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Press release from Marketwire

TeraGo Posts Increased Revenue, EBITDA in Q3 2013

DCC integration on track and contributing to revenue growth

Wednesday, November 06, 2013

TeraGo Posts Increased Revenue, EBITDA in Q3 2013

07:00 EST Wednesday, November 06, 2013

TORONTO, ONTARIO--(Marketwired - Nov. 6, 2013) - TeraGo Inc. (TSX:TGO) (www.terago.ca) today announced financial and operating results for third quarter ended September 30, 2013.

Third Quarter 2013 Financial and Operational Highlights

  • Q3 2013 revenue was $13.2 million, up 7% over $12.3 million in Q3 2012;
  • The integration of Data Centers Canada ("DCC") with the company's core business is progressing as planned and expansion into data centre services, which generated revenue of $663 thousand in Q3 2013, will contribute to the Company's growth;
  • EBITDA was $5.0 million for Q3 2013, a 22% increase from $4.1 million in Q3 2012;
  • Gross profit margin for Q3 2013 was 79.0%, compared to 77.5% for the same period in 2012;
  • Q3 2013 net earnings were $1.6 million compared to $0.7 million in Q3 2012, an increase of 125%;
  • Basic and diluted earnings per share were $0.14 and $0.13, respectively, for the third quarter of 2013, compared to $0.06 and $0.06, respectively, for the same period in 2012;
  • Net access customer locations increased by 10 in Q3 2013 compared to a decrease of 40 in Q2 2013 and an increase of 68 in Q3 2012 primarily due to the increased competition related to the availability of higher capacity services from competitors. Management continues to focus on customer service, network quality and competitive product offerings;
  • Ended the quarter with 6,533 net access customer locations in service, compared to 6,502 at September 30, 2012;
  • Average revenue per access customer location ("ARPU") for Q3 2013 was $627 compared to $621 for the same period in 2012;
  • Average monthly churn rate for access customer locations in Q3 2013 was 1.12% compared to 1.29% in the second quarter of 2013 and 1.05% in Q3 2012;
  • Ended the quarter with $2.1 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.

Third Quarter 2013 Key Developments

  • On May 31, 2013, the Company completed its share purchase transaction to acquire DCC which supports the strategy to offer complementary services. On August 31, 2013, the purchase price adjustments were finalized resulting in final consideration paid of $9.2 million. The adjustment resulted in a change to net working capital acquired of $(53) thousand and Goodwill of $(167) thousand from the initial purchase price estimated on the closing date. The amount held in escrow of $313 thousand was returned to the Company upon settlement of the balance in October 2013.
  • In September 2013, the Company entered into a $0.3 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 6.10%.
  • The Company was selected as one of Canada's top employers for young people for 2013 by Mediacorp Canada Inc. for the second consecutive year.

Events subsequent to September 30, 2013

  • In October 2013 the Company announced the elections of Nicole German and Jim Nikopoulos to its Board of Directors.

Bryan Boyd, President and CEO, TeraGo Inc. said "We're pleased with our strategic expansion into data centre services, which is developing as planned and contributing to our revenue and EBITDA growth this year."

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
2013 2012
(Unaudited ) (Unaudited )
Financial
Revenue $ 13,168 $ 12,340
Gross profit margin 79.0 % 77.5 %
EBITDA* $ 5,001 $ 4,099
Earnings from operations $ 1,911 $ 871
Net earnings $ 1,602 $ 713
Basic earnings per share $ 0.14 $ 0.06
Diluted earnings per share $ 0.13 $ 0.06
Operating
Churn rate* 1.12 % 1.05 %
Customer locations in service 6,533 6,502
ARPU* $ 627 $ 621
Number of employees 189 190
* 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 September 30, 2013 and 2012.

Three months ended September 30
2013 2012
(unaudited) (unaudited)
Net earnings for the period $ 1,602 $ 713
Foreign exchange (gain) (29 ) (37 )
Finance costs 351 203
Finance income (13 ) (8 )
Earnings from operations 1,911 871
Add:
Depreciation of networks assets, property and equipment and amortization of intangible assets 3,195 2,728
Loss (gain) on disposal of network assets (24 ) 88
Stock-based compensation expense (recovery) (81 ) 412
EBITDA 5,001 4,099

Third Quarter 2013 Results of Operations

Revenue

Total revenue for the third quarter of 2013 increased 7% to $13.2 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 $663 thousand in the third quarter of 2013. Approximately 98% of Q3 2013 revenue was recurring service revenue.

Customer locations

TeraGo had 231 new access customer additions in the third quarter, an improvement from 216 in Q2 2013, but down from 273 in Q3 2012, primarily due to increased competition related to the availability of higher capacity services from competitors. Net access customer additions were 10 in Q3 2013, an improvement from the net decrease of 40 in Q2 2013, and down from 68 in Q3 2012. Management continues to focus on customer service, network quality and competitive product offerings. The quarter ended with 6,533 customer locations in service, compared to 6,502 customer locations in service at September 30, 2012.

Churn rate

The average monthly churn rate in Q3 2013 was 1.12%, compared to 1.29% in the second quarter of 2013 and 1.05% in Q3 2012. The year-over-year increase was largely due to the increased competitive environment. Management continues to strive for lower churn rates by focusing on network quality, customer service, and customer creditworthiness.

ARPU

Average monthly revenue per access customer location, or ARPU, increased to $627 in the third quarter of 2013, compared with $621 for the same period in 2012. The increase was primarily a result of service capacity upgrades by existing customers, early termination fees, 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 third quarter of 2013 was 79.0% compared to 77.5% for the same period in 2012. The 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 $5.3 million in Q3 2013 from $5.7 million in Q3 2012. The decrease was largely a result of lower stock-based compensation and lower salaries and bonuses, partially offset by higher utility expenses from the operations of the data centre. TeraGo had 31 sales personnel at quarter end, compared to 30 a year earlier.

EBITDA

Third quarter 2013 EBITDA increased to $5.0 million compared to $4.1 million in Q3 2012, an improvement of 22%. Excluding acquisition costs associated with DCC, EBITDA for the three months ended September 30, 2013 was $5.1 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 third quarter of 2013 of $1.6 million compared to $0.7 million for the same period in 2012. Basic and diluted earnings per share were $0.14 and $0.13, respectively, for the third quarter of 2013, compared to $0.06 and $0.06, respectively, for the same period in 2012.

Capital resources

At September 30, 2013, the Company had cash and cash equivalents and short-term investments of $2.1 million and access to the $20.5 million undrawn portion of its $41.8 million credit facilities.

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 November 1, 2013, TeraGo had 11,437,802 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 more than 24.5 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 Wednesday, November 6, 2013, at 9.00 a.m. EST 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 www.investorcalendar.com/IC/CEPage.asp?ID=171827. An archived recording of the conference call will be available until November 6, 2014 at midnight EST. To listen to this recording, call 905-694-9451 or 1-800-408-3053 and enter passcode 6642799.

TeraGo's unaudited financial statements for the three and nine months ended September 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 access 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.

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 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 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. Colocation and disaster recovery solutions are also provided by Data Centers Canada, a division of TeraGo Network. The national service provider owns and manages its IP network servicing over 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.

FOR FURTHER INFORMATION PLEASE CONTACT:

Contact Information:
TeraGo Inc.
Bryan Boyd
President and CEO
1-877-982-3688
IR@terago.ca


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

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