1 million for the same period last year. The decrease was a result of lower revenues and lower gross profit in the current year and the add back of restructuring and divestiture costs in the prior year. Now turning to Slide 8. Capital expenditures totaled $2.0 million, or 32% of our revenue. CapEx expenditure continues to be predominantly success-based spend associated with the onboarding of new customers. Spend increased in the quarter as a result of purchase timing as we took advantage of available discounts, while still aligning our purchases with our backlog and our pipeline opportunities. Turning to the balance sheet. We ended the first quarter of 2023 with $1.8 million in cash and $1.1 million in short-term investments. The company is also fully compliant with the covenants under its long-term debt facility. With that said, I would like to turn the call back over to Matt. Matt, over to you.

Thanks, Phil. So before we close this call, I do want to reiterate the points I made about our near-term focus during a call a couple of months ago, and also touch on a couple of other topics, including the news that we just released about our leadership change. As we look into Q2, our team remains focused on the 2 initiatives that I spoke about on the last call. The first area of focus for us remains our fixed wireless access business. We continue to see increasing interest from our enterprise and mid-market customers for fixed wireless access connections. There are a few reasons why we see growing interest in fixed wireless access. The first reason is the success of fixed wireless access as a connectivity option continues to grow internationally. If you look just south of us, Verizon and T-Mobile reported record fixed wireless access growth in 2022 and both expect growth like that to continue. The second reason is that enterprises and mid-market companies continue to look for ways to bolster network redundancy and fixed wireless access is a logical choice for that. The third reason is that SD-WAN continues to gain share in our customer base and pairing a fixed wireless access circuit with a fiber connection for SD-WAN connectivity is a logical choice. And we're seeing more of our customers doing just that. The second area of focus for us remains 5G millimeter wave private networks. At this point, the information we have from our vendor ecosystem is similar to what we shared with you during our last call. We expect to see stand-alone 5G millimeter wave equipment that operates in Canada on our 24 gigahertz and 38 gigahertz spectrum become available in the next 3 to 6 months. At that point, we can begin engaging customers with pilots and trials which are a necessary step to take before taking orders. You may also remember that on the last call, we mentioned our 5G millimeter wave private network deployment at McMaster University. We're heading to McMaster right after our call this morning to participate on a panel discussion on the benefits of 5G fiber networks for Canadian businesses. Some of you may have also caught the webcast that The Globe and Mail did on April 27 on the benefits of 5G for Canadian businesses. We were invited alongside TELUS and Ericsson to lead a panel discussion, and we're put forward as experts on private network applications for manufacturing and warehousing. It's great to see this type of interest building. We continue to remain very excited about where the market for 5G private networks is heading and our ability to provide these types of innovative solutions to our existing customer base. Now one other point I want to make is that while we continue to see healthy demand for our products and services, as evidenced by our strong bookings and churn performance over the past year, we also recognize that recent overall market conditions are changing and influencing customer decision-making, which can impact our business. We will continue to watch these trends closely and make any necessary adjustments if there is an impact. Lastly, as you may have seen in the earnings release, we announced that there will be a transition to a new CEO. Effective June 12, 2023, Dan Vucinic will be appointed as TeraGo's Chief Executive Officer. I'm truly excited about the opportunity to pass the leadership over to Dan as he brings a wealth of relevant operating experience and is the right person to take our company to the next level. Dan and I will be working together in lockstep over the next few weeks to ensure a smooth transition for our customers, our partners and our team members. So that wraps up the prepared remarks for us today, and we can now open the call up for questions. So Ina, back over to you.

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

Maybe we can start with ARPU. Nice acceleration in the quarter of 4% year-over-year. Can you maybe help us understand the sustainability of that number for the remainder of the year?

So I'll take a shot at that, Matt, and thanks for posing the question, and then Phil, you can chime in if you felt I missed anything or want to add more context. We see that continuing, Matt, because when you look at the strategic focus we've been executing on, it's to move up the market. And as we see the -- as we gain mid-market and enterprise customers, they tend to buy higher speed services. And so we step up the latter in service speeds and service prices that we're delivering to these customers. And so we think that, that is sustainable.

Okay. That's helpful. And then maybe we can talk about the fixed test CapEx you've been deploying. When do you think the timing of returns on that investment? And can you maybe frame how you think about spending from an ROI perspective?

So when you look at our business, our business is very typical of what you'd see with a capital-intensive communications company like we are and the infrastructure type of business we have. And we typically expect to start seeing returns on any investment we make on average at about 18 months. So on a cash-on-cash payback basis, it takes about 18 months. And for us, it's a great thing because most of our customers will sign 3-year contracts or longer. So we lock them in for 3 or 4 or 5 years. So after 18 months, any investment made to service that customer will start generating cash for us as a company. Phil, did I miss anything that you want to add to that?

No, that is correct. Yes, it's 18 months payback and the timing of our expenditures, it's really based upon the backlog, the pipeline. And then in some cases, we have advantages to take purchases a little early for beneficial pricing. But again, it's equipment we know that we need to deploy to our customer sites.

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