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?

At this time, if you'd like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from the line of Bentley Cross with TV Securities. Your line is open.

Thank you. Matt, maybe we 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?

Hey, Bentley. 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. We can't comment on specifics around Tony, but let me share with you our perspective on why we made the change. We're 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 of 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 third factor, which was really the thing that converged with those other two, and that is we're continuing to see an increase in 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, TURN 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 that we on slide five, we tried to put, you know, those three 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 a customer churn. It's customer count. So as we started to see, you know, some of the smaller call it the Soho customer starting to churn, um, that churn percentage did pick up, but we've, you know, frankly maintained most of our revenue. And so as we continue to drive, you know, larger deals with the mid-market, the loss of the, you know, the Soho customer really isn't impacting our output. Does that help?

Yeah. 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 collections have come so far? Yeah.

yeah so our collections are very strong and almost surprisingly strong if you think about you know the uncertainty that we faced at the beginning of the sort of cold environment we took a small provision in the quarter and that's really normal course for us that way the provision was 55k and it's 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 you look at collectability And, you know, our accounts receivables and collections are very strong.

Thank you, gentlemen.

Thank you, Danny.

Thanks, Daniel. Your next question comes from the line of Matthew Lee with Canaccord. Your line is open.

Hey, good morning, guys. Can you maybe give us some color on the trend you're seeing on subscribers going into, you know, Q3 and maybe the timing of a potential stabilization of revenue in both businesses?

Yeah, thanks, Matt. I'd be happy to do that. So, you know, we're cautiously optimistic at the trends that we're seeing. You know, as I just talked about in my answer to Bentley, you know, our churn is stabilizing. You know, we're 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-markets, and we've talked in the past about you know leveraging our channel program uh looking at you know large multi-site deals and so you know um covid hasn't uh hasn't you know necessarily helped the acceleration of that plan but we've read the storm you know quite well uh we're cautiously optimistic as we go through the next couple of quarters uh we talked about a turnaround in the past uh you know you When are we going to see that shift in the inflection points in our revenues? We're cautiously optimistic that over the next couple of quarters as we work through this, we've got the strategy and the team in place to achieve that objective.

Maybe just following up on that, how much of the churn that you saw in the quarter of that uptick was that restructuring factor. I mean, would you have become in closer to your, you know, 1.5%?

That's exactly it. It's about 2.2% that we saw, which was, you know, related to that factor. Otherwise, we would have been, you know, around the 1.4 to 1.5 mark.

All right, that's perfect. And then just You know, on the three factors mentioned earlier with regard to the reason why Tony stepped down, you know, was the third item that you mentioned interest in your assets in terms of potential acquisition? And maybe if so, can you expand on that?

Yeah, 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 and the technology and uh, 5g as, as a use case or multiple use cases. And so when, when we all look at the press that's out there, you know, we're clearly in the middle of a space that is poised to grow and grow significantly. And I think we all know that, that, you know, we're, we're out there, we're a player, we're first to market with some of the services that we tend to be first to market with some of the services. And, um, 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.

Yeah, thanks. Thank you very much.

Yeah. I'd like to ask a question. Please press star 1 on your telephone keypad. Your next question comes from David McFadgen with Cormark. Your line is open.

Yeah, hi. Thank you. Dave, just to follow up on your comments on 5G, can you just remind us, like, where are you at in terms of bringing 5G to market, where and when? If you could just give us an update on that.

Yeah, sure. And thanks, David, for the question. So as I said in my remarks, we're continuing our testing, more of a technical trial on the 5G side. We've experienced some very encouraging results to date, but it's been limited, and it's limited by the availability of the type of equipment that you 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, you know, that next sort of phase of CPE equipment, which we expect to receive at late Q3 to continue our testing. So that being said, you know, we do want to move into customer pilots as soon as we can. As soon as we've got the right gear and, you know, we're comfortable with launching services, That probably will be pushed into 2021 instead of, you know, late 2020, just given, you know, I would say given the delays we've seen in getting the equipment available to us. But that being said, you know, 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 concerns industries that you're targeting or use cases right now that you see in the short term?

Yeah, and as we said in the press release, I think as we're 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 that type of a pilot. And as well, you know, launching, you know, Internet broadband in dense urban environments is another area we'll look at. It's sort of like the early phases of a launch of 5G services.

Okay. All right. Thank you. Thanks, David.

We have no further questions at this time. I'll turn the call back over to Mr. Dave Sharon 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.

That concludes today's conference call. You may now disconnect.