Terago Inc

TSX:TGO

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to TeraGo's Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] I'd 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 D&A for the quarter ended September 30, 2022, which is available on www.sedar.com and also consider other uncertainties and potential events.

Except as may be required by Canadian Security 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 business and to measure overall performance. TeraGo believe that these financial measures provide readers with better understanding of how management views the company's overall performance. I would now like to turn the conference over to TeraGo's Chief Executive Officer, Matthew Gerber. Sir, please proceed.

[Matthew Gerber, executive]

Thank you, David, and good morning, everybody. We hope your day is off to a great start, and thanks for joining our Q3 2022 conference call. After the markets closed yesterday, we issued a press release announcing our results for the third quarter ended September 30, 2022. As David mentioned, 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'll use for this call.

We slightly modified the format of this call from what we've done in the past, as you'll be hearing from three TeraGo executives today. Joining me and Phil, our CFO, is Blake Wetzel, our Chief Revenue Officer. Blake will be sharing more about what's driving our growth momentum in private network activities. Despite seeing one-off in-period outage credits, which impacted our Q3 revenue and EBITDA results, we were pleased to, again, see continued underlying core connectivity revenue run rate growth this quarter.

When we look at our Q3 results this year as compared to our Q3 results from 2021, and adjust revenues for the impacts of the onetime outage credits, which Phil will discuss in more detail during his remarks, our gross connectivity revenues grew by 2.5%. We also saw bookings exceed churn again this past quarter, which is another positive momentum indicator showing us that we can continue on our growth trajectory going forward.

This past quarter, we did close off most of the follow-on activities relating to the divestiture we did earlier this year and are on track for completing the balance of transition activities and deliverables by the end of the calendar year. Additionally, we continued to advance our 5G private networks agenda and began preparing for our first installation, which we plan to complete in this current quarter.

Q3 was also a very busy quarter for regulatory activities. In addition to submitting our response to ISED's millimeter wave consultation which was issued in Q2, ISED issued two additional consultations in Q3, for which we're currently working to prepare responses. This is something I'll also speak about more on the latter portion of today's call. As I'm sure many of you have seen through the press release announcement, we closed a debt financing this past quarter, which positions us well to continue supporting our growth and respond to the demand we expect to start seeing for private networks.

So with the revenue growth, again, this quarter, it's clear to us that we're past the inflection point we've been discussing on prior calls. Our fixed wireless access business is, once again, growing. This fiscal year is the first year we've seen sustained fixed wireless access revenue growth in 10-plus years. As you'll hear from us later in the call, we continue to see signs that the momentum we have achieved is sustainable and our strategy for growing our fixed wireless access business is the right one.

Our team is extremely encouraged and excited about both the growth we're delivering and the interest we're starting to see from our existing and potentially new customers for 5G millimeter wave private networks. We're also happy to be here and share that excitement with you this morning. With that said, I'll turn the call over to Phil to walk us through the numbers. Phil, over to you.

[Philip Jones, executive]

Thanks, Matt. Before I go through our financial results for the quarter, I wanted to briefly spend some time diving deeper into the onetime outage credits that Matt alluded to earlier. As a result of carrier outages that occurred in July 2022, which were beyond the control of the company, TeraGo chose to issue a number of onetime nonrecurring credits to our customers as part of our overall commitment to customer experience and satisfaction.

Starting on Slide 5 with connectivity revenues. Our connectivity revenues totaled $6.5 million in Q3 2022, which is a slight quarter-over-quarter increase compared to the same period last year. Revenue would have increased by an additional $0.15 million over the same quarter in the prior year, if not for the onetime nonrecurring credits spoken about earlier.

Moving to Slide 6, where we look at our connectivity KPIs for the third quarter of 2022 and the prior 4 quarters. Our backlog monthly recurring revenue, or MRR, in our connectivity business increased to 138,893 as of September 30, 2022, compared to 133,436 in the prior quarter and 102,911 in the same quarter prior year. The increase in backlog MRR is a result of new order bookings continuing to grow at a faster rate than the installations, and these are being driven primarily by strong sales performance in trying to get new customers that are coming through both our direct and channel sales teams.

Next, our average revenue per customer, or ARPU, for our connectivity business was $1,099 in Q3 2022 compared to $1,118 in the prior quarter and compared to $1,026 in the same period in 2021. ARPU decreased from the prior quarter due to the impact of the aforementioned onetime nonrecurring credits. Without the impact of the credits, ARPU would have increased, for the fifth quarter in a row, to $1,122, which we feel is a more accurate way of depicting this quarter's results.

Finally, for the third quarter of 2022, connectivity churn was 0.5% -- or 0.7% compared to 0.9% in the prior quarter and 0.9% for the same period last year. This marks the fifth consecutive quarter keeping churn under 1% due to our continued execution of our strategy to focus on large, mid-market, multi-location and enterprise customers and providing a superior customer experience compared to our competitors. The customers lost in the quarter were primarily smaller customers with single locations, which is an area we are diverting away from.

Turning to Slide 7 to go through our broader Q3 2022 financial highlights. Total revenue decreased to $6.6 million for Q3 2022 compared to $10.9 million for the same period in 2021, the decrease in revenue driven by the divestiture of the Cloud and colocation lines of business that took place earlier this year. Net loss for the second (sic) [ third ] quarter was $2.9 million compared to a loss of $2.3 million in the same period in 2021. The higher net loss, again, driven by onetime restructuring costs, nonrecurring customer credit and transaction-related expenses as a result of the divestiture transaction from earlier this year.

Adjusted EBITDA was $0.6 million for Q3 2022 compared to $3.1 million in the same period last year, the decrease driven by the impact of the divestiture transaction, nonrecurring credits given this quarter, along with other nonrecurring in-period charges. Turning now to Slide 8. Our capital expenditures totaled $0.9 million or 14% of revenue. CapEx expansion continues to be predominantly success-based spend associated with the onboarding of new customers.

Turning to the balance sheet. We ended the third quarter of 2022 with $1.8 million in cash and $1.1 million in short-term investments. Additionally, at the end of September, we announced that we entered into a 3-year USD 20 million secured debt facility with CrowdOut Capital. The proceeds of this financing will be used to grow the business, and in particular, to fund the customer-related and infrastructure-related capital expenditures to help drive connectivity customer success and enhance our internal systems in preparation for further development and launch of our 5G private network products. With that said, I would like to turn the call back over to Matt who will provide an update on the encouraging trends we're seeing in this business. Matt, over to you.

[Matthew Gerber, executive]

Thanks, Phil. So as Phil and I have both mentioned, accounting for the impact of the outage credits we gave to customers, our year-over-year Q3 gross revenues demonstrated continued growth in our core fixed wireless access products and services. Furthermore, there have been other momentum indicators that remain strong, namely net monthly recurring revenue, or what we call net MRR, which is a KPI that we've continued to and will be continuing to use going forward.

As a reminder, net MRR is the difference between new revenue we book and revenue that churns. Including Q3's additional net MRR, we are currently at a positive $150,000 of net MRR year-to-date. Another momentum indicator we watch is backlog, which continues to remain robust at just under $139,000. We know that this is a big backlog for our team, which is why we have dedicated additional resources to the provisioning team this quarter as we drive towards increasing our provisioning rate and draining some of this backlog.

Next, as Phil said, churn was exceptionally low this past quarter as we remain laser-focused on adding large and mid-market, multi-location enterprise customers, and we do expect to see continued churn with our single location smaller customers. Finally, the last momentum indicator is one that represents our team's ability to service our customers. This indicator is our Net Promoter Score, which, despite the impact of the nationwide extended Rogers outage to a small portion of our network, remained high at 44, which is again several multiples above what you typically see for a telecommunications provider, and certainly above the Net Promoter Score for our competitors.

Renewed growth here at TeraGo is something we've not seen for a while. So our team thought it was appropriate to pass the floor to Blake, who will tell you more about where and why we're seeing growth in the fixed wireless access business line and discuss how we are moving our 5G private network agenda forward. So Blake, over to you.

[Blake Wetzel, executive]

Thanks, Matt. As previously mentioned, we are proactively pivoting our focus towards expanding our customer base of mid and large enterprise corporations with multiple locations, which we have internally defined as 5 and more connections. This shift has contributed to our increase in ARPU, and the location growth has, quite frankly, proven to be an effective strategy to growing relationships with our customers.

To numerically illustrate the progress we've experienced, we have grown by over 500% from 1.5 years ago in our portfolio of mid and large enterprise corporations with multiple locations, growing from 40 to now over 200. This approach and focus on delivering flexible and quality services to these customers, as represented by our Net Promoter Score, has allowed us to increase the strategic position with our customers.

Next, I'd like to shift gears to discuss the progress we are -- being made on our 5G private networks initiative. As Matt iterated earlier, we are making significant advancements on this end in that several moving pieces of the strategy are beginning to come together. We are in close contact with our key radio and component suppliers on a day-to-day basis and feel strongly about the stand-alone equipment making its way over to us by the end of Q1 2023.

The ecosystem necessary to deliver these high-value complex solutions for enterprise customers is rapidly forming. We are ensuring to build best-of-breed partnerships to bring desired outcomes to our customers. On the customer front, we have begun deploying the first network with McMaster University where we will jointly demonstrate the capabilities for commercial use cases in partnership with the University and commercial partners.

We have begun to see more commercial interest and we'll work our ecosystem to design ideal solutions to meet those commercial customer needs. In tandem with the advancements being made in our 5G strategy, the broader 5G route remains an incredible growth market with a significant opportunity. With the current progress being made, we expect to see the deployment of use cases of enterprise over the next several years, and remain keen on capitalizing as much market share as possible. With that, I'd like to turn the mic back to Matt.

[Matthew Gerber, executive]

All right. Thanks, Blake. Before we transition to Q&A, I want to spend some time talking about the recent ISED consultations. As I mentioned at the start of the call, this was a very busy period for us with consultations. In Q2, ISED issued a millimeter wave consultation which outlines how ISED plans to manage millimeter wave license renewals and the auction for additional millimeter wave spectrum. .

We responded to this consultation in Q3 and felt it was consistent with how ISED indicated it planned to handle our 38 gigahertz millimeter wave spectrum in prior consultations. ISED also issued two additional consultations in Q3 that apply to us. One is for noncompetitive licensing and the other is for the longer-term spectrum outlook. We've responded to the noncompetitive licensing consultation and are preparing our response on the spectrum outlook consultation. It's the spectrum outlook consultation which provides ISED's view on how it will manage our 24 gigahertz license renewal and the auction of additional spectrum in the span.

Based on what ISED has indicated in the spectrum outlet consultation document, it appears to treat our 24-gigahertz spectrum consistently with the positions ISED has taken in the past. So in conclusion, we ended Q3 on an encouraging note and have entered into a busy fourth quarter with the same momentum. Our strategy is working as we continue to grow our core connectivity business while we expand our enterprise customer base. We're hard at work provisioning as much of our backlog as possible and converting that backlog into revenue.

We have our sights on closing several key large enterprise deals that will set us up well for 2023 and look forward to keeping you all updated on those. At this point, all leading indicators tell us that we should see the current momentum maintained in Q4 and we look forward to converting these positive indicators into tangible results. That wraps up the prepared remarks for today, and we can now open the call up for questions. So David, back over to you.

[Operator]

[Operator Instructions] We'll take our first question from Matthew Lee with Canaccord Genuity.

[Matthew Lee, analyst]

Good quarter. ARPU looked good once adjusted. But can you maybe help us understand what your F23 expectation is for growth on that metric, especially as you work through some of the higher-value backlog?

[Matthew Gerber, executive]

So Matt, good to have you on the call. We typically don't give guidance on a forward look. I think though it's fair to say that with the trends we're seeing with the business, with acquiring additional enterprise customers with a lot more multisite locations, these are inherently bigger customers with higher ARPUs. So again, without giving guidance, if the momentum and trends continue as we've seen them in the past, we should see that number continue to increase.

[Matthew Lee, analyst]

Right. Okay. That's fair. And then maybe on profitability, a little bit truncated this quarter. Can you just help us understand what your expectations are for margins, are they going to recover back to kind of Q1, Q2 levels? Or do you see kind of growth from there?

[Matthew Gerber, executive]

I think that's a great question. And we talked a little bit about this on last quarter's call. We're pleased with our overall gross margins. They're fairly consistent with what we've seen with this business in the past, and we expect to maintain those. What we also see, though, is we see growth for the first time in many, many years, the first time I've been associated with the business, and as far back as 10 years ago, the business was shrinking, or this line of business was shrinking. And so we're seeing two things that we haven't seen in the past. We're seeing growth in our core fixed wireless access business, and we're seeing genuine interest from customers in 5G private networks. And we think as a team that warrants continued investment in sales and marketing as well as technology investments in the form of some expert folks on our team that can help with both growth in fixed wireless access and growth in our 5G private networks. So our intent is we want to keep making those investments, and we would expect to see continued growth in the business, accelerating growth in the business and 5G private networks. And with that accelerating growth, we would then again expect to see profitability start increasing again. So it's a long way of saying, we want to keep making investments in the business because we think it's the right time to do that.

[Operator]

At this time, this concludes the question-and-answer session. I would like to turn the call back over to Mr. Gerber for any additional or closing remarks.

[Matthew Gerber, executive]

Okay. That's really it for me today. Again, thank you, everybody, for joining us today, and have a great rest of your day.

[Operator]

Thank you for joining us today for TeraGo's Third Quarter 2022 Earnings Call. You may now disconnect.