TeraGo Inc. (TSX:TGO) (www.terago.ca) today announced financial and operating
results for the quarter ended March 31, 2014.
Stewart Lyons, President and CEO, TeraGo Inc., commented, "TeraGo made a solid
start to what is planned to be a transitional and transformational year. We
further expanded our data center capability and now operate three facilities,
including a new Data Center in downtown Vancouver where we are now up to 14,000
square feet of space. In our access business, we moved decisively to implement
enhanced customer retention programs that generated a marked improvement in
churn and customer additions, with some expected decrease in ARPU."
Mr. Lyons concluded, "TeraGo's objective remains to transform our leadership in
broadband services into a multi-product IT services company, controlling more of
the value chain to serve the growing business need for data center and cloud
services, and enhance the loyalty of our unique base of small and medium
businesses across Canada. With the progress made in Q1, we are well-positioned
for Q2 and are moving onto our next steps in in rolling out our strategy. In
short, we are focused on achieving growth in data centers; establishing a
presence in cloud services, and creating stability in access services to drive
improved returns on assets for our shareholders."
First Quarter 2014 Financial and Operational Highlights
-- Total revenue for the three months ended March 31, 2014 was $12.9
million compared to $12.6 million for the same period in 2013, an
increase of 2.4%;
-- Gross profit margin for the three months ended March 31, 2014 was 77.7%
compared to 78.0% for the same period in 2013;
-- Adjusted EBITDA for the three months ended March 31, 2014 was $3.8
million compared to $4.3 million for the same period in 2013, a decrease
of 12%. The adjusted EBITDA decrease was due to a decrease in access
revenue and selective investments in sales and marketing;
-- Net loss for the three months ended March 31, 2014 was $1.1 million
compared to net earnings of $1.3 million for the same period in 2013, a
decrease of 182%;
-- For the three months ended March 31, 2014, basic and diluted loss per
share were $(0.10) compared to basic and diluted earnings per share of
$0.12 and $0.11, respectively, for the same period in 2013;
-- Ended the period with $1.0 million of cash, cash equivalents and short-
term investments;
-- As at March 31, 2014, $19.0 million of the Company's $41.8 million
credit facilities remains undrawn and available for future use;
-- Average monthly churn rate for the three months ended March 31, 2014 was
1.01% for access customer locations compared to 1.50% for the three
months ended December 31, 2013 and 1.21% for the same period in 2013
which is a result of the enhanced retention programs now in place;
-- Net access customer locations increased by 22 in the first quarter 2014
ending the period with 6,475 net access customer locations in service
compared to 80 net access customers locations lost in the fourth quarter
of 2013 and 12 net access customer locations lost in the same period in
2013. This increase results from management's continued focus on
retention initiatives and offerings, customer service, the needs of
small and medium-sized businesses ("SMB") and renewed sales activity
with competitive product offerings;
-- Average revenue per access customer location ("ARPU") for the three
months ended March 31, 2014 was $615 compared to $624 for the same
period in 2013. This is primarily the result of the retention program
launched by the Company for customers coming to the end of contract term
by offering them lower pricing in exchange for long-term contract
renewals as well as the impact of competitive pricing on both customer
renewals and new sales.
First Quarter 2014 Key Developments
-- The Company announced that its Board of Directors has appointed Stewart
Lyons as President and CEO of the company and a member of the Board of
Directors effective January 16, 2014 and appointed Joe Prodan as Chief
Financial Officer of the company effective February 4, 2014.
-- The Company has received notice that a new wireless entrant customer
will be disconnecting their services during 2014.
-- The Company announced that it has established a fibre-optic core network
in Western Canada through the acquisition of newly constructed fibre
facilities in downtown Vancouver, British Columbia ("BC"). These fibre
facilities connect the Company's Vancouver data center facility, as well
as twelve high customer density buildings in downtown Vancouver. This
will ensure secure broadband connectivity between customer locations and
the data center. In January 2014, the Company drew down $0.6 million
from its term debt facility with the Royal Bank of Canada ("RBC") to
finance this. This facility bears interest at the rate of 4.17%.
Events subsequent to March 31, 2014
-- To strengthen the Company's balance sheet and provide flexibility to
pursue additional opportunities, the Company signed a commitment letter
with National Bank of Canada and RBC for Credit Facilities totaling
$50.0 million, consisting of a $5.0 million revolving operating credit
facility, a $20.0 million non-revolving term credit facility to
refinance the existing credit facility and a $25.0 million non-revolving
acquisitions and capital expenditure facility (collectively, the "Credit
Facilities"). The Credit Facilities would replace TeraGo's existing
facility and are expected to close prior to May 31, 2014.
-- In April 2014, the Company announced that it has continued to expand its
data center business in Western Canada through the acquisition of an
additional 7,000 square foot data center facility in downtown Vancouver,
BC, bringing the total amount of its data center capacity in downtown
Vancouver to 14,000 square feet.
-- For the third consecutive year, the Company has earned a place in the
top 100 among Canada's top technology companies on the Branham 300 list.
Key Financial & Operational Highlights
(All financial results are in thousands of dollars, except gross profit margin,
earnings per share and operating metrics)
Three months ended March
31
2014 2013
(unaudited) (unaudited)
Financial
Revenue $ 12,874 $ 12,570
Cost of Services $ 2,874 $ 2,770
Gross profit margin 77.7% 78.0%
EBITDA(i) $ 3,291 $ 4,333
Adjusted EBITDA(i) $ 3,802 $ 4,333
Earnings (loss) from operations $ (760) $ 1,539
Net earnings (loss) $ (1,093) $ 1,340
Basic earnings (loss) per share $ (0.10) $ 0.12
Diluted earnings (loss) per share $ (0.10) $ 0.11
Operating
Churn rate(i) 1.01% 1.21%
Customer locations in service 6,475 6,563
ARPU(i) $ 615 $ 624
Number of employees 190 187
(i)See Key Performance Indicators, Additional GAAP and Non-GAAP Measures
below
The table below reconciles net earnings to EBITDA and Adjusted EBITDA for the
three months ended March 31, 2014 and 2013.
Three months ended March 31
2014 2013
(unaudited) (unaudited)
Net earnings (loss) for the period $ (1,093) $ 1,340
Foreign exchange (gain) 33 19
Finance costs 319 188
Finance income (19) (8)
Earnings (loss) from operations (760) 1,539
Add:
Depreciation of networks assets, property
and equipment and amortization of
intangible assets 3,288 2,846
Loss (gain) on disposal of network assets 12 (39)
Stock-based compensation expense (recovery) 751 (13)
EBITDA $ 3,291 4,333
Restructuring, acquisition-related and
integration costs 511 -
Adjusted EBITDA $ 3,802 $ 4,333
First Quarter 2014 Results of Operations
The Company's cash flow and earnings are typically impacted in the first quarter
of the year due to several annual agreements requiring payments in the first
quarter including annual spectrum payments, annual rate increases in long-term
contracts and the restart on January 1st of payroll taxes and other levies
related to employee compensation.
Revenue
Total revenue increased 2.4% to $12.9 million for the three months ended March
31, 2014 compared to $12.6 million for the same period in 2013.
Service revenue increased by 3.4% to $12.7 million for the three months ended
March 31, 2014 compared to $12.3 million for the same period in 2013. The
increase in service revenue was driven primarily by revenue from the data center
partially offset by a reduction in access revenue. Revenue from the data center
was $0.8 million for the three months ended March 31, 2014.
Installation revenue was $0.2 million for the three months ended March 31, 2014
compared to $0.3 million for the same period in 2013.
Customer locations
Total customer locations in service decreased to 6,475 as at March 31, 2014
compared to 6,563 as at March 31, 2013. Net access customer locations increased
by 22 in the first quarter 2014 ending the period with 6,475 net access customer
locations in service compared to 80 net access customers locations lost in the
fourth quarter of 2013 and 12 net access customer locations lost in the same
period in 2013. This increase results from management's continued focus on
retention initiatives and offerings, customer service, the needs of small and
medium-sized businesses ("SMB") and renewed sales activity with competitive
product offerings.
Churn rate
The average monthly churn rate was 1.01% for the three months ended March 31,
2014 compared to 1.21% for the same period in 2013 primarily as a result of the
enhanced retention focus now in place. Management continues to focus on
retention initiatives and offerings, customer service, the needs of small and
medium-sized businesses ("SMB") and renewed sales activity with competitive
product offerings in addition to monitoring customer creditworthiness and churn
levels.
ARPU
ARPU from access customers decreased to $615 for the three months ended March
31, 2014 compared to $624 for the same period in 2013. The decrease in ARPU was
driven primarily by lower usage revenue in the quarter as the company offers
incentives in the form of free or discounted usage packages to increase our
customer renewal rate, the result of the retention program launched by the
Company for customers coming to the end of contract term by offering them lower
pricing in exchange for long-term contract renewals as well as the impact of
competitive pricing on new sales. The Company believes the current retention
campaign will help long-term revenue growth by offering more complimentary
services such as data center and IT services to its existing base.
Gross margin
For the three months ended March 31, 2014, gross profit margin was 77.7%
compared to 78.0% for the same period in 2013. This decrease is primarily due to
an increase in property access costs.
SG&A
For the three months ended March 31, 2014, SG&A expenses increased to $6.8
million compared to $5.4 million for the same period in 2013. The increase was
primarily due to higher stock-based compensation of $0.6 million relating to a
tax indemnity claim by a former officer, restructuring costs due to a
re-aligning of Company strategy and acquisition costs, selective investments in
sales and marketing and higher utility and facilities expenses from the
operations of the data centre. As of March 31, 2014, the number of direct sales
personnel was 32 compared to 28 as of March 31, 2013.
EBITDA and Adjusted EBITDA
Adjusted EBITDA for the three months ended March 31, 2014 was $3.8 million
compared to $4.3 million for the same period in 2013, a decrease of 12%. EBITDA
for the three months ended March 31, 2014 was $3.3 million compared to $4.3
million for the same period in 2013, a decrease of 24%. The adjusted EBITDA
decrease was due to a decrease in access revenue and selective investments in
sales and marketing as discussed above. The decrease in EBITDA also included
restructuring costs due to a re-aligning of Company strategy and acquisition
related costs related to searching for new opportunities. This is in line with
management's expectation as the Company continued to focus on transforming into
a multi-product IT services company. Consistent with prior years, EBITDA and
Adjusted EBITDA for the quarter ended March 31, 2014 is impacted due to the
seasonal nature of certain expenses.
Deferred income taxes
The Company reviewed and updated the assumptions and projections regarding
future profitability as at March 31, 2014. Based on management's analysis, no
additional deferred income tax assets resulting from temporary tax differences
were recognized in the three months ended March 31, 2014.
Net earnings (loss)
For the three months ended March 31, 2014, net loss was $1.1 million compared to
net earnings of $1.3 million for the same period in 2013. The changes are due to
the items noted above.
Capital resources
As at March 31, 2014, the Company had cash and cash equivalents and short-term
investments of $1.0 million and access to the $19.0 million undrawn portion of
its $41.8 million credit facilities.
The Company anticipates incurring additional capital expenditures for the
purchase and installation of network assets and customer premise equipment. As
economic conditions warrant, the Company may expand its network coverage into
new Canadian markets using wireless or fibre optics and making additional
investments in data centers and other IT services through acquisitions or
expansion.
Management believes the Company's current cash, short-term investments,
anticipated cash from operations, access to the undrawn portion of debt
facilities and its access to additional financing in the form of debt or equity
will be sufficient to meet its working capital and capital expenditure
requirements for the foreseeable future.
Share Capital
As of March 31, 2014, there were 11,552,398 Common Shares and two Class B Shares
outstanding.
Conference Call and Webcast
Management will host a conference call on Thursday, May 8, 2014, at 9:00 am EDT
to discuss these results. To access the conference call, please dial
416-340-8527 or 1-800-766-6630. The call will also be available via webcast at
www.terago.ca or http://www.investorcalendar.com/IC/CEPage.asp?ID=172646. An
archived recording of the conference call will be available until May 8, 2015 at
midnight EDT. To listen to this recording, call 905-694-9451 or 1-800-408-3053
and enter passcode 8479162.
TeraGo's unaudited financial statements for the three months ended March 31,
2014, and the notes thereto, and its Management Discussion and Analysis for the
same period, have been filed on SEDAR at www.sedar.com.
Key Performance Indicators, Additional GAAP and Non-GAAP Measures
EBITDA and Adjusted EBITDA
The term "EBITDA" refers to earnings before deducting interest, taxes,
depreciation and amortization. The Company believes that EBITDA and Adjusted
EBITDA are useful additional information to management, the Board and investors
as it provides an indication of the operational results generated by its
business activities prior to taking into consideration how those activities are
financed and taxed and also prior to taking into consideration asset
depreciation and amortization. The Company believes that Adjusted EBITDA is
useful additional information to management, the Board and investors as it
excludes items that could affect the comparability of our operational results
and could potentially alter the trends analysis in business performance.
Excluding these items does not imply they are non-recurring. The Company
calculates EBITDA as earnings before deducting interest, taxes, depreciation and
amortization, foreign exchange gain or loss, finance costs, finance income, gain
or loss on disposal of network assets, property and equipment and stock-based
compensation. In addition, the Company excludes restructuring,
acquisition-related and integration costs in its calculation of Adjusted EBITDA.
Investors are cautioned that EBITDA and Adjusted EBITDA should not be construed
as an alternative to operating earnings or net earnings determined in accordance
with IFRS as an indicator of our financial performance or as a measure of our
liquidity and cash flows. EBITDA and Adjusted EBITDA do not take into account
the impact of working capital changes, capital expenditures, debt principal
reductions and other sources and uses of cash, which are disclosed in the
consolidated statements of cash flows.
TeraGo's method of calculating EBITDA and Adjusted EBITDA may differ from other
issuers and, accordingly, EBITDA and Adjusted EBITDA may not be comparable to
similar measures presented by other issuers. See "Results of Operations -
EBITDA" for reconciliation of net earnings (loss) to EBITDA and Adjusted EBITDA.
ARPU
The term "ARPU" refers to the Company's average revenue per customer location.
The Company believes that ARPU is useful supplemental information as it provides
an indication of our revenue from an individual customer location on a per month
basis. ARPU is not a recognized measure under IFRS and, accordingly, investors
are cautioned that ARPU should not be construed as an alternative to revenue
determined in accordance with IFRS as an indicator of our financial performance.
The Company calculates ARPU by dividing our service revenue by the average
number of customer locations in service during the period and we express ARPU as
a rate per month. TeraGo's method of calculating ARPU may differ from other
issuers and, accordingly, ARPU may not be comparable to similar measures
presented by other issuers.
Churn
The term "churn" or "churn rate" is a measure, expressed as a percentage, of
customer locations terminated in a particular month. Churn represents the number
of customer locations disconnected per month as a percentage of total number of
customer locations in service during the month. The Company calculates churn by
dividing the number of customer locations disconnected during a period by the
total number of customer locations in service during the period. Churn and churn
rate are not recognized measures under IFRS and, accordingly, investors are
cautioned in using it. TeraGo's method of calculating churn and churn rate may
differ from other issuers and, accordingly, churn may not be comparable to
similar measures presented by other issuers.
Earnings (loss) from operations
Earnings (loss) from operations exclude foreign exchange gain (loss), income
taxes, finance costs and finance income. We include earnings (loss) from
operations as an additional GAAP measure in our consolidated statement of
earnings. We consider earnings (loss) from operations to be representative of
the activities that would normally be regarded as operating for the Company. We
believe this measure provides relevant information that can be used to assess
the consolidated performance of the Company and therefore, provides meaningful
information to investors.
Forward-Looking Statements
This press release includes certain forward-looking statements that are made as
of the date hereof and based upon current expectations, which involve risks and
uncertainties associated with our business and the economic environment in which
the business operates. All such statements are made pursuant to the 'safe
harbour' provisions of, and are intended to be forward-looking statements under,
applicable Canadian securities laws. Any statements contained herein that are
not statements of historical facts may be deemed to be forward-looking
statements. For example, the words anticipate, believe, plan, estimate, expect,
intend, should, may, could, objective and similar expressions are intended to
identify forward-looking statements. By their nature, forward-looking statements
require us to make assumptions and are subject to inherent risks and
uncertainties. We caution readers of this document not to place undue reliance
on our forward-looking statements as a number of factors could cause actual
future results, conditions, actions or events to differ materially from the
targets, expectations, estimates or intentions expressed with the
forward-looking statements. When relying on forward-looking statements to make
decisions with respect to the Company, you should carefully consider the risks
set forth herein and other uncertainties and potential events. Except as may be
required by applicable Canadian securities laws, we do not intend, and disclaim
any obligation, to update or revise any forward-looking statements whether in
words, oral or written as a result of new information, future events or
otherwise.
About TeraGo Networks
TeraGo Networks Inc. provides businesses across Canada with carrier-grade
broadband, data and voice communications services. Colocation and disaster
recovery solutions are also provided by Data Centers Canada, a division of
TeraGo Networks. The national service provider owns and manages its IP network
servicing over 6,400 customer locations in 46 major markets across Canada
including Toronto, Montreal, Calgary, Edmonton, Vancouver and Winnipeg. TeraGo
Networks is a Competitive Local Exchange Carrier (CLEC) and is a wholly owned
subsidiary of TeraGo Inc. (TSX:TGO). More information about TeraGo is available
at www.terago.ca.
FOR FURTHER INFORMATION PLEASE CONTACT:
TeraGo Inc.
Stewart Lyons
President and CEO
1-877-982-3688
IR@terago.ca
TeraGo Inc.
Joe Prodan
Chief Financial Officer
1-877-982-3688
IR@terago.ca
LHA
Jody Burfening/Carolyn Capaccio
212-838-3777
ccapaccio@lhai.com
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