TeraGo Inc.

TSX : TGO


TeraGo Inc.

November 08, 2012 07:00 ET

TeraGo Reports Record Revenue and EBITDA in Q3

Strong Results in All Key Metrics

TORONTO, ONTARIO--(Marketwire - Nov. 8, 2012) - TeraGo Inc. (TSX:TGO) (www.terago.ca) today announced financial and operating results for the third quarter ended September 30, 2012.

Third Quarter 2012 Financial and Operational Highlights

  • Record revenue of $12.3 million in the third quarter of 2012, up 4% from $11.9 million in Q3 2011;
  • EBITDA1, excluding special charges (see "Special Charges" section below), was $4.4 million for Q3 2012, compared to $3.4 million in Q3 2011, an increase of 27%. Record EBITDA as reported was $4.1 million, an increase of 19% over last year's third quarter;
  • Net earnings of $0.7 million compared to $0.1 million in Q3 2011, an increase of 444%;
  • Earnings per share of $0.06 compared to $0.01 in Q3 2011;
  • Continuing strong gross profit margin of 77.5% compared to 78.3% in the prior year period;
  • Added 273 new customer locations in the quarter vs 291 in Q3 2011, to end the period with 6,502 customer locations in service;
  • Average monthly churn rate for the third quarter 2012 was 1.05% compared to 1.16% for Q3 2011;
  • Added 68 net customer locations in Q3 2012, compared to 75 in Q3 2011;
  • Average revenue per customer location ("ARPU") for Q3 2012 was $621 compared to $622 in Q3 2011; and
  • TeraGo ended Q3 2012 with $1.9 million of cash, cash equivalents and short-term investments and access to the $4.0 million undrawn portion of the Company's $20.0 million credit facilities.

1 See "Non-GAAP Measures" section below

Third Quarter 2012 Key Developments

  • On September 5, 2012, the Company announced that it has initiated a review process to identify, examine and consider a range of strategic options available to the Company with a view to enhancing shareholder value. There can be no assurance that the strategic review process will result in any change in the operation or ownership of the Company and TeraGo does not intend to make any further announcements with respect to its strategic review until such time as it deems appropriate.
  • In July 2012, following the change in the foreign ownership restrictions as a result of the amendments to the Telecommunications Act (Canada), the Company completed the automatic conversion of approximately 3.6 million issued and outstanding Class A Non-Voting Shares into Common shares on a one-for-one basis, in accordance with the Company's share articles.
  • In July 2012 TeraGo entered into a $0.5 million equipment loan with GE Capital. The loan, which further strengthens the Company's cash position, is secured by the equipment, and has a four-year term with a fixed interest rate of 5.91%.
  • TeraGo was recognized as one of the Achievers 50 most engaged workplaces in Canada for the second year in a row and was named one of Canada's top employers for young people for 2012.

Bryan Boyd, President and CEO, TeraGo Inc. said "While all our key indicators in the third quarter continued to be strong, we are particularly pleased with our record EBITDA performance and the improvement since last year. Excluding special charges associated with our strategic review, EBITDA was up an impressive 27% over Q3 of 2011."

Key Financial & Operational Highlights
(All financial results are in thousands, except gross profit margin, earnings per share and operating metrics)
Three months ended September 30
2012 2011
(Unaudited) (Unaudited)
Financial
Revenue $ 12,340 $ 11,858
Gross profit margin 77.5 % 78.3 %
EBITDA* $ 4,099 $ 3,441
EBITDA* excluding special charges $ 4,360 $ 3,441
Earnings from operations $ 871 $ 393
Net earnings $ 713 $ 131
Basic and diluted earnings per share $ 0.06 $ 0.01
Operating
Churn rate* 1.05 % 1.16 %
Customer locations in service 6,502 6,233
ARPU* $ 621 $ 622
Number of employees 190 202
* See Non-GAAP Measures below
The table below reconciles net earnings to EBITDA for the three months ended September 30, 2012 and 2011.
Three months ended September 30
2012 2011
(unaudited) (unaudited)
Net earnings for the period $ 713 $ 131
Foreign exchange (gain) (37 ) 58
Finance costs 203 213
Finance income (8 ) (9 )
Earnings from operations 871 393
Add:
Depreciation of networks assets, property and equipment and amortization of intangibles 2,728 2,483
Loss on disposal of network assets 88 157
Stock-based compensation 412 408
EBITDA 4,099 3,441
Special charges 261 -
EBITDA excluding special charges $ 4,360 $ 3,441

Third Quarter 2012 Results of Operations

Revenue

Total revenue for the three months ended September 30, 2012 increased 4% to $12.3 million compared to $11.9 million for the same period in 2011. The increase largely resulted from a greater number of customer locations in service as well as existing customers upgrading their Internet and data connections. Approximately 98% of revenue for the first nine months of 2012 was recurring service revenue.

Customer locations

273 new customer additions in Q3 2012 (291 in Q3 2011) resulted in 68 net customer locations added (75 in Q3 2011). The period ended with 6,502 customer locations in service, 4% growth since September 30, 2011.

Churn rate

The average monthly churn rate in the third quarter of 2012 was 1.05% down from 1.16% in Q3 2011. Management continues to strive for lower churn rates by focusing on network quality, customer service, and customer creditworthiness.

Gross margin

The gross profit margin for the quarter ended September 30, 2012 remained strong at 77.5% compared to 78.3% for the same period in 2011. This slight decrease is primarily due to an increase in telecommunication and other support costs as a result of the MetroBridge acquisition and annual increases in property access costs.

SG&A

Third quarter SG&A (Salaries and related costs - Other, and Other operating items) expenses decreased to $5.7 million compared to $6.4 million in Q3 2011. The decrease was primarily as a result of lower salaries and severance costs, lower equipment write downs and lower recruiting expenses. TeraGo had 30 sales personnel at quarter end, down from 33 a year earlier.

Special charges

In September 2012, the Company announced that it has initiated a strategic review process to identify, examine and consider a range of strategic options available to the Company with a view to enhancing shareholder value. Direct and incremental costs associated with this review process include investment banking fees and associated legal advisory costs and have been separately classified in the Statement of Operations. For the three months ended September 30, 2012, special charges were $0.3 million compared to $nil in Q3 2011.

EBITDA

Q3 2012 EBITDA increased to a record $4.1 million compared to $3.4 million for the same period in 2011, an improvement of 19%. EBITDA includes $0.3 million for special charges. EBITDA, excluding special charges for the three months ended September 30, 2012 was $4.4 million. This increase in EBITDA is in line with management's expectation as TeraGo continues to increase revenue while focusing on cost management.

Net earnings

Net earnings for the third quarter were $0.7 million, compared to net earnings of $0.1 million in Q3 2011, an improvement of 444%. Quarterly net earnings per share were $0.06 compared to $0.01 for the comparable period in 2011.

Capital resources

At September 30, 2012, the Company had cash, cash equivalents and short-term investments of $1.9 million and access to the $4.0 million undrawn portion of its $20.0 million credit facilities.

In July, 2012, the Company entered into an equipment loan with a financing company for $0.5 million that is secured by the equipment. The debt facility is repayable in monthly installments of $12 thousand and bears interest at a fixed rate of 5.91% for 4 years.

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.

ARPU

Average monthly revenue per customer location, or ARPU, was $621 in the third quarter of 2012 from $622 for the same period in 2011. The slight decrease was primarily due to lower variable usage revenue partially offset by existing customers upgrading the capacity of their services and adding voice services.

Shares outstanding

As of September 30, 2012, TeraGo had 11,331,775 Common Shares and two Class B Shares outstanding.

TeraGo's spectrum portfolio

TeraGo owns 76 spectrum licences in the 24 GHz and 38 GHz bands, covering Canadian markets with a population base of nearly 23 million and plans to use this spectrum to provide Ethernet-based broadband links for businesses, government and cellular backhaul, as part of the Company's growth strategy.

Conference Call and Webcast

Management will host a conference call on Thursday, November 8, 2012, at 9.00 a.m. EST to discuss these results. To access the conference call, please dial 416-340-2216 or 1-866-226-1792. A replay of the conference call will be available until November 29, 2012 at midnight EST. To access the replay, call 905-694-9451 or 1-800-408-3053, followed by passcode 9818733. The call will be accessible via webcast at www.terago.ca or at http://www.investorcalendar.com/IC/CEPage.asp?ID=169912. An archived replay of the webcast will be available for one year.

TeraGo's unaudited financial statements for the period ended September 30, 2012, and the notes thereto, and its Management Discussion and Analysis for the same period, have been filed on SEDAR at www.sedar.com.

Non-GAAP Measures

The term "EBITDA" refers to earnings before deducting interest, taxes, depreciation and amortization. EBITDA is a term commonly used to evaluate operating results. We believe that EBITDA is useful additional information to management, the Board and Investors as it provides an indication of the operational results generated by our 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. We also exclude foreign exchange gain or loss, finance costs, finance income, gain or loss on disposal of network assets, property and equipment and stock-based compensation from our calculation of EBITDA. Investors are cautioned that 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 does 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. Our method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to similar measures presented by other issuers.

The term "ARPU" refers to our average revenue per customer location. We believe 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. We calculate 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. Our method of calculating ARPU may differ from other issuers and, accordingly, ARPU may not be comparable to similar measures presented by other issuers.

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.

Forward-Looking Statements

This news release includes certain forward-looking statements that are made as of the date hereof and that are 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 news release not to place undue reliance on our forward-looking statements as a number of factors could cause actual 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, investors and others should carefully consider the risks set forth in the Q3 2012 MD&A and 2011 Annual Information Form that can be found on SEDAR at www.sedar.com 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 small and medium sized businesses with carrier-grade wireless broadband, data and voice communications services. The national network service provider owns and manages its wireless IP network servicing more than 6,500 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.

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