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Press release from Marketwire

TeraGo Posts Record Revenue in Q2 2013

Executing on Enhanced Business Plan

Thursday, August 01, 2013

TeraGo Posts Record Revenue in Q2 2013

07:00 EDT Thursday, August 01, 2013

TORONTO, ONTARIO--(Marketwired - Aug. 1, 2013) - TeraGo Inc. (TSX:TGO) (www.terago.ca) today announced financial and operating results for second quarter ended June 30, 2013.

Second Quarter 2013 Financial and Operational Highlights

  • Q2 2013 revenue was a record $12.8 million, up 4% over $12.3 million in Q2 2012;
  • EBITDA was $4.1 million for Q2 2013, 7% more than $3.9 million in Q2 2012; EBITDA excluding acquisition costs related to Data Centers Canada ("DCC") and costs related to a departing senior executive was $4.6 million, up 19% over Q2 2012;
  • Gross profit margin for Q2 2013 was 78.2%, compared to 77.8% for the same period in 2012;
  • Q2 2013 net earnings were $2.1 million compared to $0.7 million in Q2 2012, an increase of 206%. The Company recognized $1.3 million of deferred income taxes resulting from the expected utilization of deferred tax assets following the acquisition and subsequent amalgamation of DCC;
  • Basic and diluted earnings per share were $0.18 and $0.18, respectively, for the second quarter of 2013, compared to $0.06 and $0.06, respectively, for the same period in 2012;
  • Net customer locations decreased by 40 in Q2 2013 compared to 83 net customer locations added in the same period in 2012;
  • Ended the quarter with 6,523 customer locations in service, an increase of 1.4% over 6,434 at June 30, 2012;
  • Average revenue per customer location ("ARPU") for Q2 2013 was $627 compared to $624 for the same period in 2012;
  • Average monthly churn rate in Q2 2013 was 1.29% compared to 1.30% in the same period in 2012;
  • In May 2013, the Company drew down $9.5 million from its term debt facility with RBC for the purchase of DCC. This facility bears interest at the rate of 4.17%; and
  • Ended the quarter with $3.2 million of cash, cash equivalents and short-term investments and access to the $20.5 million undrawn portion of the Company's $41.8 million credit facilities.

Second Quarter 2013 Key Developments

  • In April 2013, the Company announced an enhanced business plan which includes expansion of complementary services and to build fibre to augment its network footprint in order to drive further growth and the pursuit of strategic acquisitions.
  • The Company entered into an agreement with RBC that provides additional credit facilities of $27.0 million on terms substantially consistent with the existing term debt. $20.5 million remains undrawn.
  • On May 31, 2013, the Company completed its purchase transaction to acquire 100% of the shares of DCC which operates a 16,000 square foot SSAE 16 certified data centre facility in Vaughan, Ontario, and provides data centre solutions, including colocation and disaster recovery, to businesses, enterprises, public sector and technology service providers. Acquiring DCC supports the Company's strategy to offer complementary services.
  • The Company improved its ranking among Canada's top technology companies for the sixth consecutive year rising to 84th on the 2012 Branham Top 250 Canadian Technology companies. TeraGo was also ranked as one of the top 10 Canadian Wireless Solutions Companies for 2013.
  • The Company announced the appointments of Michael Martin, Richard Brekka and Jim Sanger to the Company's Board of Directors.

Bryan Boyd, President and CEO, TeraGo Inc. said "We're very pleased that our strong financial performance continues well into 2013, with record revenue and net earnings and improved EBITDA. As evidenced by our recent initiatives, we are vigorously implementing our enhanced business plan."

Key Financial & Operational Highlights

(All financial results are in thousands, except gross profit margin, earnings per share and operating metrics)

Three months ended June 30
2013 2012
(Unaudited ) (Unaudited )
Financial
Revenue $ 12,779 $ 12,256
Gross profit margin 78.2 % 77.8 %
EBITDA* $ 4,129 $ 3,854
Earnings from operations $ 1,051 $ 929
Income tax recovery $ 1,314 -
Net earnings $ 2,101 $ 687
Basic earnings per share $ 0.18 $ 0.06
Diluted earnings per share $ 0.18 $ 0.06
Operating
Churn rate* 1.29 % 1.30 %
Customer locations in service 6,523 6,434
ARPU* $ 627 $ 624
Number of employees 186 189
* See Key Performance Indicators, Additional GAAP and Non-GAAP Measures below

Financial results for DCC are included from the date of acquisition, May 31, 2013. Churn rate, Customer locations in service and ARPU exclude results for DCC.

The table below reconciles net earnings to EBITDA for the three months ended June 30, 2013 and 2012.

Three months ended June 30
2013 2012
(unaudited ) (unaudited )
Net earnings for the period $ 2,101 $ 687
Foreign exchange 39 25
Finance costs 235 224
Finance income (10 ) (7 )
Income tax recovery (1,314 ) -
Earnings from operations 1,051 929
Add:
Depreciation of networks assets, property and equipment and amortization of intangible assets 2,998 2,614
Loss (gain) on disposal of network assets 144 (9 )
Stock-based compensation expense (recovery) (64 ) 320
EBITDA 4,129 3,854

Second Quarter 2013 Results of Operations

Revenue

Total revenue for the second quarter of 2013 increased 4% to a record $12.8 million, compared to $12.3 million for the same period in 2012. The increase largely resulted from a greater number of customer locations, as well as existing customers upgrading their Internet and data connections, and revenue from the data centre of $233 thousand as a result of the acquisition of DCC on May 31, 2013. Approximately 98% of Q2 2013 revenue was recurring service revenue.

Customer locations

TeraGo added 216 new customer additions in Q2 2013 (336 in Q2 2012). TeraGo experienced a decrease of 40 net customer locations, compared with 83 net additions in 2012, in part due to lower new customer additions. The quarter ended with 6,523 customer locations in service, 1.4% growth over the 6,434 customer locations in service at June 30, 2012.

Churn rate

The average monthly churn rate in Q2 2013 was 1.29% compared to 1.30% in Q2 2012. Management continues to strive for lower churn rates by focusing on network quality, customer service, and customer creditworthiness.

ARPU

Average monthly revenue per customer location, or ARPU, increased to $627 in the second quarter of 2013, compared with $624 for the same period in 2012. The increase was primarily a result of service capacity upgrades by existing customers, an increase in the number of customers choosing higher capacity services or voice services and lower credits partially offset by lower usage revenue.

Gross margin

The gross profit margin for the second quarter of 2013 remained strong at 78.2% compared to 77.8% for the same period in 2012. The slight increase is primarily due to savings recognized from telecommunication and maintenance costs partially offset by annual increases in property access costs and spectrum costs.

SG&A

SG&A (Salaries and related costs - Other, and Other operating items) expenses decreased to $5.9 million in Q2 2013 from $6.0 million in Q2 2012. The decrease was largely a result of lower stock-based compensation and lower sales and marketing organization costs, partially offset by due diligence and other DCC acquisition related costs, and costs related to a departing senior executive. TeraGo had 29 sales personnel at quarter end, compared to 31 a year earlier.

EBITDA

Second quarter 2013 EBITDA increased to $4.1 million compared to $3.9 million in Q2 2012, an improvement of 7%. Excluding acquisition costs associated with DCC and costs related to a departing senior executive, EBITDA for the three months ended June 30, 2013 would have been $4.6 million. The increase in EBITDA is in line with management's expectations as TeraGo continues to increase revenue while focusing on cost management.

Net earnings

TeraGo achieved net earnings for the second quarter of 2013 of $2.1 million compared to $0.7 million for the same period in 2012. Basic and diluted earnings per share were $0.18 and $0.18, respectively, for the second quarter of 2013, compared to $0.06 and $0.06, respectively, for the same period in 2012. In Q2 2013, the Company recognized $1.3 million of deferred income taxes resulting from the expected utilization of deferred tax assets following the acquisition and subsequent amalgamation of DCC.

Capital resources

At June 30, 2013, the Company had cash and cash equivalents and short-term investments of $3.2 million and access to the $20.5 million undrawn portion of its $41.8 million credit facilities.

In April 2013, the Company entered into an agreement with RBC that provides additional credit facilities of $27.0 million on terms substantially consistent with the existing credit facilities that will be available to support investment in the Company's enhanced business plan.

The $27.0 million in senior term debt is available to the Company in 3 facilities:

  • $8.0 million, to finance new broadband network capital expenditure investments and related expenses including future upgrades;
  • $6.0 million, to finance new broadband network capital expenditures and related expenses for municipalities, utilities, schools, hospitals or other business/ enterprise customers; and
  • $13.0 million, to finance strategic acquisitions.

In May 2013, the Company drew down $9.5 million from its term debt facility with RBC for the purchase of DCC.

TeraGo has the option of choosing fixed or floating interest rates. These facilities are principally secured by a general security agreement over the Company's assets.

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.

Shares outstanding

As of July 26, 2013, TeraGo had 11,428,889 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 24 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, August 1, 2013, at 9.00 a.m. EDT to discuss these results. To access the conference call, please dial 416-340-9534 or 1-877-440-9795. The call will also be available via webcast at www.terago.ca or http://www.investorcalendar.com/IC/CEPage.asp?ID=171346. An archived recording of the conference call will be available until August 1, 2014 at midnight EDT. To listen to this recording, call 905-694-9451 or 1-800-408-3053 and enter passcode 9141381.

TeraGo's unaudited financial statements for the three and six months ended June 30, 2013, 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

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.

ARPU

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.

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.

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 Q2 2013 MD&A and 2012 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 businesses across Canada with carrier-grade broadband, data and voice communications services. The national service provider owns and manages its IP network servicing 6,523 customer locations in 46 major markets across Canada including Toronto, Montreal, Calgary, Edmonton, Vancouver and Winnipeg. TeraGo Networks also operates Data Centers Canada which provides data centre solutions, including colocation and disaster recovery, to businesses, enterprises, public sector and technology service providers in the Greater Toronto Area. 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:

Contact Information:
TeraGo Networks Inc.
Bryan Boyd
President and CEO
1-877-982-3688


TeraGo Networks Inc.
Bosco Chan
Interim Chief Financial Officer
1-877-982-3688
IR@terago.ca
www.terago.ca

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