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Good morning, ladies and gentlemen. Welcome to TeraGo's First 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 March 31, 2022, 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 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 TeraGo's Chief Executive Officer, Matthew Gerber. Sir, please proceed.
Thanks, Chris, and good morning, everybody. We hope your day is off to a great start, and thanks for joining our Q1 2022 conference call. After the markets closed yesterday, we issued a press release announcing our results for the first quarter ended March 31, 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 use for this call. It has been a short interval than usual for this call, but we're just as excited as we were 7 weeks ago when we held our Q4 earnings call and discuss the recent cloud and colocation business lines divestiture. As you'll see from our results and here on this call, our team is now laser-focused on providing the industry's best wireless connectivity services to our business customers. Our vision for TeraGo is to be Canada's leading provider of enterprise-grade wireless connectivity for business customers, and we are moving aggressively towards obtaining this vision.
During the call, we'll take you through how the team continues to build momentum in our core fixed wireless access business. This momentum has again resulted in quarter-on-quarter core connectivity revenue growth and a connectivity business that is now delivering stable, consistent and predictable results.
Additionally, we continue to work towards becoming Canada's leading provider of 5G millimeter wave private networks and connectivity and announced our first 5G millimeter wave connection to a provider of connectivity services for Multi-Dwelling Units. We also made a move this past quarter to bolster our management team with the hiring of an experienced public company CFO that has been through the type of growth that we envision for TeraGo in the future. Andy is still with us through the end of this month to facilitate a smooth transition for Phil Jones, who you'll hear from on future calls. Phil, welcome on board.
And before I turn the call over to Andy, I want to convey to Andy on behalf of the TeraGo team, the best of luck in your new endeavor. We'll all miss working with you very much. All right. Andy, over to you.
Thanks, Matt. Before I begin, I'd like to preface that our first quarter financial results include one month of revenue and expenses from the divested cloud and colocation business including certain connectivity revenues from divested customers.
With that said, I'd like to turn your attention to the slide deck, starting on Slide 5 with connectivity revenue. Connectivity revenue totaled $6.4 million in Q1 2022, a decrease of 1.5% quarter-over-quarter due to the divestiture. Excluding the impact of the divestiture, normalized connectivity revenue increased by $0.1 million or 1.7% in Q1 compared to the prior quarter. Note that connectivity revenue in Q1 included a benefit of approximately $100,000 from divested cloud and colocation customers that will not be part of TeraGo's revenues going forward. Moving to Slide 6 for a look at our KPIs. Our backlog monthly recurring revenue, or MRR, in our connectivity business decreased to $127,000 as of March 31, 2022, compared to $131,000 in the prior year. The decrease in backlog MRR was driven primarily by increased provisioning activities.
Next, our average revenue per customer, or ARPU, for our connectivity business increased slightly to $1,061 in Q1 2022 compared to $1,039 for the same period last year. The increase was driven by continued growth in our channel with mid-market and enterprise customers.
Finally, for the first quarter of 2022, connectivity churn was 0.7% compared to 1.3% for the same period last year. The improvement in churn is driven by our initiatives to upgrade customers to higher speeds and retain customers with new service offerings. Turning now to Slide 7 to go through our broader Q1 financial highlights. Total revenue decreased 26.9% to $7.9 million for Q1 2022 compared to $10.8 million for the same period in 2021. The decrease in revenue was driven by the divestiture of our cloud and colocation business in January of this year.
Net loss for the first quarter was $3.1 million compared to a loss of $2.2 million in the same period last year. The higher net loss was driven by onetime restructuring costs, and lower gross profit related to the sale of the cloud and colocation business.
Adjusted EBITDA was $1.1 million for Q1 2022 compared to $3.2 million for the same period last year. The decrease was driven primarily by lower EBITDA contribution from the divested cloud and colocation business. Turning now to Slide 8. Capital expenditures totaled $1.8 million or 23% of our revenue, approximately $100,000 of capital expenditures in Q1 related to the divested business.
Turning to the balance sheet. We ended the first quarter with $7.6 million in cash and $1.1 million in short-term investments. On February 1 of this year, TeraGo repaid in full our term debt totaling $20 million and the credit facility was terminated.
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 before I get into what's changed in the past 7 weeks, I again want to remind everybody about the key strategic move we made in January. On January 30, we divested the cloud and colocation business lines to Hut 8 Mining. Financially, the divestiture provided us with $30 million, which we used to pay up our debt, supply our working capital needs to operate the business and fund our efforts to expand into 5G-millimeter wave connectivity in private networks. So while the financial impact of the divestiture was significant, the strategic impact was even greater.
TeraGo post divestiture is now a singularly focused pure-play wireless connectivity business. Our team is focused on nothing but delivering the best possible service experience for our wireless connectivity business customers across Canada. Even though it has only been a couple of months, this focus is already yielding results. Andy talked about the positive financial results, which we are seeing and are all excited about, but just as interesting is the results we are seeing with how satisfied our customers are with our service. This quarter, we saw our highest ever NPS scores from our connectivity customers. We scored a 69 this quarter compared to 48 last quarter. For those of you that watch NPS scores, you know that this is a remarkable score for our connectivity company and places us staggeringly far ahead of our competition, which typically see single-digit or negative NPS scores.
Some of you may be wondering about how the divesture is going and whether or not our team or customers have seen any negative impacts. I'm really pleased to share that everything associated with the transition is going exactly as planned. The Hut 8 team has been working well with our team, and that has resulted in a seamless transition up to this point. Additionally, I'm proud to announce that we have not lost a single customer as a result of the transaction or the transition process. We continue to work diligently with Hut 8 team and plan for the transition to wind down over the course of this year.
I now want to provide some additional context around our core connectivity business and the momentum we are seeing. As I mentioned at the beginning of the call, we are gaining more momentum as we focus all of our time, resources and efforts on our fixed wireless access customers. We're slowly but encouragingly beginning to see results that further validate the inflection point we've been talking about previously.
Similarly to the last call, the 2 key factors contributing to the momentum are improvements with bookings and churn. The impact of positive results in both bookings and churn over the past few quarters is creating a positive trajectory for revenues and fueling the revenue inflection point we are experiencing for the second quarter in a row. This is another quarter where we saw positive net monthly recurring revenue, which is the difference between new customer contracts we booked and customer revenue at churn. And that positive net monthly recurring revenue has translated into revenue growth in our core connectivity business.
I also want to touch again on the topic we discussed during the last meeting, which is our partnership with Intracom Telecom and how we are using Intracom's WiBAS 5G platform. As I mentioned on our last call, we engaged Intracom with the goal of scaling and commercializing point-to-multipoint technologies for our fixed wireless access customers.
In essence, with the adoption of the Intracom platform, we can streamline operations as point-to-multipoint technology improves deployment capabilities, reduces our cost to provide service and ultimately gives us an opportunity to scale operations more rapidly. Our team is both excited and proud to share our initial deployments of the Intracom systems have gone exactly as expected as we recently launched in Ottawa, Mississauga and Markham. We're seeing strong interest in the market so far, has turned up our first customers on the platform and plan to extend our footprint with the Intracom technology beyond the 3 initial locations. I mentioned in my opening remarks that the team is laser-focused on providing the best service experience for our business customers. This focus on our team's execution continues to help in key mid-market and enterprise customers. This past quarter, we again added new customers, including 2 prominent Canadian brands that have a significant presence across the country. These customers are choosing to do business with us because of our capabilities to provide a superior level of service. We know that we can respond and provision more rapidly and address issues or concerns more quickly, all while providing a personal touch when responding, and these customers are experiencing firsthand our ability to do these things.
Finally, I'd like to touch on a key strategic topic, which is our progress with getting ready for and deploying 5G millimeter wave connectivity in private networks. The main thing I'd like to share here is that we're continuing to execute on our short-term milestones, which is setting ourselves up to be in a position to deploy 5G services and volume for customers later this year as stand-alone millimeter wave equipment becomes readily available.
As with what we did last year, we continue to invest in our core network and upsides so that we have additional network capacity to service customers that want the bandwidth of 5G millimeter wave services will deliver. We've also started engaging existing and prospective customers in discussing needs for 5G connections and private networks and are starting to see interest across our existing customer base in addition to interest from new names. Our marketing team is working with several partners that have the capabilities to deliver software and services that would be required to deploy 5G millimeter wave networks so that we're positioned to bring complete and ready-to-install solutions to customers later this year. Another step we took this past quarter towards millimeter wave deployments was installing our first connection to an MDU in the Toronto area. This high-speed 5G connectivity solution allows Internet service providers, in our case, our business customers, to provide high-speed Internet services to previously hard-to-service buildings and residences. This 5G product is a new line of business for us, and we feel has good potential to drive incremental revenues for us going forward.
We also continue to make good progress with McMaster University on exploring ways for us to innovate in the delivery of 5G millimeter wave private networks. In particular, we're having discussions about specifics relating to building out the private networks in the first buildings at McMaster to support our first joint use cases.
So all in all, our 5G millimeter wave strategy has not changed, and we're working diligently on positioning the company for success later this year and in the long term. Our team is encouraged by the trajectory we're headed in and look forward to providing with updates as we progress.
So to conclude, first quarter has been an encouraging start for the new year here at TeraGo. We feel that we put the most challenging aspects of the divestiture behind us and expect to be mostly completed with transition services activities by the end of the summer. Our connectivity team will continue to stay the course and execute, which would lead to stable, consistent and predictable results for our core wireless connectivity business.
And finally, we plan to continue laying the groundwork for offering 5G millimeter wave connectivity and private networks to capitalize on the growing market opportunity in hand. I think you can tell we're absolutely thrilled about our ability to focus on simply providing the best wireless connectivity service experience to our business customers in Canada. So that wraps up the prepared remarks today, and we can now open the call for questions. So Chris, back over to you.
[Operator Instructions] Your first question comes from Matthew Lee, Canaccord.
The quarter obviously had a lot of puts and takes, but could you maybe start by helping us understand connectivity EBITDA, what would have been on a stand-alone basis in the quarter?
So Andy, do you want to take that one?
Yes, sure. So our total EBITDA for the quarter, as you'll see, was just $1.1 million, about 2/3 of that is sort of connectivity stand-alone. So 1/3 was contribution from the cloud and colocation business while we owned it in Q1.
Great. So I mean, that's a little bit lower than I think I was expecting for the connectivity business. Could you maybe talk about the pressures you're seeing on margins right now and how you're going to get back to mid- to high-teen margins?
So let me take a shot at that, Andy, and then you can chime in. So when you look at our gross margins, our gross margins have been fairly stable. And so I know you're talking about operating margins. One of the things we're going to be doing this year is, as I mentioned, continuing to invest in the business and in positioning ourselves for 5G. So we're expecting that, and I think that we typically don't give guidance going forward, but we expect to continue to make investments in advance of the wave we're anticipating towards the end of this year that we'll see and revenues for 5G connectivity services picking up.
And then maybe just a bigger picture question. It's great to see you doing the MDU market. Can you maybe talk about how that deal came about? And where you see MDU fitting into your strategy?
Yes, happy to do that. So when you look at opportunity areas for us going forward, we really see 2 areas as key strategically. One is 5G private networks, which we talked about, and the other is connecting MDUs. We have had in our base previously some multi-tenant unit and Multi-Dwelling Unit customers. And we -- frankly, we've been approached over the past 3 to 6 months by several organizations that are implementing MDU builds, and they've approached us for several reasons.
And really, there are 2 core reasons we see. One is they don't want to deal with an incumbent provider, so they don't want to buy a fiber connection from an incumbent provider and they would prefer to deal with us, or the building is in an area that it's not easy or economically viable to get fiber to them. We think that MDU area represents a fairly significant opportunity for the company. When we look at the market overall, even in the, we call them, near-net opportunities where we can hit an MDU, we have a line of sight to an MDU to from our hub sites, the opportunity is in the tens of millions of dollars. I'm not saying we're going to capture all that, but it's a significant opportunity for us. And we're going to continue to pursue it aggressively.
Your next question comes from David McFadgen, Cormark.
A couple of questions. I mean, on the gross margin, this quarter was down 71%. Is that kind of a good run rate to use going forward for the connectivity business?
Andy, I'll defer to you. I don't have the models in front of me in terms of guidance on that.
Yes. What I can say about that is the total reported gross margin were still over 70%. The gross margin on the connectivity business is a little bit higher than that. So on a normalized, if we excluded the cloud and colo results, it would have been 75%. And that is the level we would anticipate in the near future.
Okay. And then just on the MDU, you talked about lighting them up with the 5G connectivity. Is that network owned by you? Or is that a private network that you talked about, the opportunity there?
So Dave, when we talk about lighting up an MDU, so will hit an MDU from one of our hub sites. So we'll set up a wireless connection between our hub site and the MDU. And that's on net for us, so that is our network.
Okay. So I'm just wondering, because you talked about building private networks for the -- when do you think you might have some announcement about that network?
So I think the first area of activity you'll see is what we're doing with McMaster, and our intent there is to light up areas and buildings in the campus with the private network. What we're waiting for from a commercial standpoint is availability of what's called stand-alone one-way equipment, which is the equipment that we need to deploy commercially on our spectrum. And I think we talked on the conference -- on the earnings call last quarter about Qualcomm's recent announcement that they are making the newest chip set for stand-alone millimeter wave, and that will be generally available for commercial shipments towards the end of this year. So that's why we were fairly consistent, and we've been fairly consistent in positioning over the past few calls that we anticipate being able to do those installs commercially towards the end of this year.
Okay. And for this customer, the 30 MB you talked about, what download and upload speeds are you telling them they're going to get?
Blake's on the call, he can check me, but our connection to the MDU, the 2 gig connection, and our partners sell different levels of service within that building to the end-user customers. And I'm not 100% familiar with their exact offering, but it's a typical range of consumer service goods.
Okay. Well, because isn't this a 5G service, so it should be a lot faster now?
Two gig is what they want, so the capability is there to go faster. But 2 gig is what they wanted to buy, so that's what we're servicing the building there.
At this time, this concludes your question-and-answer session. I'd now like to turn the call back over to Mr. Gerber for his closing remarks.
I don't have any specific closing remarks. I will then again thank everybody for joining the call, and have a great rest of your day. Thanks, everybody.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.