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Good morning, ladies and gentlemen welcome to TeraGo's Q2 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session with pre-qualified analysts on the call and instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. 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 sections in each of the annual MD&A for the year ended December 31, 2019, and the Q2 2020 MD&A, which are available on www.sedar.comExcept as maybe required by Canadian security laws, the company does not undertake any obligation to update any forward-looking statement as a result of new information. To remind listeners that TeraGo uses certain non-GAAP financial measures to arrive at adjusted results to assess its and to measure overall performance. TeraGo believes that these financial measures provide readers with a better understanding of how management review - views the company's overall performance. I will now turn the conference over to TeraGo chairman, Mr. Matthew Gerber. Please go ahead.
Thanks operator. Good morning everybody and thanks for joining our second quarter 2020 earnings conference call. I suspect a lot of you saw the press release we issued that covers our second quarter results ending on June 30, 2020. That press release, financial statements, and MD&A as the operator mentioned are currently available on SEDAR as well as our company website along with the deck that Dave is going to take you through during this call. As you probably saw in yesterday's announcement, somebody familiar to those of you that have joined these calls in the past is going to be stepping in as our Interim CEO replacing Tony Ciciretto who is the part of effective immediately.In addition to his CFO duties, Dave has assumed operating responsibilities for us and will continue to do so until we hire a new CEO. You probably also saw that we announced Ken Campbell, a proven wireless industry vet has joined our board as well. So on behalf of the board and the management team, we would like to thank Tony for his years of service at TeraGo. Tony was a key part of driving our 5G initiatives and strengthening our company's [indiscernible] and IT infrastructure businesses into what they are today and so on behalf of all of us, we want to wish Tony well in his future pursuits. As the release mentioned, we're initiating a search for a new CEO and our goal is to find a seasoned industry executive, much like we found in Ken for our board seat, who will be able to execute on the company's long-term growth plan. The board specifically is looking for a seasoned leader that has relevant improvement experience in building companies in the wireless communication space in Canada. This expertise will help TeraGo more effectively capitalize on the assets that we hold and better leverage our first mover advantage as being the first company to deploy B2B 5G services in Canada.So on behalf of the entire team, we also want to welcome Ken to the Board. You probably saw in the release, he's got more than 20 years of hands-on commercial experience with a lot of different mobile operators and he served in leadership roles around the globe, including companies in North America, in Europe, and in North Africa. We're really, really thrilled to have his wireless connectivity market experience at our table.And then lastly, we also want to thank Jim Sanger who has spent 7 years' time and has dedicated 7 years of service to TeraGo on TeraGo's Board. So we will wish him well in his future endeavors. With that, I'll turn the call over to Dave who'll walk you through our operational highlights for the quarter and financial details and then after which we'll open the call up for questions. So Dave, over to you.
Great, thanks Matt and good morning everyone. I'd like to echo Matt's comments and thank Tony for his dedicated service to TeraGo. I know I speak for all of TeraGo in wishing Tony all the best in the future. Before diving into the numbers, I want to touch on the operational highlights and KPIs for the second quarter and as you can see from our earnings release, we were able to deliver solid financial results in the second quarter. Despite the lingering effects of the pandemic and the current state of the economy, our financial results reflect the fact that our business is essential and that our services are necessary. Our network, data centers, and critical facilities are all up and running and we're supporting customers 24/7 despite having our non-essential employees working remotely. Thanks to the resilient nature of our business, the broad diversification of our customer base, and the execution of key operational initiatives, we've been able to generate strong cash flow in the second quarter. I'm also proud to share that we've achieved a net promoter score of plus 68 during the second quarter, which compares very favorably to our industry peers and is a testament to look for the reliability of our infrastructure and the strong relationships we fostered with our customers over the years.So let's take a quick look at our operating metrics for Q2 in more detail. On slide 5, you will see that our sales and customer success initiatives are helping to stabilize and improve our key operating metrics. Starting first with our backlog, monthly recurring revenue or MRR in the connectivity business. In Q2, backlog MRR increased 52% to 86.9 K from 57.1 K year-over-year, driven by higher sales volumes. Our cloud and colocation backlog MRR in Q2 was 18.9 K, up 11% from 17 K last year.Shifting over to ARPU, in our connectivity business, ARPU for the second quarter was relatively flat at 1041, up slightly compared to 1023 in Q2 of last year. Our continued focus on acquiring and retaining mid-market business customers is critical to maintaining and eventually growing our connectivity ARPU.Our cloud and colocation ARPU for Q2 was 3255, slightly up from 3185 in Q2 of last year and what's mostly driving this are upgrades from our existing customers.Looking at our third key operating metric, customer churn for the second quarter, churn in our connectivity business was 1.7% compared to 1.6% in Q2 of last year and this slight increase in churn was driven by a limited number of customer closures with some restructuring of their physical locations.Churn in our cloud and colocation business decreased to 1.1% in the second quarter compared to 1.7% in Q2 of last year and has been relatively flat over the last few quarters. Turning now to our financial performance for the second quarter, on slide 6, you'll see that our total revenue in the second quarter declined only 4.9% to 11.6 million compared to 12.2 million in Q2 of last year.Breaking it down further, connectivity revenue in the quarter decreased only 3.9% to 7.3 million compared to 7.6 million in Q2 of 2019.Our cloud and colocation revenue for the second quarter decreased 4.3% to 4.4 million compared to 4.6 million in Q2 of last year. I do want to highlight here that we grew total revenue sequentially quarter-over-quarter in Q2. We had solid performance in both our segments with stable revenues and connectivity and growth in our cloud and colocation business due to solid bookings and low customer churn.Turning now to EBITDA, in the second quarter or EBITDA increased 6.7% to 4.8 million compared to 4.5 million in Q2 of last year. The increase was driven by a number of factors, including government grants received as a result of COVID-19, lower stock-based and severance charges in addition to our continued cost reduction efforts. Moving down the income statement, net loss for the second quarter totaled 0.7 million compared to a net loss of 2.8 million in Q2 a year ago.Turning to our cash flow on slide 8, I'm very pleased to report that in the second quarter, we generated 4.8 million in cash from operating activities, while capital expenditures were 1.9 million or about 16% of total revenue in Q2. The CapEx spend was driven primarily by success capital required for the connectivity business and our purchase of the Nokia 5G equipment for use in testing. On the balance sheet at quarter end, we had 9.3 million in cash, which was up from 7.5 million last quarter and up from 8.7 million at the end of Q4 2019.In addition, we recently amended our credit agreement with RBC and TD Bank, giving us access to a total of 35 million, comprising a 30 million term loan and a 5 million revolver. Overall, our balance sheet is strong with ample cash on hand available to us adding another layer of resiliency to our business. I'd now like to update you on our progress on executing our multi-pronged growth strategy, which we think are the 3 pillars on Slide 9. I'll start with the first pillar of stabilizing our business and generating free cash flow and as you've heard me say, we're making good progress on the connectivity side towards stabilizing churn on a quarter-to-quarter basis.And this is all thanks to the initiatives we've implemented over the last 12 months, not only mitigate churn but to enhance our customer service. The $4.8 million we generated from operating cash flow in the second quarter is almost double the amount we generated last quarter which further demonstrates the progress we made in this critical area. With respect to our second pillar, we remain focused on large multi-site connectivity deals across Canada and I'm very encouraged by the growth in our sales pipeline for these types of deals and on our third pillar, I'd like to provide some color on our 5G testing with Nokia and Askey.We continue to make very good progress on our 5G technical trial. The results we've experienced so far has been encouraging and in line with our expectations with the current generation of technology. We've been able to consistently achieve speeds of 800 megabits per second with latency below one millisecond. All while utilizing only a 200 megahertz channel on a single edge device. We expect performance to increased substantially above 1 gigabit per second when we're able to increase channel sizes using the next version of CPE devices scheduled for delivery in late Q3.In summary, thanks to our diversified customer base, predictable recurring revenue business model, prudent approach to cash management and strong balance sheet, I feel we're in a great position to capitalize on the opportunities ahead of us. That concludes our prepared remarks and we're now ready to open the call for questions, Operator.
[Operator Instructions] Your first question comes from the line of Bentley Cross with TD Securities.
Maybe you can clear the elephant out of the room. Why did the Board feel that Tony wasn't the right fit to drive the company forward from here.
It's great to talk to you in person too. I know -- I've read your coverage and it's nice to finally meet via phone. Yeah, we can't comment on specifics around Tony, but let me share with you our perspective on why we made the change. We are a very diligent Board when it comes to looking at the company's strategy and we do periodic strategic reviews and for those of you that have been around those exercises, you know that the strategy should drive the organizational form, the resources, and the team, and we felt there was a convergence to things that really drove us to look at making the change and we felt that the time was right now to make the change. One is the strength of this team. For those of you that have worked with Dave, you know we've got a strong leader right now in the company and the senior leadership team is also very strong. So that team stands alone on its strength, coupled with the fact that you've seen the results, the operating results are good, we have a strong position right now on our balance sheet as well and then the 3rd factor, which was really the thing that converged with those other two and that is, we're continuing to see an increasing interest in us and our business and what we're going to do with our assets and so when you look at the convergence of those three things, we felt the time was right to look for a leader who can take us to the next level.
That's good perspective. Thank you. And then focusing more on the operations, Dave, churn ticked up a little bit, but at the same time ARPU is ticking up nicely in the connectivity business, can you just kind of flush out what's driving those two factors.
Sure. Yeah. And that's really why evidently on slide 5, we tried to put those 3 key operating metrics on one page to kind of tell the entire story. So just recall that the churn rate that we disclose is really customer trend, its customer count. So as we started to see some of the smaller, call it the SOHO customers, starting to churn, that churn percentage did pick up, but we've frankly maintained most of our revenue. So as we -- as we continue to drive larger deals with the mid-market, the loss of the SOHO customer isn't impacting our ARPU, does that help.
Yes. And then lastly for me, just on bad debt. Was there any sort of provision taken in the quarter or can you maybe talk about how collection [indiscernible]
Yes, so our collections are very strong and almost surprisingly strong if you think about the uncertainty that we faced at the beginning of a sort of coded environment. We took a small provision in the quarter and that's really normal course for us Bentley, the provision was 55 K and it is very much in line with provisions we've taken on past quarters. We look at it on a case-by-case basis, bottom up, very detailed. We look at collectability and our accounts receivable and collections are very strong.
Your next question comes from the line of Matthew Lee with Canaccord.
Can you maybe give us some color on the trends you're seeing on subscribers going into Q3 and maybe the timing of a potential stabilization of revenue in both businesses.
Yes. Thanks, Matt, I'd be happy to do that. So we're cautiously optimistic that at the trends that we're seeing. Our EBITDA as I just talked about in my answer to Bentley, our churn is stabilizing, it's -- we are seeing churn at the low end of our customer base in terms of size of customers and number of locations that they have with us, our focus is clearly on the mid-market. We've talked in the past about leveraging our channel program, looking at large multi-site deals and so COVID hasn't necessarily helped the acceleration of that plan, but we've weathered the storm quite well, we're cautiously optimistic as we go through the next couple of quarters. We talked about a turnaround in the past as to when are we going to see that shift in the inflection point in our revenues and you know, we're cautiously optimistic that over the next couple of quarters as we work through this, you got the strategy and the -- and the team in place to achieve that objective.
And maybe just following up on that, how much of the churn that you saw in the quarter, that uptick was that restructuring factor. I mean, would you have become closer to your 1.5% if...
That's exactly it. It's about 2.2% that we saw which was related to that -- to that factor, otherwise, we'd have been around the 1.4 to 1.5 mark.
All right. That's perfect. And then just on the three factors mentioned earlier with regard to the reason why Tony stepped down, what's the third item that you mentioned, interest in your assets in terms of potential acquisition and maybe if so can you expand on that.
Yes, so, I can take that Dave and inference wasn't meant as interest in acquisition, it was really meant as just general interest in the marketplace, in the technology, and 5G as a use case or multiple use cases and so when we all look at the press itself, we're clearly in the middle of a space that is poised to grow and grow significantly and I think we all know that we are -- we're out there, we're a player, we're first to market with some of the services, we tend to be first to market with some of the services and we're going to leverage that asset going forward to drive the best return we can for our shareholders. So that's what I meant by that interest and I hope that clarifies that.
[Operator Instructions] Your next question comes from line of David McFadgen with Cormark.
Dave, just -- just a follow-up on your comments on 5G, can you just remind us where are you at in terms of bringing 5G to market, where and when, if you could just give us an update on that.
Yes, sure. And thanks David for the question. So as I said in my remarks, we are continuing our testing, more of a technical trial on the 5G side. We've been experiencing very encouraging results to date, but it's been limited and it's limited by the availability of the type of equipment that we would need frankly to launch full services. And so we wanted to just be as transparent and as open as we can right now to give you an update on some of the test results that we've achieved so far, but we do need to wait for that next sort of phase of CPE equipment, which we expect to receive late Q3 to continue our Tech, our testing.So that being said, we do want to move into customer pilots as soon as we can, as soon as we've got the right gear and we're comfortable with launching services, that probably will be pushed into the 2021 instead of late 2020 just given, I would say, given the delays we've seen in getting the equipment available to us. With that being said, that is a major pillar of our strategy and we're very excited about the opportunity that that program will drive for us.
Okay. And are there any particular industry that you're targeting or [ use cases ] right now that you see in the short term?
Yes. As we said -- as we said in the press release, I think as we -- as we are talking to potential customers who want to participate in the pilot, what seems to be emerging are two things. One is private networks, things like manufacturing is a big industry segment, I think is ripe for in that type of a pilot and as well launching internet broadband in dense urban environment is another area we will look at to sort of make the early phases of larger 5G services.
We have no further questions at this time, I'll turn the call back over to Mr. Dave Charron for any closing remarks.
Well, great. And thanks everyone for joining us on the call today and on behalf of the management team, the Board, and myself, I want to thank you for your support and I look forward to speaking with you next quarter. Thanks everyone.
Thanks everybody.
This concludes today's conference. You may now disconnect.