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Press release from Marketwire

TeraGo Posts Continued Revenue, EBITDA Increases in 2013

Data centre operations contributing to revenue growth, Vancouver facility acquired

Wednesday, February 26, 2014

TeraGo Posts Continued Revenue, EBITDA Increases in 2013

07:00 EST Wednesday, February 26, 2014

TORONTO, ONTARIO--(Marketwired - Feb. 26, 2014) - TeraGo Inc. (TSX:TGO) (www.terago.ca) today announced financial and operating results for the year ended December 31, 2013.

Stewart Lyons, President and CEO, TeraGo Inc., commented, "TeraGo has completed a year of continued progress and growth, and our forward strategy is aligned with the needs of the small and medium business customer. We envision 2014 as a year of transition and transformation into an IT services company, leveraging our leading position in broadband access services with the continued growth of a complementary data centre services capability. Key steps in this transformation include rounding out our operational and business development team, evolving our go to market strategy, and expanding our data centre footprint and services suites to win a greater share of both existing and new customers' needs. Our aim is to drive improved returns on assets for our shareholders through accelerating growth over time."

2013 Financial and Operational Highlights

  • Continued increase in annual revenue of $51.4 million in 2013, up 5% over 2012;
  • Q4 2013 revenue of $12.9 million increased 3% over Q4 2012;
  • EBITDA was $16.5 million for the full year 2013, compared to $15.3 million in 2012, an increase of 8%.
  • Q4 2013 EBITDA of $3.0 million declined 23% from the same period in 2012, principally due to $1.3 million related to a costs incurred for a departing executive and related recruiting expenses for a replacement, cost of services and costs related to the Vancouver data centre purchase;
  • Gross profit margin for the full year and Q4 2013 were 78.0% and 77.0% respectively, compared to 77.6% and 77.9% for the same periods in 2012;
  • Net earnings for 2013 decreased 11% to $4.3 million compared to $4.9 million in 2012; Net loss for Q4 2013 was $0.7 million compared to net earnings of $3.2 million for the same period in 2012. This was principally due to $1.3 million related to costs incurred for a departing executive and related recruiting expenses for a replacement, cost of services and costs related to the Vancouver data centre purchase in the Q4 2013, combined with an income tax recovery of $2.5 million recorded in Q4 2012;
  • Basic and diluted earnings per share of $0.38 and $0.36, respectively, for the full year compared to $0.43 and $0.41, respectively, in 2012; Q4 2013 basic and diluted loss per share were $0.06 and $0.06 respectively, compared to $0.29 and $0.27, respectively, for the same period in 2012;
  • Ended the year with 6,453 net access customer locations in service compared to 6,575 at the end of 2012;
  • Net access customer locations decreased by 80 in Q4 2013, compared to an increase of 73 of the same period in 2012, primarily due to increased competition in higher capacity services;
  • Average revenue per access customer location ("ARPU") for the full year and Q4 2013 was $625 and $621, respectively, compared to $622 and $625, respectively, in 2012;
  • Average monthly unit churn rate for 2013 and Q4 2013 increased to 1.28% and 1.50% respectively, compared to 1.05% and 0.86% for the same periods in 2012. This was primarily due to increased competition in higher capacity services and a large low ARPU multisite (41 sites) customer cancellation that occurred in Q4 2013. Excluding this cancellation, the churn rates for 2013 and Q4 2013 would have been approximately 1.23% and 1.28% respectively;
  • Ended 2013 with $2.6 million of cash, cash equivalents and short-term investments and access to the $19.6 million undrawn portion of the Company's $41.8 million credit facilities;
  • Data centre services generated $1.6 million in revenue in 2013. The integration of Data Centers Canada ("DCC") with the company's core business is progressing as planned and data centre services will continue to contribute to the Company's growth.

2013 Key Developments

  • In April 2013, TeraGo secured additional credit facilities with RBC of $27.0 million on terms substantially consistent with the existing term debt. The total debt facility stands at $41.8 million, of which $19.6 million remains undrawn.
  • On May 31, 2013, the Company completed its share purchase transaction to acquire DCC which supports the strategy to offer complementary services. Purchase price adjustments resulted in final consideration paid of $9.1 million, net of cash acquired.
  • As part of its strategy to expand its data centre services to major Canadian urban centres, on December 23, 2013, TeraGo acquired all the assets and assumed the lease of a 5,058 square feet data centre facility, with options to expand, in Vancouver, British Columbia that will serve the greater Vancouver area. The facility, which provides data centre solutions, including colocation and disaster recovery to businesses, enterprises, public sector and technology service providers.
  • Michael Martin, Richard Brekka, Jim Sanger, Nicole German and Jim Nikopoulos were appointed to the Company's Board of Directors.
  • TeraGo's ranking on the Branham Top 250 Canadian Technology Companies improved for the sixth consecutive year to 84th; it was ranked as one of the top 10 Canadian Wireless Solutions Companies for 2013; and 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 December 31, 2013

  • TeraGo's Board of Directors appointed Stewart Lyons, President and CEO and a member of the Board of Directors effective January 16, 2014. Mr. Lyons replaces Charles Allen, who has served as Interim President and CEO since the November 2013 departure of Bryan Boyd.
  • Joe Prodan was appointed Chief Financial Officer effective February 4, 2014. Bosco Chan, who served as Interim CFO since the May 2013 departure of Scott Browne, will continue as Vice President, Finance.
  • Ian Thorburn was appointed Vice President, Legal effective January 13, 2014. The position has been vacant since Jim Nikopoulos left the company in September 2013.
  • In February 2014, the Company received notice that a new wireless entrant customer may be disconnecting their services during 2014.
  • The Company announced that it has established a fibre-optic core in Western Canada through the acquisition of fibre facilities in downtown Vancouver, British Columbia. This fibre connects the Company's Vancouver data centre facility with several buildings, ensuring secure broadband connectivity between customer locations and the data centre.
Key Financial & Operational Highlights
(All financial results are in thousands, except gross profit margin, earnings per share and operating metrics)
Three months ended
December 31
Year ended
December 31
2013 2012 2013 2012
Financial
Revenue $ 12,909 $ 12,567 $ 51,426 $ 49,168
Gross profit margin 77.0 % 77.9 % 78.0 % 77.6 %
EBITDA* $ 3,043 $ 3,967 $ 16,506 $ 15,272
Earnings (loss) from operations $ (327 ) $ 924 $ 4,174 $ 3,120
Net earnings (loss) $ (734 ) $ 3,245 $ 4,309 $ 4,857
Basic earnings (loss) per share $ (0.06 ) $ 0.29 $ 0.38 $ 0.43
Diluted earnings (loss) per share $ (0.06 ) $ 0.27 $ 0.36 $ 0.41
Operating
Churn rate* 1.50 % 0.86 % 1.28 % 1.05 %
Customer locations in service 6,453 6,575 6,453 6,575
ARPU* $ 621 $ 625 $ 625 $ 622
Number of employees 191 189 191 189

* 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. Operating results related to churn rate, customer locations in service and ARPU exclude results for DCC.

The table below reconciles net earnings to EBITDA for the three months and year ended December 31, 2013 and 2012.

(in thousands of dollars) Three months Year ended
ended Dec 31 December 31
2013 2012 2013 2012
Net earnings (loss) for the period $ (734 ) $ 3,245 $ 4,309 $ 4,857
Foreign exchange loss (gain) 34 11 63 (14 )
Finance costs 352 197 1,126 828
Finance income (5 ) (9 ) (36 ) (31 )
Income tax( recovery) expense 26 (2,520 ) (1,288 ) (2,520 )
Earnings (loss) from operations (327 ) 924 4,174 3,120
Add:
Depreciation of network assets, property and equipment and amortization of intangible assets 3,240 2,821 12,279 10,674
Loss on disposal of network assets 121 106 202 276
Stock-based compensation expense (recovery) 9 116 (149 ) 1,202
EBITDA 3,043 3,967 16,506 15,272
Special Charges - 438 - 699
EBITDA excluding special charges $ 3,043 $ 4,405 $ 16,506 $ 15,971

2013 Results of Operations

Revenue

Total revenue for the year ended December 31, 2013 increased 5% to $51.4 million compared to $49.2 million for 2012. Fourth quarter 2013 revenue of $12.9 million was up 3% from $12.6 million for the same period in 2012. The increase largely resulted from data centre revenue of $1.6 million and $0.7 million for the full year and Q4 2013, respectively, as well as existing customers upgrading their Internet and data connections. Approximately 98% of total 2013 revenue was recurring service revenue.

Customer locations

713 new access customer additions in 2013 (1,118 in 2012) resulted in a decrease of 122 net access customer locations as compared to 2012. Net access customer locations decreased by 80 in Q4 2013, compared to an increase of 73 of the same period in 2012. Both the annual and quarterly declines were primarily due to increased competition in higher capacity services. The year ended with 6,453 customer locations in service compared to 6,575 at the end of 2012.

Churn rate

The average monthly churn rate in 2013 was 1.28% compared to 1.05% in 2012. The fourth quarter 2013 average monthly churn rate was 1.50%, compared to 0.86% for the same period in 2012. The average monthly churn rates for both the year and fourth quarter increased primarily due to increased competition in higher capacity services and a large low multisite (41 sites) customer with low ARPU ($162) cancellation during Q4 2013. Excluding this cancellation, the churn rates for 2013 and for Q4 2013 would have been approximately 1.23% and 1.28% respectively. 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 $625 in 2013, compared with $622 in 2012. The increase was primarily a result of service capacity upgrades by existing customers, a higher proportion of new customers choosing higher capacity services or voice services, early termination fees, and lower credits partially offset by lower usage revenue. Fourth quarter 2013 ARPU decreased to $621 compared to $625 for the same period in 2012, driven primarily by lower usage revenue in the quarter.

Gross margin

The gross profit margin for 2013 remained strong at 78.0% compared to 77.6% for 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. Fourth quarter gross profit margin was 77.0% compared to 77.9% for the same period in 2012. The decrease is primarily due to an increase in property access costs and spectrum costs.

SG&A

SG&A (Salaries and related costs - Other, and Other operating items) expenses remained consistent, totalling $23.7 million for both 2013 and 2012. Lower stock-based compensation and lower salaries and bonus were offset by higher utility and facilities expenses from the operations of the data centre, costs incurred for a departing senior executive and related recruiting expenses for replacement and a charge of $681 thousand related to due diligence and other acquisition costs for the acquisition of DCC and the Vancouver data centre. SG&A expenses increased to $7.0 million in Q4 2013 from $5.6 million in Q4 2012, primarily due to higher utility and facilities expenses from the operations of the data centre, and approximately $1.3 million related to costs incurred for a departing senior executive and related recruiting expenses for replacement, and cost of services and costs related to the Vancouver data centre purchase. TeraGo had 31 direct sales personnel at year end, the same as a year earlier.

EBITDA

2013 EBITDA increased to $16.5 million compared to $15.3 million in 2012, an improvement of 8.0%. Fourth quarter EBITDA decreased to $3.0 million from $4.0 million for the same period in 2012. Excluding the due diligence and other acquisition costs associated with DCC and the costs related to a departing senior executive, EBITDA for 2013 and for Q4 2013 was $18.4 million and $4.3 million, respectively. The increase in EBITDA is in line with management's expectation as the Company continues to increase revenue while focusing on cost management. For the full year and fourth quarter of 2012, EBITDA includes special charges of $0.7 million and $0.4 million, respectively, relating to the Company's strategic review.

Income tax recovery

In the second quarter of 2013, management reviewed the tax implications as a result of the acquisition and subsequent amalgamation of DCC. A tax benefit of $1.3 million associated with previously unrecognized tax losses was recognized in the second quarter as management considered it probable that future taxable profits would be available against which they can be utilized. The deferred tax asset was determined based on existing laws, estimates of future probability based on financial forecasts, and tax planning strategies. Management performed the deferred tax assets review on a consistent basis and concluded no further change is needed for the three months ended December 31, 2013.

Net earnings (loss)

TeraGo achieved net earnings for 2013 of $4.3 million compared to $4.9 million in 2012. For the fourth quarter of 2013, net loss was $0.7 million compared to net earnings of $3.2 million for the same period in 2012. Basic and diluted earnings per share of, respectively, $0.38 and $0.36 for the full year compared to $0.43 and $0.41 in 2012. Q4 2013 basic and diluted loss per share were $0.06 and $0.06 respectively, compared to EPS of $0.29 and $0.27 for the same period in 2012;

Capital resources

At year end 2013, the Company had cash, cash equivalents and short-term investments of $2.6 million and access to the $19.6 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.

Share Capital

As of December 31, 2013, TeraGo had 11,458,611 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, February 26, 2014, at 9:00 am 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 at www.terago.ca or http://www.investorcalendar.com/IC/CEPage.asp?ID=172221. An archived recording of the conference call will be available until February 26, 2015 at midnight EST. To listen to this recording, call 905-694-9451 or 1-800-408-3053 and enter passcode 7576825.

TeraGo's audited financial statements for the three months and year ended December 31, 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

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.

Key Performance Indicators

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.

Additional GAAP Measures

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 2013 MD&A and 2013 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 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:

Contact Information:
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
www.terago.ca


LHA
Jody Burfening
212-838-3777


LHA
Carolyn Capaccio
212-838-3777
ccapaccio@lhai.com

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