TeraGo Inc.

Good morning, ladies and gentlemen, welcome to 2020 year end financial results conference call at this time. All participants are in the list and only mode following the presentation. We will conduct a question and answer session with Pre qualified analysts on the call and instructions will be provided at that time for you to keep up for questions. If anyone has any difficulties carrying a conference, please press star followed by 0 for operator systems at any time. I would like to remind everyone that this conference call is being recorded. Tarago 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 risk set forth in the Risk Factor section in each of the annual MD&A for the year ended December 31, 2020, which is available on www.cidar.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. We would also like to remind listeners that Terrigal uses certain non-GAAP financial measures to arrive at adjusted results to assess its business and to measure overall performance. Terrigal believes that these financial measures provide readers with better understanding of how management views the company's overall performance. I will now turn the conference over to Mr. David Sharon, Interim CEO and Chief Financial Officer of Terrigal. Please go ahead.

Thank you, Denise, and good morning, everyone. Thank you for joining TerraGo's Q4 earnings conference call. After the market closed yesterday, we issued a press release announcing our results for the fourth quarter and full year into December 31st, 2020. That press release, financial statements, and MV&A are currently available on CDAR, as well as our website, along with the slide deck that I'll use for this call. Before I provide an operational and financial update, I'd like to turn the call over to Matt Gerber, TerraGo's board chairman, to say a few words. Matt?

Thanks, Dave. Good morning, everybody. It's good to be on this call again with you today. I think the last call I was on was last summer when we announced a change in our leadership, so it's nice to be able to join this call again. First thing I want to do is get ahead of a question that many people have asked me over the past few months, and that is about the status of our CEO search. Our team wanted to get through our strategic planning process towards the end of last year and then determine our strategy going forward before searching for a new leader. The board spent time the past few months reviewing candidates, and I'm happy to say that we're close to announcing a new CEO. And I can assure all of you that the candidate will be aligned with Tergo's vision and strategy and will be committed to working with this management team to execute it. Now, before I turn it back over to Dave to dive deeper into the financials and key performance indicators, I want to provide a brief overview of the fourth quarter. I think, as all you know, operating during this pandemic is now the new norm for every company, regardless of industry or geography. Thankfully, as a provider of essential services, we've been able to sustain our operations, even while many of our team worked remotely. We've also leveraged our resilient business model and executed on our near-term initiatives, all of which have positioned us extremely well for long-term success. In the near term, this team has been able to maintain solid customer retention, grow our backlog with new orders, and expand our sales pipeline. Thanks to great teamwork and leading around the clock customer service, our net promoter score, NPS, continues to be strong and well ahead of our competition. As we mentioned in the earnings release, our NPS score is now 62, and it's something that we're extremely proud of. And obviously, we remain dedicated to serving our customers. So with that said, I'll pass it back to Dave, and we'll take a quick look at operating metrics for Q4. So Dave, back over to you.

All right. Thanks, Matt. Let's go to slide five, and starting first with our backlog monthly recurring revenue, or MRR, in our connectivity business. At year end, our backlog MRR increased to 130,000 from 92,000 at the end of last year. This significant increase was driven by higher sales volume from both the direct sales team and the channel team. Cloud and co-location backlog MRR for the fourth quarter of 2020 grew to 56,000 from 19,000 a year ago. The increase in backlog MRR was also driven by higher sales that have yet to be provisioned. Taking a look at average revenue per customer, or ARPU, in our connectivity business, ARPU for the fourth quarter of 2020 slightly increased to 1,025 compared to 1,019 a year ago. However, our cloud and co-location ARPU for the fourth quarter of 2020 increased to 3,582 from 3,393 last year. The increase is due to strong upgrade activity from existing customers And as we also saw last quarter, increased demand for more CPU storage and other offerings within our cloud and colocation portfolio. Looking at our third key operating metric churn for the fourth quarter of 2020, churn in both our connectivity business and the cloud and colocation business was relatively flat compared to Q4 of last year and compared to last quarter. I'm very pleased to see that churn for both segments of our business remained at a consistent level as a result of improved retention efforts, which also reflects the essential nature of our service to our customers' business. Turning now to the financial performance for the fourth quarter of 2020 on slide six, you can see that our total revenue on the fourth quarter declined 9% to $10.9 million compared to $12 million in Q4 of last year. Connectivity revenue in the quarter decreased 11% to 6.5 million compared to 7.3 million in Q4 of 2019. The decrease was mostly attributable to churn exceeding provisioning of new customers and new services. Cloud and co-location revenue decreased 6% to 4.4 million compared to 4.7 million in Q4 of 2019, but increased 1% to the prior quarter. Turning now to EBITDA on slide seven, in the fourth quarter of 2020, our adjusted EBITDA was 3.7 million compared to 4 million in Q4 of last year. The decrease was primarily due to the decrease in revenue, as well as investments we're making in our go-to-market team. Moving down the income statement, net loss for the fourth quarter of 2020 totaled 2.2 million, which was relatively flat compared to a net loss of 2.1 million in Q4 of 2019. Taking a look at our cash flow on slide eight, in the fourth quarter, we generated 2.3 million in cash from operating activities, while capital expenditures were 1.5 million or 13.8% of total revenue, driven primarily by the strong success capex in the connectivity business. Turning now to the balance sheet, at quarter end, we had 5.9 million in cash, which was down from 8.7 million at the end of Q4 of 2019. I'd now like to review our progress on executing our multi-pronged growth strategy, which we think of as our core three pillars on slide nine. I'll start with the first pillar of maintaining a profitable business and generating positive free cash flow. As I referenced earlier, we've seen our churn stabilizing, which is crucial to moving us closer towards revenue growth and positive free cash flow. In addition, we continue to exercise prudent cost management and we continue to invest carefully. That leads me to the second pillar of accelerated growth through a premier channel and alliance program. And while we've seen solid traction across all facets of our sales organization, which includes inside sales, direct sales, and channel sales, our channel team is really starting to contribute and has significantly grown our sales pipeline. Last but not least, I'd like to provide an update on our 5G technical trials. And as we continue to ramp up testing, we've been encouraged by our results thus far. As we've disclosed in our most recent press release, we announced significant advancements from improved throughput speeds to approximately 1.5 gigabits per second. Additionally, we're shifting our technical trials from our head office location to our Mississauga data center, to better leverage our network core as well as to enable edge computing options. I anticipate that we'll be moving to 5G customer pilots in 2021, thanks to the excellent progress we've made in our technical trials. I do want to add that while we're waiting for new standalone millimeter wave radios and equipment to become available before we can launch a national rollout of 5G services, our engineers are very excited about some new point to multi-point equipment that they're testing that will likely roll out in advance of the standalone 5G millimeter wave technology. We'll have more to say about this later this year, but both the performance and the economics at this stage look very promising. As well, we're launching new products and services today to leverage our network and our customer base. A great example of this is our recent sales win to deliver managed SD-LAN solution to a prominent national healthcare provider in Canada. Our offering provides advanced visibility for application and network optimization, leverages TerraGo's fixed wireless Internet 5010 product, and will enable our customer to run an intelligent and efficient national network. In conclusion, as a result of our resilient business model, diversified customer base, significant growth in order backlog, stabilization of churn, and launch of new products and services, I believe 2021 can become an inflection point for TerraGo and we look forward to reaping the benefits with our shareholders, employees, and our partners. That concludes my prepared remarks, and we can now open the call for questions. Denise?

Well, ladies and gentlemen, to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Bentley Cross with TD Securities. Your line is open.

Morning, Dave. First, I wanted to ask a bit of a point of clarification. I mean, you guys don't disclose connectivity subs, but I can kind of back into it from all the other data points. And the way I calculate it, connectivity subs are down roughly 125 quarter over quarter. So first question is, is that roughly accurate? And then second question to that, because churn was flat, am I correct in assuming maybe in a COVID environment that just meant less provisioning than we've seen in recent quarters?

Yeah, I won't comment on the number of customers that churned, but I think the way you're thinking about it, Bentley, is generally correct. We have seen some churn, especially in the smaller customer base. And that is, you know, I'll call that the normal course of churn that we've seen throughout the past few quarters. With respect to the second part of your question, can you just repeat it?

Because churn in absolute numbers was flat, when I get that implied number of subs that rolled off, it suggests that the gross loading was down. And I assume that's maybe because of the COVID environment and more difficult to provision, but any color you can provide would be appreciated.

Yeah, you know, that's correct. And so our provisioning activity has been down and really hasn't yet been able to catch up with the sales activity that we've seen. So it's a good point, and it's what I wanted to elaborate on in this section of the call. The provisioning activity has been influenced by a number of factors. I'd say the first thing that I look at is the mix of services that are purchased and whether we need to use third parties to deploy those to the customer. The second point is the desired timeline for service activation. And that becomes a bigger factor for customers with multi-site, uh, connectivity. And the third thing that we're seeing Bentley is, um, is, uh, uh, and I would say all the truth to COVID is just getting timely access to real estate and to equipment supply. And both of those factors have been impacted here. So, um, we've seen great sales activity that's increased our, um, uh, or, or the backlog. And a big focus area for us in 2021 is going to be on provisioning, making sure that the provisioning team can keep up with the go-to-market team.

Okay. And then last clarification question. On the gross margin front, am I correct in assuming that the step-down is somewhat a function of you using partners increasingly, whether that be the channel or selling third-party solutions and you guys selling into your customer base?

Yeah, that's partially correct, Bentley. It is due to the mix. So it's not only using partners, but there has been some resale. As we look to provision customers with multiple sites, most of the sites or many of the sites are on-net and some of it's off-net, so there should be a mix there. of margin there in those types of deals.

Okay. And then lastly, and a bigger picture question, the press release you put out on this increased throughputs and speeds is nice, but I think a lot of investors and myself included were kind of hoping that this ball would get rolling a little bit faster. And I acknowledge that it's a lot easier to do in a spreadsheet than it is in the real world, but What has been the major impediment to putting out a customer solution? I know obviously it's hard to get gear when you're at Carrego and not Verizon, but any other call you can offer would be appreciated.

Yeah, no, happy to do that, Bentley. And I think a lot of it does have to do with the fact that we're still using, you know, non-standalone 5G equipment. And that equipment, you know, also requires the use of 4G LTE radio along with the 5G non-standalone equipment. And so while we're waiting for, you know, new equipment, we're doing the testing that we can. We just received some newer, higher-powered customer edge devices, and that's enabled us to get, you know, some of those impressive speeds that we just recently announced. And so as we're As we're waiting for new equipment, we're doing a couple of things, Natalie. First, we're going to be moving our testing to our Mississauga data center where we can, you know, look at potentially seeing how edge computing plays into the overall 5G solution. And second is, and what I mentioned in my prepared remarks, was around some new equipment some new point-to-multipoint equipment that is pre-5G, but that will enable us to really increase speeds and improve the economics of our delivery to customers. And so we're not standing still. We're also disappointed in the rate of speed of our progress here. But, you know, given all the constraints that we have, we're doing the best that we can.

Thanks, Dave, for the call. I'll pass the mic over to you.

Your next question comes from David McFadgen with Cormark. Your line is open.

Oh, hi. I have a couple of questions. So just on the large customer that you announced this morning, can you tell us who that customer is with previously? And if you can disclose maybe the annual revenues and anything material from that customer?

Yeah, thanks, David. Unfortunately, I'm not going to be able to disclose that. I think we wanted to get out into the market that we have won the deal. We launched the managed SD-WAN solution just a few quarters ago. And while we have a very good pipeline of deals that we're working on, we're very happy that we were able to announce one. And I expect that we'll be announcing others in the first half of 2021. But unfortunately, I won't be able to disclose who that customer was with previously and the size of the deal, not at this time anyway.

Can you tell me if the customer was with one of the incumbents? That's probably a good assumption. Okay. And then can you give us any update on your go-to market strategy for 5G? Are you going to be just using the 38 strategy? gig spectrum or will you be using the other 5G spectrum that you have?

Well, right now our testing is with 38 because that's the radios that are available. We're expecting 24 gigahertz non-standalone radios in Q3 and Q4 of 2021, David. And so we'll do the testing with that radio and then you know, we'll be able to put a more robust solution together for a launch of broadband, of basic services, you know, probably toward the end of this year and into next year. But in the meantime, you know, we are having very good discussions with some of our partners and some larger customers or potential customers around, you know, uh private networks and solutions that we can provide uh sooner rather than later and so we're excited about the ability to do customer pilots in you know various uh industry segments so whether it's manufacturing or mining or even on university campuses there's a number of exciting um i'll call it ideas and discussions that we're having again both with partners and with some uh large potential customers

And then you talked about testing your equipment, flying some multi-flying equipment. You said it's 35G, but can you elaborate on how that could help your business?

Yeah, so what we found, David, is that as customers required higher speeds, the radios that we're currently using to deliver higher speeds are generally point to point. And the lower speeds, the more legacy customers and products that we've had out there are the points and multipoint lines. And so what we're very excited about is some new technology that allows us to not only deploy faster, but also to achieve higher speeds on a point-to-multipoint basis that will put, that won't be such a burden to the provisioning team. And, you know, as I mentioned earlier, the economics of delivering that type of service to multiple customers is much better. So it's really going to be what I'm hoping is a game changer for Jericho.

Okay.

All right. Thank you. Thanks, David.

Again, as a reminder, to ask a question, please press star and the number one on your telephone keypad. Your next question comes from Matthew Lee with Canaccord. Your line is open.

Morning. I missed the early part of the call, so forgive me if I ask a question that's already been asked. But, you know, in terms of the connectivity business, you know, going forward in 2021, it seems like the revenue trends have kind of... become a little bit weaker overall Q4 versus Q3 and earlier. Maybe you can talk to how you turned that around specifically with regards to, you know, improving customer churn and maybe adding, you know, customers to your backlog.

Sure. Thanks, Matt. There's a couple of things I wanted to highlight here. One is I was answering Bentley's question on provisioning. We've seen provisioning as an area of opportunity for us in 2021. And as we As we ramp up provisioning and make improvements in both the process and the tools that we use, I expect that that will accelerate movement from order backlog into revenue. The other thing I wanted to highlight was that in Q4, we did see some lower one-time revenues that contributed to the decline in Q4 compared to Q3. And just for everyone, one-time revenue usually refers to early termination fees, and we saw lower early termination fees in Key Forest compared to previous quarters, and I just wanted to point that out. But then to kind of talk about the future and what we're doing to accelerate revenue, there's really, you know, it falls under two categories. First is new products. And so we've already announced our Internet 5010 product. We've announced our SD-LAN product. We're going to be announcing quite soon our managed network services offering and other new products throughout 2021. So that's going to be an opportunity to have more on the truck to sell. And second is we're going to continue our focus on large multi-site deals. And as we move up, you know, up to sort of food chain, if you will, from, you know, the solo market to, you know, call it the mid-market and into small and mid-sized enterprises, you know, we're starting to see those deals in our pipeline. And as we win those deals, you know, that is going to generate a significant amount of new revenue for Terrigal. And that will be our focus for 2021.

That's great. And, you know, I know you don't give guidance, but can you kind of give us some directional guidance in terms of, you know, the connectivity revenue growth? Is it going to, you know, be a positive for 21 or kind of, you know, slightly negative but better than what we saw in 20?

I expect it to be positive, Matt. I think that as we execute on our go-to-market plan, as well as we convert the backlog into revenue, As I mentioned in my prepared remarks, I think that 2021 could be that inflection point for Terrigal.

All right, perfect. I really appreciate it. I'll pack one.

Thanks, Matt. And there are no further questions. I'm going to call back over to David and Sharon.

All right, thank you. And I just want to thank everyone for your support of Terrigal, and we look forward to providing you an update on our Q1 call in the spring. Thanks, Denise. Okay.

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