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Good morning, ladies and gentlemen, and welcome to TeraGo's Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference 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 both the 2022 annual MD&A as well as the MD&A for the 6 months ended June 30, 2023, 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 the 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, Daniel Vucinic. Sir, please proceed.
Good morning, everyone, and welcome to our second quarter 2023 earnings call. This is my first earnings call as TeraGo's CEO, and I am pleased to be here with you all. As I enter my near 2-month anniversary as CEO, I've become more and more excited after each passing day as a result of the amazing team members here and the immense amount of potential we can capitalize on. I come to TeraGo with over 25 years of telecom experience at various companies driving enterprise value creation through organic and inorganic growth and operational excellence. I've been on the side of the smaller competitor driving innovation, competition and differentiated customer experience, all of which are applicable to TeraGo today. Additionally, I've had the privilege to hold senior positions in all departments, including products, sales, technology, customer experience and operations, enabling a holistic understanding of the telecom landscape. My prior tenure has provided me with the experience, business insights and learnings that I'll love to share at TeraGo. Starting from day 1 on the job, I hit the ground running after a meticulous initial assessment of the business and much collaboration with the executive team and employees, TeraGo will be implementing a Shareholder Value strategy, which is the pivot from TeraGo's former corporate plan and a step towards a new and refined direction. The prior game plan for the company was one of hyper-focused top line revenue growth, which resulted in inflated OpEx and CapEx figures. In our assessment, we found that there was a lack of strategic focus and concentration as our old chunks were trying to be everything to everyone in every market and every customer segment. The numbers don't lie as this was clearly reflected in relatively lower cash flow and adjusted EBITDA margins. Our Shareholder Value strategy is still in the works of being memorialized, but we have a pretty good sense of the trajectory as our end goal is to drive Shareholder Value creation. One of the vital subsets to our strategy is what we call Smart Growth, which is positioning fixed wireless as a premium product in the right place at the right price and with the right customer segment. This combined with the optimization of operational expenses and stronger returns on capital investments will ensure revenue and adjusted EBITDA growth, ultimately leading us towards a path to bottom line profitability and positive cash flow. And of course, lastly, we want to be sure to capitalize on TeraGo's unique and robust wireless spectrum for both fixed wireless and 5G private network. Our organization has a competitive advantage relative to our peers, thanks to these assets, and it is part of our revamped strategy to make sure we maximize the full value. That said, as I'm sure you could have guessed, this plan is a long-term one and not something that can happen overnight. Our team will remain the user focus in manifesting our refined plan, but it will take some time. Taking a step back, prior management was predominantly focused on the divestiture, which was completed successfully. However, with TeraGo ready for its next phase within its corporate time line, the Board of Directors felt that now was the time for new leadership with a proven track record to grow this business, combined with a more operational mindset. I look forward to updating you all in the near future as our Shareholder Value strategy unfolds. Phil, over to you.
Thanks, Dan. Starting on Slide 5 with connectivity revenues. Connectivity revenues totaled $6.5 million in Q2 2023 compared to $6.6 million for the same period in the prior year. The year-over-year decrease being the result of the churn of customers that were associated with the 2022 divestiture transaction. When comparing the current quarter revenues to immediately prior quarter Q1 2023, our revenue was flat as provisioning and onboarding of new customers was on par with customer churn. Moving to Slide 6 for a look at our connectivity KPIs for the second quarter of 2023 and the prior 4 quarters, our backlog of monthly recurring revenue, or MRR, in our connectivity business decreased year-over-year to $85,471 as of June 30, 2023, compared to $133,436 for the same period in 2022. The decrease in backlog MRR is the result of lower bookings year-over-year combined with de-bookings of previously signed orders resulting from technical, geographical and customer landlord limitations preventing fulfillment of the orders. All of these factors being beyond the control of TeraGo. Next, our average revenue per customer, or ARPU, for our connectivity business was $1,104 in Q2 2023, compared to $1,101 in Q1 2023 and compared to $1,118 in the same period in 2022. ARPU at the end of Q2 2022 was a historic high point due to customer and product mix in effect at that time. TeraGo continues to be successful in expanding its customer base to larger multi-location customers. However, some of these orders have been a large volume of our lower revenue products, resulting in the year-over-year ARPU decrease. Despite the year-over-year decline in ARPU, the metric has been increasing each of the last 3 consecutive quarters. Finally, connectivity churn was 1.2% compared to 0.9% in the prior quarter and 0.9% for the same period last year. The increase in churn in the current quarter was largely the result of a single multi-location customer who is at the end of the contract term and required by their foreign parent company to switch to a fiber-based connectivity solution. We continue to focus on mid-market and large-scale customers and have begun implementing new strategies and policies and procedures to more proactively engage with existing customers, increasing our contract renewals, customer retention and long-term revenue. Turning to Slide 7 to go through our broader Q2 2023 financial highlights. Total revenues for Q2 2023 were $6.5 million compared to $6.7 million for the same period in 2022. The difference in gain being result of the divestiture transaction and completion of the corresponding transaction services agreement. Net loss increased to $4 million in Q2 2023 compared to a net loss of $3.1 million in the same period last year. The increased net loss being the result of both lower revenues and higher salary and operating costs as a result of the CEO change that took place in Q2 2023. Adjusted EBITDA was $0.5 million in Q2 2023 compared to $1.0 million for the same period last year. The decrease was a result of lower revenues and gross profit compared to the prior year, combined with higher SG&A net of restructuring costs. However, adjusted EBITDA in the prior quarter was $0.8 million, which we feel is a more accurate benchmark since the prior year comparable quarter contain both costs and revenues associated with the divestiture transaction service agreements. Turning now to Slide 8. Capital expenditures totaled $1.5 million or 23% of our revenue. CapEx expenditure continues to be predominantly success-based spend associated with the onboarding of new customers. Turning to the balance sheet. We ended second quarter of 2023 with $4.8 million in cash and $0.2 million in short-term investments for a combined position of approximately $5 million. Despite severance and related costs paid as a result of the CEO transition, the company continues to focus on cash management and although the quarter did lack revenue and EBITDA growth, the company is ahead of its own internally budgeted cash balance. The company is fully compliant with the covenants under its long-term debt facility. With Dan now at the helm and the activation of our Shareholder Value strategy, we've continued to downward optimize our cost structure, our head count, our salary cost, net of the CEO transition compared to the prior quarter and same 3- and 6-month periods in the prior year. With that said, I'd like to turn the call back over to Dan.
Thanks, Phil. The current results are the results, but there is significant potential to create more value with customers, shareholders and employees, leveraging our unique assets in fixed wireless and private 5G. With respect to 5G, TeraGo plans to leverage our millimeter wave assets for customers that require ultra-low latency and higher data consumption as well as leveraging the mid-band spectrum through ISED's noncompetitive local licensing process to drive the power of 5G networks to really fuel the industry as it relates to innovation and significantly improving productivity, quality, safety and cost savings for our customers. In conclusion, as I've shared already, this is a long-term manifestation of the Shareholder Value strategy. We are still ways to go, but we are hyper focused in ensuring that we will get to our goal of generating revenue and EBITDA growth in our business, optimizing operational expenses and mitigating churn. All in all, I'm very excited for the times ahead, and I appreciate your continued support for our organization. That wraps up the prepared remarks for us today, and we can now open up the call for questions. Operator, over to you.
[Operator Instructions] Your first question is coming from Sid Dilawari of Cormark Securities.
Firstly, just on the backlog MRR decline, you flagged a few external factors that resulted in lower bookings and de-bookings. Can you help us sort of unpack that? And maybe just also elaborate a little bit on if there's any potential in the near term to recoup some of this lost revenue in subsequent quarters?
Yes. Thanks for your questions, Sid. Appreciate it. Yes, in terms of the backlog, none of this had resulted in revenue yet. As we book an order, it sits in our backlog, it becomes revenue once we provision. So the decrease year-over-year part of it is, obviously, as we onboard new customers, brings the balance down. Our bookings have been lower than they were a year ago. And then with the case of the de-books, there won't be an opportunity to try and re-up that customer. The reason for the de-book was due to technical issues, whether it'd be geography, could be the customer landlord. Therefore, making the deal economics not work and then other technical challenges that just can't be overcome for that customer or potential customer.
Sorry. So when you say geography, does that mean not serviceable where they're located or...
No, it's because our equipment requires a clear line of sight, so it simply means we couldn't get a line of sight from the hub to the customer's location.
Okay. And then just secondly, on the SG&A expense. It continues to creep up and this quarter, it was 94% of your top line versus 78% last year. Can you talk about what's leading to that ongoing spike in SG&A? And when can we sort of start to see that stabilize a little bit more and see some of your gross margin dollars flowing more into EBITDA?
Sure. Yes, the Q2, we have a large expenses related to the CEO change. And if we netted all of those costs out, then our SG&A would have been flat or slightly below where it was in Q1. And that trend is continuing forward. We've had some natural attrition at the company. We have chosen not to backfill those roles as we continue to optimize the head count of the company back to what's appropriate for the current level of activity.
Okay. So I guess, on a normalized basis, it should be around somewhere where it was last year going forward?
Or lower.
Okay. Okay. That's really helpful. And then just one last one for me. Just on the ARPU decline, it was marginal. And you obviously highlighted last Q2 being sort of the peak in terms of ARPU. So should we be expecting to sort of see ARPU stabilize in the current range or the Q1 '23 range going forward?
Yes. It's where we are now. We've had 3 straight quarters of growth. It was just down compared to where we were a year ago. So Q4, Q1 and then Q2 of this year have all been trending upwards. And we certainly expect it to stay within that range, if not to continue to slightly increase upward.
Thank you very much. [Operator Instructions] Okay. We don't appear to have any further questions in the queue. And that concludes our question-and-answer session. And that concludes today's conference call. Thank you very much, everybody, for your participation. You may disconnect your phone lines at this time, and have a wonderful day.