Terago Inc
TSX:TGO
Earnings Call Analysis
Q4-2023 Analysis
Terago Inc
TeraGo's CEO, on board since June 12, expressed confidence in the company's value creation strategy. Despite facing higher finance costs and a drop in revenue partially due to the cessation of $1.4 million from cloud and colocation services, the company has managed to reduce overall expenses. A net loss increase was offset to some degree by overall cost reductions year-over-year, showcasing the company's ability to manage expenses in challenging times. While annual adjusted EBITDA decreased from $4.1 million in 2022 to $3.4 million in 2023, there was a slight uptick in EBITDA in Q4 of 2023 compared to the same period the previous year. This indicates a positive turn in the company's financial performance as it heads into the new year.
TeraGo is focusing on expanding its service offerings, building on unique value contributions to the Canadian business ecosystem, notably for Small and Medium-sized Businesses (SMBs). With SMBs making up 88% of employment and over 50% of Canada's GDP, TeraGo's targeted strategy can have significant economic impacts. The company's spectrum assets, including bands at 38 and 24 gigahertz, are crucial for continued investment in diverse and innovative service offerings. The recent prioritization of the 24 gigahertz band by ISED and ongoing consultations about license renewals create both opportunities and challenges for TeraGo's strategic planning.
Entering 2024, TeraGo has a stable financial footing with $4.4 million in cash and cash equivalents, along with $0.2 million in short-term investments. The second half of 2023 showed significant improvement with positive cash from operations at $0.8 million in Q3 and $1.1 million in Q4, rebounding from negative cash flows in the first half of the year. The focus now is on a 'smart growth' strategy that includes lowering Selling, General & Administrative (SG&A) costs and other cost optimizations. This prudent financial management is essential for supporting planned growth investments while maintaining operational stability.
Following the departure of the previous CFO, TeraGo is in search of a new permanent Chief Financial Officer, a role that is critical for strengthening investor confidence and guiding the company's financial strategy. The CEO anticipates this appointment to further enhance TeraGo's value creation efforts and plans to reintroduce the company's strategy to the investor community in the second half of 2024 after integrating the new CFO.
A key contributor to the company's continued financial improvements is its evolving pricing strategy, which has led to a 10% growth in Average Revenue Per User (ARPU). By shifting focus towards higher mid-market and lower enterprise multisite managed service solutions, and positioning its fixed wireless service as a premium offering, the company is seeing a real impact on revenue. This strategy leverages the unique features of wireless technology, which provides increased reliability compared to cable networks that can be affected by physical disruptions.
Despite aggressive expansion of fiber across the country, TeraGo remains confident in its competitive edge, thanks to its strategic rate adjustments and the technological diversity of its offerings. TeraGo's suite includes higher-speed point-to-point solutions and other wireless services well-positioned against fiber and broadband cable, reinforced by both proprietary and partner-provided fiber and cable services. By offering a varied portfolio, TeraGo caters to clients with multisite locations, providing tailored connectivity options that combine the reliability of fixed wireless with the speed of fiber.
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Good morning, ladies and gentlemen. Welcome to TeraGo's Fourth Quarter and Annual 2023 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 looking -- forward-looking statements under applicable Canadian securities legislation. While 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 2023 annual MD&A which is available on www.sedar.com and also consider other uncertainties and potential events. Except as may be required by Canadian securities law, 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 home 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.
Thank you. Good morning, everyone, and welcome to our fourth quarter and annual 2023 earnings call. I am proud to report my second quarter since becoming CEO on June 12. Our value creation strategy accelerated delivery on behalf of customers, employees, shareholders, continue to pace in the final quarter of 2023. In our prior earnings release, I highlighted improvements across all our financial indicators. Today, I'm pleased to share that in the second half of 2023, we have continued the trend of strengthening these metrics.
Improvements in the second half of 2023 as compared to the second half of 2022, we increased adjusted EBITDA by 8%. Positive cash flow from operations went up by 96%. In the second half of 2023, we have delivered substantial financial wins, which have afforded TeraGo, the opportunity to reinvest in this transformation. This will drive a reenergizing of our top line.
With new sales leadership in place and further growth investments anticipated, it is my intention to drive value as much from the top line revenue growth as from cost optimization and careful management of our capital expenditures. TeraGo is extremely well positioned as a nimble carrier-grade managed service provider of choice with differentiated frequencies, deep capabilities and a delivery track record in emerging growth areas.
Smart profitable growth will be a theme in 2024 and beyond. Moving on, as mentioned in Q3 2023, ISED published a spectrum outlook 2023 to 2027. Elevating the 24 gigahertz band to priority 1, which is a major tailwind for our organization. As we anticipated in fourth quarter of 2023, ISED also launched a consultation on license renewals impacting our 38 gigahertz and 24 gigahertz bands as well as the preliminary consultation launched on changes to our 24 gigahertz band.
Like any wireless business, spectrum is our lifeblood, reasonable long-term visibility and our ability to put our spectrum to work in a way that fosters a growing competitive knowledge-based economy is absolutely critical for us to be able to invest in our diverse and innovative service offerings. We remain fully engaged in this important process.
Now given the exciting potential TeraGo uniquely provides considerable value to the Canadian business ecosystem in 3 ways. #1, TeraGo only focuses on business and primarily the SMB market, which is a vital economic engine for Canada as the SMB market accounts for 88% of the employment and contributes over 50% of Canada's GDP. #2, TeraGo owns its own wireless spectrum, largest holder of millimeter wave spectrum owns its own wireless network and owns its own national backbone Network.
TeraGo is not a reseller and #3, TeraGo continues to invest in this business, enabling customers to fuel innovation. With that said, there is significant momentum in market growth in private networks as it's a transformative technology trend that enables various customer verticals to differentiate and achieve their business outcomes. TeraGo has actively begun building an ecosystem of vendors, customers and partners to forge a consortium of strategic stakeholders that can collaboratively develop enterprise solutions for our clients.
TeraGo will be at the heart of this evolution given its spectrum ownership and expertise.
Now I'll turn it over to our interim CFO, Parveen Mithra. Parveen, over to you.
Thank you, Dan. Starting at Slide 5 with connectivity revenue. Connectivity revenues were flat at $6.5 million for both quarter 4 and prior quarter of 2023 and up $0.2 million compared to the same period last year. This was a result of increased overall average revenue per user in the current year due to strategic pricing initiatives.
Turning to Slide 6 for a look at our connectivity KPIs for the fourth quarter of 2023 and the prior 4 quarters. On average revenue -- our average revenue per user, or ARPU, for our connectivity business was $1,164 in Q4 2023, compared to $1,063 for the same period in 2022. ARPU levels have been increasing each of the last 5 consecutive quarters due to changes in customer base, product mix and a new pricing strategy implemented in Q4 2023.
Next, connectivity churn was 1% compared to 1.3% in the prior quarter and 0.9% for the same period in the prior year. The increase in customer churn was a result of certain customers at the end of their contract terms, switching to fiber-based connectivity solutions that were not previously available to them. Thanks to our new policies and strategies, in regards to customer renewals and retention, we are already seeing early signs of progress in churn post quarter end.
Turning to Slide 7 to go through our broader full year 2023 financial highlights. Connectivity revenues for year ended December 31, 2023, were $26 million compared to $25.9 million for the same period in 2022. The increase of $0.1 million being the result of higher ARPU. The increase in ARPU is a result of the company's ongoing focus to attract mid-market and large scale, predominantly multi-location customers combined with changes in pricing strategy. Net loss for the year ended December 31, 2023, was $13.2 million compared to a loss of $11.6 million for the same period in 2022.
The increase in net loss was a combination of higher finance costs, lower total revenue as prior year included $1.4 million of cloud and colocation revenue combined with nonrecurring costs associated with staffing and management changes. These were partially offset by a reduction in overall operating expenses year-over-year. Adjusted EBITDA was $3.4 million for the year ended December 31, 2023, compared to $4.1 million for the same period in 2022. The decrease is a result of the prior year, including 1 month of cloud and colocation revenue as mentioned earlier, partially offset by a reduction of overall operating expenses in the current year.
Turning now to Slide 8. Although adjusted EBITDA dropped in the first half of 2023 due to higher cost of services and selling and -- selling general and administrative or SG&A costs, improvements were seen in the second half of the year, resulting in slightly higher adjusted EBITDA in Q4 2023 compared to the same period in prior year. The company continues its smart growth strategy, lower its SG&A cost and other optimization initiatives. Turning now to the balance sheet, we ended the year 2023 with $4.4 million in cash and cash equivalents and $0.2 million in short-term investments. The second half of 2023 resulted in improved positive cash from operations at $0.8 million in Q3 and $1.1 million in Q4 compared to negative cash from operations in the first half of 2023.
With that said, I would like to turn the call back to Dan.
Thanks Parveen, the value creation strategy has gained sufficient traction and is already yielding tangible benefits. I expect that TeraGo's efforts will be further buoyed by the addition of a permanent Chief Financial Officer following the departure of the previous CFO due to personal family reasons after a brief tenure. A search is well underway for our permanent Chief Financial Officer, and I look forward to reacquainting the investor community with TeraGo and the value creation strategy in the second half of 2024 following the integration of this key member of our team.
That wraps up the prepared remarks for us today, and we can now open up the call for questions.
Operator, back to you.
[Operator Instructions] We have a question from Sid Dilawari with Cormark Securities.
A few for me. Just firstly on your ARPU. We've seen a few quarters of ARPU growth now, and that's finally starting to show up a bit more in the top line now. And then this quarter was obviously the strongest quarter in terms of ARPU growth at 10%. And Daniel, you alluded to changes in pricing strategy during the quarter, which really helped your ARPU. Can you maybe talk more on these pricing strategies from a higher level and maybe your customer mix now versus a few years ago in the connectivity business? And then just how sustainable this level of growth is, in 2024.
Sure. Thanks for the question, Sid. So a number of factors go into the higher ARPU as you briefly mentioned. So TeraGo previously was trying to be everything to every segment in every area, and we've really focused on going up segment in terms of the higher mid-market, lower enterprise multisite managed service type solutions, which make a big difference in terms of our strategy as well as from a pricing perspective, we looked at our pricing, looked at the competition and really positioned our fixed wireless as a premium product as it is so.
As it is not only carrier diverse from the other telcos, but it's also technology diverse, meaning that buried cables continue to get cut out there and multiple carriers go down, whereas a fixed wireless type service will stay up because it's obviously through the air as an example. So we've done a number of different things to really focus on these particular areas and to further make investments and expand in those areas going forward.
Okay. Just a follow-up on that. Fiber expansion is obviously ongoing across the country you just touched on it briefly here. So just hoping to get your thoughts on all these rate hikes position you from a competitive perspective against some of your fiber competitors. I know you mentioned the advantages of a fully wireless network as opposed to some of these cable operators experiencing service disruptions. But just in a highly competitive environment from a fiber perspective, how do you see your competitive positioning with these rate hikes?
And that's the analysis that we've done compared to fiber and even broadband type cable, as we know in the SD-WAN space, a lot of accesses are the, what they call cheap and cheerful Internet broadband. So we've got a number of different products in our fixed wireless that either compete with fiber and are priced competitively at the higher speeds and those are more of the point-to-point type solutions, call it kind of 100 meg to 1 gig and even we're doing 10 gig now. And then we've got other products that are under 100 meg as well as asynchronous type solutions that are 50/10 meg and 100/20 meg we're making sure that we're taking a look at both the cable and the fiber market.
And it's also important to note that although we're primarily a wireless company, we do offer an extensive fiber and cable also type accesses through our partners because we've got a number of network-to-network interconnections across our network. So we do both, especially when you think about clients that have multisite locations. It will be a combination of fixed wireless as well as fiber-type services or cable.
And then you also spoke to the higher installation yield during the quarter and maybe some of the recent lessons learned from some of the hurdles you've faced with installation in recent quarters where there were some limitations related to geography, technical constraints, et cetera. I would imagine that to have played a role in this high installation yield. So maybe if you can touch on talk briefly on that, that would be great.
Yes. That was 1 of the learnings when I first came in to take a look at why installs were taking such a long time and where our challenges and roadblocks were. So we took a look at that with a cross-functional team and looked at it from a people process and tools perspective, we were organized more complicated than we needed to be across multiple different groups and departments.
So we consolidated a few of those groups and from an organization transformation perspective and then also enhanced our real estate process. As you know, we need to get real estate approvals at the customer end for fixed wireless specifically. As well as our hub and also from a tools perspective. And what we found is a significant difference in terms of soon as it gets -- sales is booked. We're already installing weeks later, and we've received many different kudos from our clients on how quickly we've been able to install as part of that.
So kudos to the team and the leadership as part of the team to really make a significant difference there.
Got it. And then just one last one for me and maybe Parveen can take this one. You talked about upcoming growth related investments in 2024. Just wondering if we should expect any massive swings in CapEx for the year.
Sorry, just you cut out on the last part in terms of investments?
Yes. Just wondering if we should expect any massive swings in CapEx for '24.
I can take that one, and Parveen, feel free to jump in. From a CapEx perspective, that's also part of our strategy is to be more diligent and manage CapEx tightly, and what we have been doing in existing business is really focusing on previously invested assets that are underutilized and fully leveraging those and back to our strategy where we're not chasing every single dollar revenue dollar at a high CapEx and OpEx. So our CapEx spending has gone down from the current business, but we are reinvesting part of that CapEx, what I'm going to call savings or diligence into additional products and expanding our SD-WAN and managed service type portfolios as well as some hubs as part of that.
As we have no further questions on the line at this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Vucinic for his closing remarks.
Thanks again, everyone, for joining our call today. Thank you for your continued support and we look to -- we look forward to providing an update on our progress on our next quarterly earnings call. Thanks, everyone.
Thank you, and thank you for joining today for TeraGo's Fourth Quarter 2023 Earnings Call. You may now disconnect.