U.S. markets open in 4 hours 51 minutes

Edited Transcript of TGO.TO earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 Terago Inc Earnings Call

THORNHILL May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Terago Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Antonio P. Ciciretto

TeraGo Inc. - President, CEO & Director

* David Charron

TeraGo Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Bentley Cross

TD Securities Equity Research - Associate

* Matthew James Lee

Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to TeraGo's Q1 2019 Financial Results Conference Call. (Operator Instructions) I would 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 MD&A for the year ended December 31, 2018, which is available on www.sedar.com, and also consider other uncertainties and potential events. Except as maybe required by Canadian securities 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 TeraGo uses certain non-GAAP financial measures to arrive at adjusted results, to assess its business and to measure overall performance. TeraGo 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 call over to Mr. Tony Ciciretto, President and Chief Executive Officer of TeraGo. Please go ahead.

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Casey, and good morning, everyone. Welcome to TeraGo's First Quarter 2019 Earnings Call. Joining me on the call today is David Charron, TeraGo's Chief Financial Officer.

TeraGo released its first quarter 2019 financial results after the market closed on May 8. Our press release, financial statements and MD&A are currently available on SEDAR and our company website, along with a slide presentation accompanying this call. As discussed in our last earnings call, we are focused on sales execution and enhancing sales effectiveness and pipeline development while managing costs and preserving our balance sheet. We have a number of initiatives underway to improve our sales effectiveness and we expect to see greater traction in the second half of the year. This includes recently welcoming Geoff Kereluik as our new VP of sales. Geoff brings extensive experience from the information and communications technology industry, having previously held senior sales and marketing positions at Hewlett-Packard and Bell Canada.

Another initiative we have to broaden our sales reach is through channel partnerships. Over the past quarter, we have been encouraged by some of the new opportunities our channel partners are bringing forward, including tapping into U.S. organizations that have operations in Canada. We have signed several agreements over the past quarter with the U.S. wholesalers and agents frustrated with dealing with bureaucratic and slow-moving Canadian telcos. We have also developed a number of programs aimed at leveraging our installed network and data center capacity. We will continue to pursue cloud and colocation business as an avenue for growth, and we believe we have the right products and services to effectively service the mid-market. As a testament to this, in April, TeraGo was named a major player in IDC's 2019 Canadian Datacenter Operations and Management Service Providers report (sic) [Canadian Datacenter Operations and Management 2019 Vendor Assessment]. Among TeraGo's strengths cited in the report were positive perceptions on the quality and uptime of our data centers and our strategy to provide consulting and managed services around AWS.

Slide 6 shows our key operating metric trends, including backlog, monthly recurring revenue, average revenue per user and churn rate. Over the past several quarters, we have made steady progress to improve sales backlog in both connectivity and cloud and colocation businesses. However, to drive growth in our core revenues, we need to build from these levels, and we have several opportunities in our sales pipeline that we hope to close in the second half of the year.

Over the past several quarters, average revenue per user and churn metrics have been relatively stable. ARPU in cloud and colocation has trended higher, driven by our managed services offering, while connectivity ARPU has declined modestly to customer -- due to customers that have recently churned. Overall, we believe that the pricing trends in the market have remained consistent with what we have seen in the past, and we would like to see ARPU in the connectivity grow modestly as we focus on attracting and retaining higher-value accounts.

Our plan for the core business is to drive revenue growth and remain as capital efficient as possible while preserving EBITDA generation and cash. This will allow us to stay steady -- sorry, stay ready, excuse me, to invest and surface value from our spectrum assets as the 5G opportunity is realized.

After successfully completing the first 5G phased technical trial last quarter, we have been working with our technology partner, PHAZR, on enhancements to the radio and software platform to better serve our intended markets.

PHAZR has informed us of industry delays in the availability of 24-gigahertz radio equipment that will likely postpone our next set of trials into next year. We are also in discussions with other radio equipment vendors, but there doesn't appear to be an option right now that will expedite this timeline significantly. That said, we believe interest and anticipation for 5G is continuing to build.

The recent 600-megahertz auction in Canada and the 24-gigahertz and 28-gigahertz auction in the United States shows the momentum behind various 5G spectrum bands. In our conversations with technology and under -- other industry participants, we believe the consensus view is that the urban markets -- in urban markets a multiband strategy for 5G that includes millimeter-wave spectrum makes a lot of sense. The spectrum-sharing philosophy ensures service operators are able to offer the right balance between coverage and speed. We believe this reaffirms the value of our 24- and 38-gigahertz spectrum assets, which covers Canada's 6 largest cities and over 2/3 of the country's population. We are continuing to refine our business case for 5G. But our current plan is to take advantage of light of sight -- line of sight opportunities that maximize our return on invested capital. That means we would like to begin with a B2B offering that leverages our current network of wireless equipment installations on over 600 rooftops across Canada and existing base of over 3,000 enterprise customers. We'll continue to evaluate options to address B2C markets for 5G, but still with the view of deploying capital efficiently.

With that, I'll now turn over to Dave to walk us through the financials in the quarter in greater detail. David?

--------------------------------------------------------------------------------

David Charron, TeraGo Inc. - CFO [3]

--------------------------------------------------------------------------------

Thanks, Tony. I'm on Slide 9 now. In the first quarter, total revenue declined 9.8% from the prior year period to $12.4 million. The churn experienced in the third and fourth quarters of 2018 resulted in a lower base of revenue entering the year, and this was coupled with a lower level of new sales provisioning activity in the quarter. As a result, connectivity revenue for the first quarter declined 12.3% from the prior year period, while cloud and colocation revenue declined 5% from the prior year period.

In the first quarter, we adopted the new lease accounting rules under IFRS 16. IFRS 16 has a material impact to our financial statements due to the nature of both our connectivity and colocation businesses. Under IFRS 16, all of our leases are now recognized on the balance sheet as right-of-use assets and lease liabilities. In addition, lease costs are now recognized through depreciation and finance costs on the income statement. Previously, these costs were recognized as cost of services and operating expenses. I should also mention that we've applied IFRS 16 using the modified retrospective approach, and under this method, the comparative information from prior period is not restated. So with that, our adjusted EBITDA in the first quarter, including the impact of IFRS 16, was $4.6 million. However, excluding the impact of IFRS 16, adjusted EBITDA for the first quarter would have been $2.8 million or 23% of revenue compared to $3.1 million or 23% of revenue in the prior year period.

IFRS 16 resulted in a $1.8 million positive impact to adjusted EBITDA in Q1. And despite this decline in revenue, we reported steady adjusted EBITDA margins when normalized for IFRS 16, as we continue to focus on managing costs while investing in the sales organization. Our reported net loss for the first quarter was $1.2 million compared to a net loss of $1.3 million in the prior year period. The slight improvement in net loss was driven by lower selling, general and administrative expenses.

Turning now to Slide 11. In the first quarter, we generated $5.7 million in cash flow from operating activities and incurred $1.9 million in lease payments. Adjusted for IFRS 16, we therefore, generated $3.8 million in cash from operating activities compared to $1.8 million in the year ago period. Capital expenditures were $2.1 million or about 17% of revenue for the quarter. And once again, we were free cash flow positive in Q1.

At the end of the first quarter, we had $3.1 million in cash and we continue to have an undrawn $10 million operating line as well as a $25 million acquisition and CapEx facility that will allow us to invest in future growth activities. Our leverage at the end of the first quarter stands at 2.55x adjusted EBITDA, excluding the impact of IFRS 16, which was flat to last quarter and remains well below our covenant of 3.5x.

I'll now turn the call back to Tony for his closing remarks.

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [4]

--------------------------------------------------------------------------------

Thank you, David. In summary, TeraGo remains focused on sales execution and enhancing our sales effectiveness and pipeline development as we position the company for future growth through 5G. The changes we've made to our cost structure at the end of the fourth quarter have successfully allowed us to continue operating at a level that preserves adjusted EBITDA and cash flow. And we're encouraged with the growth and quality of our sales funnel, and we look forward to realizing the benefits from those initiatives as the year progresses.

Lastly, we remain highly focused on surfacing the value from our 24- and 38-gigahertz spectrum assets. We believe our core business is in a stable position that will allow us to remain patient and accelerate investments into 5G when the time is most appropriate. And our plan is to leverage our existing assets to maximize return on investments.

With that, I'll now turn it over to the operator to take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from Matthew Lee with Canaccord.

--------------------------------------------------------------------------------

Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [2]

--------------------------------------------------------------------------------

Just wanted to quickly do some housework questions on IFRS 16. So in terms of lease payments and the impact on the financial statements, will that be relatively stable quarter-to-quarter?

--------------------------------------------------------------------------------

David Charron, TeraGo Inc. - CFO [3]

--------------------------------------------------------------------------------

Yes. That's correct, Matt. We made the adjustment in the first quarter. And you can expect that going forward, the impact on adjusted EBITDA and the payment schedule in the cash flow statement will be relatively stable quarter-to-quarter.

--------------------------------------------------------------------------------

Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [4]

--------------------------------------------------------------------------------

Great. And just a quick follow-up on that. The IFRS 16 impact, is the majority connectivity?

--------------------------------------------------------------------------------

David Charron, TeraGo Inc. - CFO [5]

--------------------------------------------------------------------------------

It's about 2/3 on connectivity and about 1/3 colocation and corporate.

--------------------------------------------------------------------------------

Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [6]

--------------------------------------------------------------------------------

And just operationally, I mean, the one thing that kind of stood out to me is in the connectivity business, you had a couple of really strong quarters of ARPU growth, which I think you attributed to focusing on mid-end customers. But this quarter, I think that kind of fell off. So can you give us a question about that or has the strategy changed a bit or is Q1 just a blip?

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. Thanks, Matt. It's Tony. So as David said in his remarks, there were specific customer churn situations in late 2018 that really impacted the base of revenues that we entered into this -- with this year. So this obviously happened for various reasons, but really more company specific than competition related. So we do see it as more of a blip. There are always -- anytime you have any specific onetime churn events, it always is an anomaly for -- at least, for us. So we expect that certainly that the actions that we've taken to strengthen really our sales activity and our sales engine will really help stabilize the rate of decline in the second half and going forward.

--------------------------------------------------------------------------------

Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [8]

--------------------------------------------------------------------------------

So in second half, we should see ARPU stabilize or maybe even positive.

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

That's correct as well as the churn.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Bentley Cross with TD Securities.

--------------------------------------------------------------------------------

Bentley Cross, TD Securities Equity Research - Associate [11]

--------------------------------------------------------------------------------

Just wanted to follow-on with the last question. Both in the response and then in your opening script, you talked about second half. Is it fair to assume that Q2 is going to look a lot like Q1 and that we're not going to see much recovery yet?

--------------------------------------------------------------------------------

David Charron, TeraGo Inc. - CFO [12]

--------------------------------------------------------------------------------

Well, I would expect that to be the case. We might see some improvements throughout the quarter, Bentley. But I think we mentioned last quarter that a lot of the activity -- a lot of the sales activity and the changes that we are implementing, we expected to see that impact in the second half.

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

I think the only thing I would add to that, Bentley, is that typically the conversion from the backlog to the -- or the pipeline to the -- to revenue is going to be based not only on the lines of business, but also the size of the deals that we have. So -- but again, I think Q2 will, as David mentioned, probably be along the same line, but in the second half certainly we'll see the improvements.

--------------------------------------------------------------------------------

Bentley Cross, TD Securities Equity Research - Associate [14]

--------------------------------------------------------------------------------

Okay. And then going back to the PHAZR situation. It sounds like they were a little bit slower than expected in getting you guys gear and there are not really any viable alternatives. You did suggest that you've been exploring possibilities with other vendors. Can you maybe just talk about that a little bit and what the other options might entail?

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

Sure, sure. So I think first of all, I think the -- this delay is not really only pointed at PHAZR. I think this is an industry trend as a whole. With the 24-gigahertz auction in the U.S. just now completing, I think there is significant, certainly, demand in the 24-gigahertz radios. But they're going to be obviously in short supply. The other thing that we've -- and again, I'll talk about some of the others that we -- manufacturers that we've spoken with. But essentially, they are all waiting to hear who the winners are for the auction. And that will depend on where they put their -- most of their focus. And so because of that, their technology development is being delayed. And it is right across the industry. So the other issue that I think all manufacturers are grappling with is that the most popular modem now is from Qualcomm. And they're the only CP manufacturer right now.

And so that's actually put a -- obviously, a supply issue with them. And that's also affected the radio availability. And again, I would stress that this is all across the industry. Now that being said, we have been talking with others like Huawei, Samsung, Ericsson and CBNL out of the U.K., but all of them are experiencing very similar issues, and some of which are obviously are focused with that current -- some current service providers that they have made a commitment with. So a lot of it is in short supply. And it's not just PHAZR.

--------------------------------------------------------------------------------

Bentley Cross, TD Securities Equity Research - Associate [16]

--------------------------------------------------------------------------------

Okay. And then maybe lastly, I just want to give you an opportunity to maybe get your soap box out. I mean, obviously a lot of us are waiting on what the government will do with regards to potential clawback. Just wondering your updated thoughts there.

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. Well, I think we're all waiting, Bentley, and this has been a long time coming. From our standpoint, obviously, the next step for clarity for us is around the 38-gigahertz spectrum. There are going to be a number of opportunities, I think, that I said will -- or could make any type of announcement. I know that there is a -- an industry conference coming up in June where the industry minister is going to be speaking. Hopefully, he can shed some light on some new information. But it has been a long timing -- long time coming and we're all, I think, as an industry, waiting for some clarity.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Your next question comes from Matthew Lee with Canaccord.

--------------------------------------------------------------------------------

Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [19]

--------------------------------------------------------------------------------

Guys, just a quick follow-up. So last quarter, you talked about maintaining relatively stable EBITDA as a goal for F'19. Is that still the target? And do you feel like you're on track?

--------------------------------------------------------------------------------

David Charron, TeraGo Inc. - CFO [20]

--------------------------------------------------------------------------------

Yes. That's still the target. Again, we're -- as we said in our remarks, we're managing our costs, we're being surgical where we're focusing our investments. And with increased revenues, we expect to see a corresponding increase in our EBITDA -- our adjusted EBITDA. But for the first half, this should be relatively flat.

--------------------------------------------------------------------------------

Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [21]

--------------------------------------------------------------------------------

Sorry, for the first half of the year, do you think EBITDA going to be flat year-over-year?

--------------------------------------------------------------------------------

David Charron, TeraGo Inc. - CFO [22]

--------------------------------------------------------------------------------

Going to be flat for the first quarter. So I think it's going to be relatively flat. I'm not going to give you an exact number, Matt, but we should see our EBITDA to be relatively flat to what we just reported, and improvements in the second half as revenue improves.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

And there are no further questions at this time. I will turn the call back over to Tony Ciciretto for any closing remarks.

--------------------------------------------------------------------------------

Antonio P. Ciciretto, TeraGo Inc. - President, CEO & Director [24]

--------------------------------------------------------------------------------

All right. Thanks, Casey, and thanks everyone again for listening to our call. We look forward to speaking to you on the next quarter call. Have a great day. Bye-bye.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.