TeraGo Inc.

Good morning, ladies and gentlemen. Welcome to TerraGo'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 instructors 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. Tara Go 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 MDNA for the year ended December 31, 2019, and the Q2 2020 MDNA, which are available on www.cdar.com. 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. I would like to remind listeners that TerraGo uses certain non-GAAP financial measures to arrive at adjusted results to assess. its business and to measure overall performance. TerraGo 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 TerraGo Chairman, Mr. Matthew Gerber. Please go ahead.

Thanks. 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 in June 30th, 2020. That press release, financial statements, and MBA, as the operator mentioned, are currently available on CDAR, 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 Ciceretto, who's departed the company 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 that ken campbell a proven wireless industry vet has joined our board as well so on behalf of the board and the management team we'd like to thank tony for his user service at tarago tony was a key part of driving our 5g initiatives and strengthening our company's core connectivity and ip 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. He'll be able to execute on the company's long term growth plan. The board specifically looking for a seasoned leader that has relevant improvement experience in building companies in the wireless communication space in Canada. This expertise will help Terrago 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 the release. He's got more than 20 years of hands-on commercial experience with a lot of different mobile operators. And he's 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 seven years' time and has dedicated seven years of service to Tergo on Tergo's board. So we'll wish him well in his future endeavors. With that, I'll turn the call over to Dave. He'll walk you through operational highlights for the quarter, financial details, and then afterwards, 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 Tarago. I know I speak for all of Tarago, 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 to the reliability of our infrastructure and the strong relationships we've 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 five, you'll 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 MER, in the connectivity business. In Q2, backlog MER increased 52% to 86.9K from 57.1K year-over-year, driven by higher sales volumes. Our cloud and co-location backlog in Q2 was 18.9K, up 11% from 17K 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 co-location ARPU for Q2 was $32.55, slightly up from $31.85 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 or summer structuring of the physical locations. Churn in our cloud and co-location business decreased to 1.1% in the second quarter compared to 1.7% in Q2 of last year, and it's been relatively flat over the last few quarters. Turning now to our financial performance for the second quarter, On slide six, 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, our 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 co-location 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 revenues 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 co-location business due to solid bookings and low customer churn. Turning now to EBITDA in the second quarter, our 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 base 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 eight, 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 the 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 2D 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 of as three pillars on slide nine. 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. This is all thanks to the initiatives we've implemented over the last 12 months to 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 ASCII. We continue to make very good progress on a 5G technical trial. The results we've experienced so far have 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 increase substantially above one 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. Operators?