TeraGo Inc.

Good morning, ladies and gentlemen. Welcome to Tarago's Key2 2021 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 instructions 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 the operator assistance at any time. I would like to remind everyone this conference is being recorded. Terriga 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 factors section in each of the annual MD&A for the year ended December 31, 2020, and the Q2 2021 MD&A, which are available on www.cdr.com. Except as may be required by Canadian security laws, the company does not undertake any obligation to update any forward-looking statements as a result of new information. We would also like to remind listeners that Terrigo uses certain non-GAAP financial measures to arrive at adjusted results to assess its business and to measure overall performance. Terrigo 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 Mr. Matthew Gerber, CEO of Terrigo. Please go ahead.

Thanks very much, operator. Good morning, everybody, and a big thanks to all of you for joining our Q2 2021 earnings call. After the market closed yesterday, we issued a press release announcing our results for the second quarter ended June 30th, 2021. The press release, financial statements, and MD&A are currently available on CDAR, as well as on our company website, along with the slide deck that we'll use for this call. Our team is encouraged by what we achieved this past quarter, and I'm pleased to be able to share those achievements with you today. What you'll hear from us today is that we've continued to focus on executing our growth strategy, and as a result, witnessed successes in adding new customers, delivering additional managed services to our existing customer base, and acquiring our new customers via both our direct sales team and our expanding channel partner network. We were also able to once again achieve a stellar net promoter score of 79, which provides further evidence that our team delivers a level of service that none of our competition can match. In addition to customer and partner wins, we were also successful in bolstering and securing our balance sheet. We completed an equity raised early in the quarter and closed the quarter with an extended credit agreement, which provides us with ample capital to continue operating the business and execute our growth strategies. These successes again translated into us booking more business and customer churn this past quarter. As we mentioned on Les Gore's earnings call, we expected the momentum we were seeing with improving sales and reducing churn would eventually translate into revenue growth, and we finally did see that top-line growth in Q2. While our team is encouraged by this positive momentum, we also realize that we need to sustain this trend if growth is going to continue for the long term. As you can imagine, all of us are intensely focused on execution and driving the business forward in order to build on the successes we saw in Q2. So before I dive deeper into the more detailed updates, I'd like to pass the call to Dave to discuss our financials and key performance indicators for the second quarter. Dave, over to you.

Thanks, Matt. I'll kick things off by starting on slide seven with backlog monthly recurring revenue, or MRR, in our connectivity business. And as of June 30th, 2021, backlog MRR increased to 127,000 from 87,000 in Q2 last year. The significant increase in backlog MRR was driven primarily by higher sales volume compared to the prior year period. Cloud and co-location backlog MRR for the second quarter of 2021 decreased to 15,000 from 19,000 in the same year-ago period. The decrease in backlog MRR was driven by the timing of sales bookings and increased provisioning activities in the quarter. Taking a look at average revenue per customer, or RP, In our connectivity business, RP for the second quarter of 2021 decreased slightly to $1,032 compared to $10.59 in the same period last year. The slight decrease in RP due to the customer contract renewals at lower rates. I'm pleased to report that our cloud and colocation RP for the second quarter of 2021 increased to $3,722 from $3,108 in the same period last year. The increase in RPs due to new customer acquisitions, upgrades from existing customers, and some churn of lower RP customers. Now looking at our third key operating metric churn for the second quarter of 2021, churn in the connectivity business was 1.4%, which compares favorably to the 1.7% in Q2 of last year. If you recall, we saw an elevated level of customer churn in the prior year period due to some customer closures and restructuring related to the COVID-19 pandemic. Churn in our cloud and co-location business was steady at 1.1% in the second quarter of 2021, consistent with the result in Q2 of last year. Moving on to revenue on slide eight, you can see that our total revenue in the second quarter slightly increased to 10.9 million compared to 10.8 million from the prior quarter, but declined 6% from the 11.6 million in Q2 of last year. Connectivity revenue in the quarter decreased slightly to 6.6 million from 6.7 million in the prior quarter and decreased 11% from 7.4 million in Q2 of 2020. The declines in both periods were attributable to churn exceeding customer provisioning. Cloud and co-location revenue increased to 4.3 million compared to 4.1 million in the prior quarter and increased from 4.2 million in Q2 of 2020. The growth in both periods was driven by new customer acquisition and upgrades from existing customers. Turning now to EBITDA on slide 9, in the second quarter of 2021, our adjusted EBITDA slightly increased to $3.4 million from $3.2 million in the prior quarter, a decrease from $4.8 million in the same period in 2020. The reduction in EBITDA was driven primarily by a decrease in revenue, higher cost of services due to the mix of services sold, and a smaller amount of government grants received. Moving down the income statement, net loss for the second quarter of 2021 decreased from 1.8 million from 2.2 million in the prior quarter, but increased from 0.7 million in the same period last year. Turning to our cash flow on slide 10, in the second quarter, we generated 2.2 million in cash from operating activities while capital expenditures were 2.2 million or 20.6% of total revenue, driven primarily by success of CapEx in both the connectivity and the cloud and COLA businesses. On the balance sheet in Q2, we significantly improved our liquidity with the closing of a $14.7 million private placement, as well as an extension to our existing credit facility. The proceeds from the private placement will support the ongoing execution of our strategic plan, and a portion of the proceeds will be used to repay our term debt in Q2. In total, we repaid $5.25 million towards our long-term debt, which reduced our total debt outstanding to $22 million at quarter end. The credit agreement has been extended to June 2023. The ongoing quarterly payments have been reduced the $562,500 per quarter down from $750,000 per quarter. The net effect of these changes was quarter-end cash balance of $9.9 million, which was up from $5.9 million at year-end December 31st. Our improved cash position and access to the revolving facility provide us with ample working capital to execute on our near-term clients. With that said, I'd like to turn the call back to Matt, who will provide an update on our encouraging trends that we're seeing in addition to our multi-pronged growth strategy.

Matt? Thanks for that, Dave. So I'd like to take a few minutes now and share some thoughts with you on how we're dealing with the growth strategy. If you have the slide deck, it's shown on slide 11 of that presentation. I'll start with the first element of the strategy, which is maintaining a profitable business and generating positive free cash flows. We're driving this element of the strategy by growing our customer base and expanding the managed services that we provide to our customers on top of our connectivity, cloud, and co-location products. A couple of good examples of the customer wins that contributed to the success in this area during the past quarter are the projects we currently have underway with Ducks Unlimited and CompuSense. As a world-leading registered charity dedicated to the conservation of water, wetlands, and wildlife, Ducks Unlimited was in need of our robust networking system to enhance its operational efforts. After an extensive vetting process, Ducks ended up proceeding with us due to the comprehensive SD-WAN solution we're now offering, our network, and wireless coverage across the entire country, and also our ability to deliver exceptional levels of service. We're now in the process of working with Dux to install software-defined wide-area network services at their locations nationwide. Next, CompuSense is a world-renowned industry leader that creates consumer sensory testing solutions and software-as-a-service platforms for businesses in over 50 countries. The CompuSense team needed a managed service provider that could migrate their data to a secure Canadian cloud environment and provide a foolproof backup solution, and we were the chosen candidates. With the success of our initial implementation for CompuSense, our team has expanded the partnership, and we're now in the process of jointly working to stand up a new VMware private cloud environment for them at our Kelowna data center. In addition to adding customers last quarter, we also launched several new managed services that have been positively received by both our new and existing customers. In March, we launched managed network services, which is a service that provides our connectivity customers with peace of mind, knowing that we're monitoring their networks 24 by 7 to ensure everything is working properly. In July, we expanded our Microsoft product portfolio by adding Microsoft 365, managed Microsoft Azure, and managed disaster recovery, which means our customers can now rely on us to deal with the complexity associated with implementing and managing these Microsoft products. We plan to continue adding services like these that make it easier for customers to consume our network and infrastructure products. So next, I'd like to shift gears and talk about the second element of the strategy, which is building a premier channel and alliance partner program. Overall, we've been encouraged by the number of new partner wins and engagements that our team delivered this past quarter. A good example of this is our expanded relationship with Pure Storage. Pure Storage is a technology company that develops all flash data storage hardware and software products. It helps customers put data to use while reducing the complexity and expense of managing the infrastructure behind it. In the second quarter, we announced that Terego was the first Pure Storage partner to achieve Canadian elite managed service provider partner status. Our initial engagement, which started with Pure last year, was to provide customers with state-of-the-art cloud storage bundled with TerraGo's managed cloud, backup, and disaster recovery service. We've seen strong synergies working hand-in-hand with the Pure Storage team so far and look forward to expanding the partnership with them. In addition to technology partners like Pure that enable us to bring additional services to our customers, we continue to expand our relationships with reseller partners that bring us new connectivity, cloud, and co-location customers. Between the technology and reseller partners, we've been able to drive significant growth in our channel sales and saw a 173% growth in channel sales over the same period last year. Our team feels strongly that the reason we've been able to continue winning the business and expand our existing customer relationships is due to our track record of delivering exceptional service for our mid-market and enterprise customers. In the vertical markets we focus on more often than not, Internal IT teams are wearing many hats, and as a result, have a limited time to focus on strategically important systems work. When we come into the equation, we supplement the customer's IT teams as the expert in wireless network, cloud, co-location, and connectivity to provide an experienced Ergo team and our managed services that deliver 24 by 7 support for our customers. So it's safe to say that our employees go the extra mile to give our customers peace of mind and let them focus and let their IT teams focus on running their businesses. As I previously mentioned, the best evidence we can show you that supports these sentiments and claims is our Net Promoter Score, or NPS, which is a fairly widely utilized industry metric of consumer loyalty and relationships. We think NPS is a great measure of success or failure within the services industry as the scores are provided by customers after they interact with the companies. We recorded an NPS score of 79 for Q2, which to put that in perspective is many multiples ahead of our competitors, which we think average in the single digits and in some cases into the negatives. So we are far and away ahead of our competition when it comes to service levels and quality. As I mentioned on the last earnings call, all the things I just described to you are contributing to the momentum we're starting to see with the business. We continue to see a positive difference between our sales performance and customer churn, which means we're growing our customer base and associated revenues. This past quarter is positive evidence of this momentum as we saw revenue need to grow. If we continue to build this type of momentum, we'll continue to see this corresponding type of growth in our business. Then the last thing I want to mention is how we're dealing with the third element of the growth strategy, which is moving to offer 5G services. As we described on the last call, we continue to test different equipment at different TerraGo locations and continue to see positive results. We also continue discussions with several customers on potential pilot installations. These would be for private networks at various sites, and those discussions are ongoing. And we're targeting at this point a similar schedule to what we described for you last on the last call, which is having these installations up and running by the end of the year. So in conclusion, it's been an encouraging first half of the year for us and our team. We continue to be very well positioned as a company given our national wireless footprint, our unique millimeter wave spectrum assets, our cloud and co-location infrastructure, and the ability to deliver a host of managed services on top of our network and infrastructure products. Our team will maintain its focus on the three key strategic elements and continue to drive new customer additions and expanding services portfolio, building our basic channel partners and positioning the company to leverage our 24 gigahertz and 38 gigahertz spectrum assets as 5G applications for business gain traction across Canada. So that concludes the prepared remarks. I think we can now open the call up for questions. So over to you, operator.

If you would like to ask a question, please press star 1 on your telephone keypad. Again, if you have a question, please press star, then the number 1 on your telephone keypad. We'll take a question from Matthew Lee with Canaccord.

Hey, morning, guys. Morning, Matt. Yeah, so on the co-location side, you know, glad to see continued strength on the R-Proof front. You know, are there any one-time items in there, or is that kind of the – 3,700 number to be expected to continue going forward.

Yeah, yeah. I don't think there's any one-timers in there at, you know, they're seeing very good traction and we expect to continue that growth.

Great. And then maybe, you know, if we think about connectivity, this is the fourth straight quarter of, you know, $100,000 plus backlogs. is that just, you know, incoming demand or are you seeing any delays in provisioning that might be driving some of that?

So it is some increase in incoming demand. And, uh, while we'd like to provision faster, um, we have certain things we need to go through in order to provision that connectivity, like real estate approvals. And so, um, we were maintaining a pace at, at draining that backlog. And, um, would anticipate that backlog starting to come down a little bit. And, Dave, I don't know if you have any more color you wanted to share on that.

Yeah, no, that's right, Matt. I think, you know, there's a number of factors that go into the backlog situation. connectivity type business that we've been booking tends to be the multi-site deal that we talked about in previous quarters. And those take a little longer to provision. So in addition to getting site sites prepared uh making sure that customers are ready for you know those services to be provisioned and then just managing you know our own teams across the country um we're seeing improved provisioning but uh we're very focused on making sure we can continue to improve that great and then last for me you know in terms of stabilization of revenue

You know, are we still on track to kind of reach that year-over-year revenue growth level by Q421?

I think I'll start, Matt. You can go ahead.

Well, I was just about to say, Matt, you know, I think we all know we don't typically provide forward guidance. And I would say, you know, we're really encouraged by the momentum we're seeing. And if we can continue that momentum, we would expect to see growth and continued growth throughout the rest of the year.

All right. Great.

Yeah. Dave, I don't know if you wanted to add anything to that.

Nope. That's everything.

Thanks. Yeah. Your next question comes from one of the with Coremark Securities.

Hi, Sid. Hey, guys. Good morning. So just on your connectivity business, it seems like the ARPU pressure is persisting. Could you talk about the market in general as to why the renewals are coming in at lower rates than previously?

Sorry, Fred, I'm having trouble understanding the question. Would you mind repeating it?

Yeah, sure. So it was just on connectivity ARPU. I think you guys mentioned in your remarks that renewals were coming in at a lower rate. So I'm just wondering if you can maybe just talk about the competitive intensity in the marketplace right now and what you're seeing, and if you can see some civilization off our pool in the future.

Yeah. Yeah. So I'll start, Matt, you can, you can provide some additional color. You know, what we're seeing in, um, in the connectivity side of the businesses, and we've talked about this on previous calls, Sid, is, uh, you know, on the low speed legacy customers that we have. It's tend to be, you know, the single site deals. We are seeing, we are seeing some both churn at that level as well as pricing pressure. Our focus has been on uh, the mid market. And, you know, we've been, we've been targeting larger customers and larger multi-site deals. And we've seen, you know, we just talked about the growth in our backlog and the provisioning that we're doing, uh, on those deals across Canada. And so that's the shift that we're seeing. And so we are going to see our pools improving in time as we start to deal with, you know, customers that have larger, you know, requirements of multi-sites across Canada. And I'm happy to add to that.

I don't think so. I think you covered it, Dave.

So just to be sure, it looks like the multi-site deals that are coming in have lower RP than the deals that were introduced that have lower number of sites. Is that correct?

Well, I would look at it from the point of view of a customer that has multiple sites. They are going to be larger deals, just by definition, than customers that have a single site. Now, there is some pricing pressure on that for legacy customers where either they're churning or we are repricing them for some newer products, and pricing is updated to reflect the current market environment. So I would expect going forward when you're looking at the larger customers with multiple sites across Canada, our pools are going to start to go up.

Okay. I think maybe, Sid, to just expand a little bit on that from a competitive positioning standpoint, we very much see an opportunity to drive forward with a position where we are a services provider, or a different way to say it, an infrastructure-powered services provider for the mid-market and enterprise customers. And we're seeing success in that area. customer group, which as Dave mentioned, is larger customers, greater number of sites, buying more services from us. And that's where we're focused and that's where we're seeing growth and that's where we intend to drive growth going forward with the business. And as Dave mentioned, the smaller customers we're seeing turn off are the small ARPU single site type of customers.

Okay. Thanks, guys. That's helpful. And then, sorry, this one last one for me. I'm not sure if I missed this in the release, but it looks like you say to set up the revenue from cloud to connectivity for Q220. What was the basis of that? Maybe Dave can just elaborate on that a little bit more. Sure.

I'll take that one. So we did adjust our historic mix of connectivity and cloud and cloud revenues. And so when we were looking at certain revenue mix from certain products that we were recording, we went back and adjusted it. The adjustment was small. It represented about, I think, about 200K of revenue per quarter that moved from cloud and core to connectivity. And so it was less than a 2% adjustment to that mix. But we wanted to make sure that on the presentation that we had in Q2, we were consistent going back to 2019.

OK. So is that going to be consistent for Q3, 2020, and Q4, 2020 as well? Or is that sort of just one time?

If we're going forward, it will be consistent to how we presented it in Q2.

OK. OK. All right. Thanks, Larry. Thanks for coming. Thanks.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. Again, the star, then the number 1 on your telephone keypad. We'll pause for just a moment. There are no questions in queue. I will now turn the call back over to management.

Okay, I think that wraps up for today at this point. So thanks, everybody. Again, thanks for joining us, and look forward to speaking with you again next quarter.

Thank you for participating in today's conference call. You may now disconnect.