TeraGo Reports 2016 Year End Financial Results
TeraGo Enters into New Strategic Phase Positioned as a Leading Canadian Managed Cloud and Connectivity Solutions Company
(firmenpresse) - TORONTO, ONTARIO -- (Marketwired) -- 02/23/17 -- TeraGo Inc. ("TeraGo" or the "Company") (TSX: TGO) (), today announced financial and operating results for the three months ended and year ended December 31, 2016.
"I''m pleased with our financial performance in the fourth quarter of 2016, capping a good finish to a solid year," commented Tony Ciciretto, President and CEO of TeraGo. "We have entered into our new strategic phase and are rolling out a number of key initiatives in 2017 to position ourselves as a leading Canadian Managed Cloud and Connectivity Solutions company".
Mr. Ciciretto added, "TeraGo will focus on providing businesses across Canada with resilient hybrid cloud solutions through our owned & operated data centres and securely connecting workloads with managed private interconnection on our own national fibre and wireless network. We are making foundational investments in 2017 in our Product Portfolio, Customer Experience and Marketing & Sales areas to support our strategy."
Financial Highlights
(1)Non-IFRS Measures
This press release contains references to "Adjusted EBITDA" which is not a measure prescribed by International Financial Reporting Standards (IFRS). The Company believes that Adjusted EBITDA is 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 and 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 necessarily imply they are non-recurring, infrequent or unusual. Adjusted EBITDA is also used by some investors and analysts for the purpose of valuing a company. The Company calculates Adjusted 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, stock-based compensation and restructuring, acquisition-related and integration costs. Investors are cautioned that Adjusted EBITDA should not be construed as an alternative to operating earnings (losses) or net earnings (losses) determined in accordance with IFRS as an indicator of our financial performance or as a measure of our liquidity and cash flows. Adjusted 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.
A reconciliation of net loss to Adjusted EBITDA is found in the MD&A for the three months ended and year ended December 31, 2016. Adjusted EBITDA does not have any standardized meaning under IFRS/GAAP. TeraGo''s method of calculating Adjusted EBITDA may differ from other issuers and, accordingly, Adjusted EBITDA may not be comparable to similar measures presented by other issuers.
Conference Call
Management will host a conference call tomorrow, Friday, February 24, 2017, at 9:00 am ET to discuss these results.
To access the conference call, please dial 647-427-2311 or 1-866-521-4909. The audited financial statements for the three months ended and year ended December 31, 2016 and Management''s Discussion & Analysis for the same periods have been filed on SEDAR at . Alternatively, these documents along with a presentation in connection with the conference call can be accessed online at .
An archived recording of the conference call will be available until March 3, 2017. To listen to the recording, call 416-621-4642 or 1-800-585-8367 and enter passcode 72950407.
About TeraGo
TeraGo provides businesses across Canada and internationally with cloud, colocation and connectivity services. TeraGo manages over 3,000 cloud workloads, nine data centres in the Greater Toronto Area, the Greater Vancouver Area, Ottawa, Kelowna, Winnipeg, St. Louis and Newport, United Kingdom, and owns and manages its own IP network. The Company serves approximately 4,000 business customers 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 recognized as a Canadian Telecommunications Employer of Choice for 2016. TeraGo Networks was also recognized by IDC as a Major Player in MarketScape Cloud Vendor Assessment.
Forward-Looking Statements
This press release includes certain forward-looking statements that are made as of the date hereof. Such forward-looking statements may include, but are not limited to, statements relating to TeraGo''s growth strategy and new strategic phase, the rolling out of key initiatives in 2017, and foundational investments in 2017 in our Product Portfolio, Customer Experience and Marketing & Sales areas. 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. The forward-looking statements reflect the Company''s views with respect to future events and is subject to risks, uncertainties and assumptions, including the risk that TeraGo''s growth strategy, investments and go-to-market approach will not generate the result intended by management, current growth trends in the Company''s cloud and data centre business and in the industry may not continue as expected, TeraGo may not meet the growing and complex needs of its customers, and those risks set forth in the "Risk Factors" section in the annual MD&A of the Company for the year ended December 31, 2016 available on . Accordingly, readers should not place undue reliance on 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. Except as may be required by applicable Canadian securities laws, TeraGo does not intend, and disclaims 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.
TERAGO INC.
MANAGEMENT''S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS FOR THE THREE MONTHS AND FISCAL YEAR ENDED DECEMBER 31, 2016 AND 2015
The following Management''s Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of TeraGo Inc. All references in this MD&A to "TeraGo", the "Company", "we", "us", "our" and "our company" refer to TeraGo Inc. and its subsidiaries, unless the context requires otherwise. This MD&A is dated February 23, 2017 and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2016 and the notes thereto. Additional information relating to TeraGo, including our most recently filed Annual Information Form ("AIF"), can be found on SEDAR at and our website at . For greater certainty, the information contained on our website is not incorporated by reference or otherwise into this MD&A. All dollar amounts included in this MD&A are in Canadian dollars unless otherwise indicated.
Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. For a description of material factors that could cause our actual results to differ materially, see the "Forward-Looking Statements" section and the "Risk Factors" section in this MD&A. This MD&A also contains certain industry-related non-GAAP and additional GAAP measures that management uses to evaluate performance of the Company. These non-GAAP and additional GAAP measures are not standardized and the Company''s calculation may differ from other issuers. See "Definitions - IFRS, Additional GAAP and Non-GAAP Measures".
FORWARD-LOOKING STATEMENTS
This MD&A includes certain forward-looking statements that are made as of the date hereof only 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. This MD&A includes, but is not limited to, forward looking statements regarding TeraGo''s growth strategy, strategic plan, the growth in TeraGo''s cloud and data centre businesses, retention campaign and initiatives to improve customer service, additional capital expenditures, investments in data centres, products and other IT services, expansion of network coverage, acquisitions and the integration of Codeninja Ltd. (doing business as "BoxFabric") and the hosting business assets acquired from AirVM Inc. into the Company (the "Hosting Business"). 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, uncertainties and assumptions, including the risk that TeraGo''s growth strategy and strategic plan will not generate the result intended by management, cross-selling of TeraGo''s cloud services may not succeed, retention efforts decreasing profit margins, opportunities for expansion and acquisition not being available or at unfavourable terms, the Company not being able to realize the anticipated benefits and synergies from combining and integrating BoxFabric and the Hosting Business into TeraGo''s existing business and those risks set forth in the "Risk Factors" section of this MD&A and other uncertainties and potential events. In particular, if any of the risks materialize, the expectations, and the predictions based on them, of the Company may need to be re-evaluated. Consequently, all of the forward-looking statements in this MD&A are expressly qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences for the Company.
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.
OVERVIEW
Financial Highlights
Key Developments
(1) Adjusted EBITDA is a Non-GAAP measure. See "Definitions - IFRS, Additional GAAP and Non-GAAP Measures.
(2) See "Adjusted EBITDA" for a reconciliation of net loss to Adjusted EBITDA
TERAGO OVERVIEW
TeraGo provides businesses across Canada and internationally with cloud, colocation and connectivity services, through nine (9) data centres as well as cloud Infrastructure as a Service ("IaaS") computing and storage solutions. With respect to the Company''s connectivity services, it owns and operates a carrier-grade, Multi-Protocol Label Switching ("MPLS") enabled fixed wireless, IP communications network in Canada targeting businesses that require Internet access and data connectivity services.
The Company provides enterprise cloud services nationally and internationally to multiple high value enterprise customers across a variety of verticals, including secondary and post-secondary education, hospitals, federal and provincial governments and non-profit organizations. The Company specializes in managing enterprise cloud services including IaaS and Platform as a Service ("PaaS") with network. It currently has strategic relationships with several technology partners that give it access to certain products and solutions to provide enterprise cloud services.
The Company''s subscription-based business model generates stable and predictable recurring revenue from cloud, colocation and connectivity services. The Company offers its connectivity services across Canada and its data and cloud services internationally. Once a customer is obtained, TeraGo''s strategy is to generate incremental recurring revenue from that customer by: adding new customer locations, increasing service capacity supplied to existing locations, increasing data centre cabinet space and power and/or providing additional services, as applicable.
TERAGO''S BUSINESS MODEL
TeraGo''s subscription-based business model generates stable and predictable recurring revenue from Internet, data, voice services, data centre services and cloud services.
TeraGo''s customers typically sign one, two or three-year contracts. The majority of new customers sign contracts for three years or more. Services are billed monthly or quarterly over the term of the contract.
With its entry into data centre services and cloud services, TeraGo has built an operating platform to service the IT solutions sector. Cross selling opportunities to the customer base, while leveraging the Company''s carrier grade network has augmented and diversified the Company''s revenue base.
CLOUD SERVICES
TeraGo provides cloud services that seek to meet the complex and evolving IT needs of our customers. TeraGo provides IaaS for compute, storage, disaster recovery cloud solutions and other offerings either on a direct or indirect basis. These solutions allow the Company to compete in the cloud services market.
TeraGo offers customized cloud storage and compute offerings to customers across Canada. TeraGo cloud can offer a virtualized computing environment whereby customers can access on-demand computing power without the need to acquire and maintain expensive server equipment. TeraGo can also provide offsite cloud storage for key backup and disaster recovery situations, including utilizing partnerships with software and hardware vendors such as Veeam and Solidfire. The Company has strategic relationships and partnerships with technology leaders such as IBM, Cisco, VMware, Microsoft, Mitel and others that gives it early access to intelligence, products and solutions to provide enterprise cloud services.
COLOCATION SERVICES
TeraGo provides data centre colocation services that protect and connect our customers'' valuable information assets. Customers can provision computing equipment within shared partial cabinets or full, private cabinets, as well as customized caged space designed for their specific needs. TeraGo provides connectivity on redundant routes in and out of the facilities.
Hosting and colocation revenue is derived from set-up fees for new installations and monthly recurring charges based on the number of cabinets and/or the quantity of cage space, power requirements, managed services provided and Internet/data bandwidth requirements. Other services, such as disaster recovery services, are provided under custom contractual arrangements.
TeraGo also offers a variety of managed hosting solutions, which may require us to manage various aspects of a customer''s hardware, software or operating systems in public or privately accessible environment. TeraGo offers disaster recovery services on a custom basis. This includes back-up office facilities that can be used in case of disaster. These facilities can be provisioned at the data centre location and provide customers with the capability to restore office functionality with direct access to their information located in the data centre.
Our network can provide these customers Internet and/or secure private virtual LAN connections between the data centre facility and the customer''s office location(s).
Data centre services customers typically include national government agencies, financial services companies, cloud and data storage service providers, content and network service providers, and small and medium businesses which rely on TeraGo to store and manage their critical IT equipment and provide the ability to directly connect to the networks that enable our information-driven economy.
Data Centre Facilities
TeraGo''s data centres provide data centre solutions, including colocation and disaster recovery, to a roster of small and medium-sized businesses, enterprises, public sector and technology service providers. TeraGo has approximately 60,000 square feet of data centre capacity in seven facilities across Canada:
Mississauga, Ontario
TeraGo operates a 10,000 square foot AT 101 SOC2 Type 2 certified data centre facility in Mississauga, Ontario that was previously managed by BlackBerry Limited and built to a tier 3 standard. This facility predominantly serves the Greater Toronto Area.
Vaughan, Ontario
TeraGo operates a 16,000 square foot AT 101 SOC2 Type 2 certified data centre facility in Vaughan, Ontario, serving the Greater Toronto Area. This data centre and its operations were purchased in May 2013 when the Company acquired Data Centres Canada Inc.
Kelowna, British Columbia
TeraGo operates its 18,000 square feet AT 101 SOC2 Type 2 certified data centre in Kelowna named the GigaCenter. The GigaCenter is built to a tier 3 standard and the location in Kelowna is considered ideal for a data centre as the region is considered a seismically stable geographic location, has a temperate climate and has a lower probability of both natural and man-made events that may be a risk.
Vancouver, British Columbia
TeraGo operates two AT 101 SOC2 Type 2 certified data centre facilities in downtown Vancouver. Its first facility, acquired in December 2013, is 5,000 square feet and is expandable to 7,000 square feet. The facility has redundant fibre facilities between the data centre and the ''telco hotel'', 555 West Hastings, in downtown Vancouver. The second facility which was acquired in April 2014 is 7,000 square feet and is served by TeraGo''s fiber optic lines. Both facilities are used to service the Greater Vancouver Area.
Winnipeg, Manitoba
TeraGo provides data centre services to its customers in central Canada through a data centre in Winnipeg. Colocation services, via the data centre facility, are provided through an agreement that TeraGo has with a local operator.
Ottawa, Ontario
TeraGo provides data centre services to its customers in Ottawa, Ontario through a Tier III AT 101 SOC 1 Type 2 certified data centre. Colocation services, via the data centre facility, are provided through an agreement that TeraGo has with a local operator.
St. Louis, Missouri, United States
TeraGo provides cloud services to its customers through a SSAE 16 (formerly SAS70) SOC 2 certified data centre in St. Louis, Missouri, United States pursuant to an agreement TeraGo has with a local operator.
Newport, Wales, United Kingdom
TeraGo provides cloud services to its customers through a Tier 3 designed data centre in Newport, Wales, United Kingdom pursuant to an agreement TeraGo has with a local operator.
CONNECTIVITY SERVICES
TeraGo owns and operates a carrier-grade Multi-Protocol Label Switching ("MPLS") enabled wireline and fixed wireless, Internet Protocol ("IP") communications network in Canada, providing businesses with high performance, scalable, and secure access and data connectivity services.
TeraGo''s carrier grade IP communication network serves an important and growing demand among Canadian businesses for network access diversity by offering wireless services that are redundant to their existing wireline broadband connections.
TeraGo''s IP network has been designed to eliminate single points of failure and the Company backs its services with customer service level commitments, including 99.9% service availability, industry leading mean time to repair, 24 x 7 telephone and e-mail access to technical support specialists.
TeraGo offers Canadian businesses high performance unlimited and usage-based dedicated Internet access with upload and download speeds from 5 megabits per second ("Mbps") up to 1 gigabit per second ("Gbps"). Unlike asymmetrical DSL services offered by many of our competitors, TeraGo provides services that are symmetrical, hence customers can have the same high speed broadband performance whether uploading or downloading. TeraGo enhances service performance by minimizing the number of networks between our customers and their audiences, using peering arrangements with multiple tier-one carriers to connect to the Internet.
To deliver its services, the Company has built and operates a carrier-grade, IP network, using licensed and license-exempt spectrum and fibre-optic wireline infrastructure that supports commercially available equipment.
The Company owns and controls a national MPLS distribution network from Vancouver to Montreal that aggregates customer voice and data traffic and interconnects where necessary with carrier diverse leased fiber optic facilities. Major Internet peering and core locations are centralized in Vancouver, Toronto and Seattle, although Internet access is also available in all regional markets for further redundancy.
TeraGo offers a range of diverse Ethernet-based services over a secured wireless connection to customer locations up to 20 kilometres from a hub (provided line of sight or wireline networks exist) or through a fibre optic connection.
Quality of Service Capabilities
TeraGo''s MPLS network, including key high traffic hub sites, is equipped with Quality of Service ("QoS") capabilities to improve performance and traffic management. All of TeraGo''s major national markets are end-to-end QoS enabled providing the foundation to support voice traffic and other potential future applications.
Radio Spectrum
24-GHz and 38-GHz Wide-area Licences
The Company owns a national spectrum portfolio of 24-GHz and 38-GHz wide-area spectrum licences which covers regions across Canada, including 1,160 MHz in Canada''s 6 largest cities. This spectrum is used for: point-to-point and point-to-multipoint microwave radio deployments; connecting core hubs together to create a wireless backbone where appropriate (often in a ring configuration to avoid points of failure); and in the access network or "last mile" to deliver high capacity (speeds of 10 to 1,000 Mbps) Ethernet-based links for business, government and cellular backhaul.
For further details on licensed spectrums, please refer to the Company''s 2016 AIF.
Voice Services
TeraGo provides a number of unified communications services and is approved by the Canadian Radio-television and Telecommunications Commission ("CRTC") to offer voice services as a Type IV competitive local exchange carrier ("CLEC"). TeraGo provides businesses with a cost effective, flexible and high quality connection from their private branch exchange (PBX) to the public switched telephone network (PSTN). TeraGo''s service provides features and capabilities generally consistent with those provided by incumbent local exchange carriers ("ILECs"), while offering greater value for our customers.
SELECTED ANNUAL INFORMATION
The following table displays a summary of our Consolidated Statements of Comprehensive Earnings (Loss) for the three months ended December 31, 2016 and 2015 and the years ended December 31, 2016, 2015 and 2014 and a summary of select Balance Sheet data as at December 31, 2016, 2015 and 2014.
Refer to "Definitions - IFRS, Additional GAAP and Non-GAAP Measures" for a description of the components of relevant line items below.
Revenue
Total revenue decreased 3.4% to $14.6 million for the three months ended December 31, 2016 compared to $15.1 million for the same period in 2015. Total revenue increased 2.4% to $59.1 million for the twelve months ended December 31, 2016, compared to $57.7 million for the same period in 2015.
Cloud and colocation revenue
For the three months ended December 31, 2016, cloud and colocation revenue increased 13.3% to $4.8 million compared to $4.2 million for the same period in 2015. The increase was driven by greater adoption of cloud services from new and existing customers as well as from the acquisition of the Hosting Business. For the twelve months ended December 31, 2016, cloud and colocation revenue increased 39.0% to $18.3 million compared to $13.2 million for the same period in 2015. The increase was driven by the factors described above, as well as the acquisitions of RackForce, BoxFabric and the Hosting Business. The percentage of revenues from cloud and colocation of our total revenue have increased steadily quarter over quarter during 2016 (Q1 = 29.7%, Q2 = 30.0%, Q3 = 31.3% and Q4 = 32.9%).
Connectivity revenue
Connectivity revenues were impacted by a variety of factors, including regional economic difficulties, the company moving away from maintaining its lowest value customers, certain customers renewing long term contracts at lower current market rates and lower usage revenues as certain customers have shifted to unlimited usage plans.
Cost of services
For the three months ended December 31, 2016, cost of services decreased 2.9% to $3.3 million compared to $3.4 million for the same period in 2015. The decrease was primarily driven by savings in local loop and transit costs. For the twelve months ended December 31, 2016, cost of services increased to $13.5 million compared to $13.2 million for the same period in 2015. The increase is mainly due to costs associated with owning RackForce, BoxFabric and the Hosting Business, partially offset by the synergies noted above.
Salaries and related costs and other operating expenses ("SG&A")
For the three months ended December 31, 2016, SG&A decreased to $6.9 million compared to $7.4 million for the same period in 2015. The decrease was primarily driven by lower personnel related expenses, an adjustment to an onerous contract provision related to a data centre due to the increasing number of customers served, and lower legal fees, partially offset by increased restructuring, acquisition-related and integration costs, including those associated with the departure of the former COO. For the twelve months ended December 31, 2016, SG&A increased to $32.0 million compared to $30.6 million for the same period in 2015. The increase was primarily driven by restructuring charges for the former President and CEO and VP of Marketing, and due to costs associated with owning RackForce, BoxFabric and the Hosting Business.
Adjusted EBITDA(1)
For the three months ended December 31, 2016, Adjusted EBITDA(1) increased 0.5% to $4.89 million compared to $4.86 million for the same period in 2015. The increase in Adjusted EBITDA(1) was primarily driven by lower salaries and related costs and other operating expenses offset by decreased connectivity revenue. For the twelve months ended December 31, 2016, Adjusted EBITDA(1) increased 2.9% to $18.9 million compared to $18.4 million for the same period in 2015. The increase was driven by the acquisitions of RackForce, BoxFabric and the Hosting Business, partially offset by the introduction of costs associated from the acquisitions and the factors described above.
The table below reconciles net loss to Adjusted EBITDA(1) for the three and twelve months ended December 31, 2016 and 2015.
Finance costs
For the three months ended December 31, 2016, finance costs decreased to $0.4 million compared to $0.5 million for the same period in 2015. For the twelve months ended December 31, 2016, finance costs decreased to $1.9 million compared to $2.6 million for the same period in 2015. The decrease in both periods was driven by the mark to market impact of revaluing the Company''s interest rate swap contract on the drawn credit facility.
Income tax expense
For the three months ended December 31, 2016, there was an income tax recovery of $15 thousand compared to an income tax expense of $4 thousand for the same period in 2015. For the twelve months ended December 31, 2016, income tax expense increased to $0.7 million compared to a recovery of $1.1 million for the same period in 2015 due to changes in the anticipated recovery of deferred tax assets in the near term.
Depreciation and amortization
For the three months ended December 31, 2016, depreciation of network assets, property and equipment and amortization of intangibles decreased by $0.3 million compared to the same period in 2015. For the twelve months ended December 31, 2016, depreciation of network assets, property and equipment and amortization of intangibles increased to $15.3 million compared to $15.1 million for the same period in 2015. The increase is mainly attributed to the depreciation and amortization of RackForce acquired intangibles and cloud and data centre infrastructure for all of fiscal 2016 compared to nine months in 2015.
Net loss
For the three months ended December 31, 2016, net income was $0.4 million compared to a net loss of $0.2 million for the same period in 2015. The increase in net income was primarily driven by lower finance costs, lower depreciation and amortization and lower stock-based compensation expense, partially offset by increased restructuring costs. For the twelve months ended December 31, 2016, net loss was $4.3 million compared to a net loss of $2.8 million for the same period in 2015. Net loss was negatively impacted compared to the prior period by increased restructuring, acquisition-related and integration costs, and a write-off of deferred tax assets, partially offset by revenue growth in the cloud and colocation services associated with the RackForce, BoxFabric and the Hosting Business acquisitions.
Seasonality
The Company''s net customer growth, with respect to its connectivity business, is typically impacted adversely by weather conditions as the majority of new customer locations require the installation of rooftop equipment. Typically, harsher weather in the first quarter of the year results in a reduction of productive installation days.
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 rate increases in long-term contracts and the restart on January 1st of payroll taxes and other levies related to employee compensation.
LIQUIDITY AND CAPITAL RESOURCES
TeraGo has historically financed its growth and operations through cash generated by operations, the issuance of equity securities and long-term debt.
The table below is a summary of cash inflows and outflows by activity.
Operating Activities
For the three months ended December 31, 2016, cash generated from operating activities was $5.1 million compared to cash generated of $5.2 million for the same period in 2015. The decrease in cash generated is due to changes in working capital. For the twelve months ended December 31, 2016, cash generated from operating activities was $16.4 million compared to cash generated of $15.7 million for the same period in 2015 principally related to changes in working capital.
Investing Activities
For the three months ended December 31, 2016, cash used in investing activities was $2.3 million compared to cash used of $1.3 million for the same period in 2015. The increase in cash used in investing activities is due to higher capital expenditures related to provisioning customers. For the twelve months ended December 31, 2016, cash used in investing activities was $9.6 million compared to cash used of $41.1 million for the same period in 2015. The year ended December 31, 2015 included $31.0 million for the acquisition of RackForce.
Financing Activities
For the three months ended December 31, 2016, cash used from financing activities was $1.6 million compared to cash used of $1.5 million for the same period in 2015. For the twelve months ended December 31, 2016, cash used from financing activities was $6.8 million compared to cash generated of $35.6 million for the same period in 2015. The increase in cash used for financing for the three months ended December 31, 2016 is due to a reduction of proceeds from exercised options pursuant to the Company''s stock option plan, which are partially offset by less interest and principal repayments. The increase in cash used from financing activities for the twelve months ended December 31, 2016 is mainly due to higher cash proceeds received for the same period in 2015 from the amended credit facility to finance the acquisition of RackForce and an equity offering.
Capital Resources
As at December 31, 2016, the Company had cash and cash equivalents of $13.0 million and access to the $34.3 million undrawn portion of its $85.0 million credit facilities.
The Company anticipates incurring additional capital expenditures for the purchase and installation of network, data centre and cloud assets, systems and processes upgrades 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 centres, cloud and other IT services through acquisitions or expansion.
Management believes the Company''s current cash, 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
Term Debt Facility
In June 2014, the Company entered into an agreement with a syndicate led by the National Bank of Canada ("NBC") to provide a $50.0 million credit facility that is principally secured by a general security agreement over the Company''s assets.
In March 2015, the Company entered into an amended agreement with a syndicate led by NBC that increases the credit facility by $35.0 million ($30.0 million increase to the term debt facility and $5.0 million increase to the revolving facility) and extended the term from June 6, 2017 to June 30, 2018. Other terms are substantially consistent with the existing credit facilities.
The total $85.0 million facility that matures June 30, 2018 is made up of the following:
The financing fees have been deferred and amortized using the effective interest method over the term of the facility.
The NBC facility is subject to certain financial and non-financial covenants which the Company is in compliance with at December 31, 2016. Under this facility, the Company is also subject to a cash flow sweep that could accelerate principal repayments based on a detailed calculation outlined by NBC not later than 120 days after the end of each fiscal year.
Equity Offering
On June 11, 2015, the Company completed an equity offering to issue and sell 1,755 common shares for gross proceeds of $10.0 million (the "Offering"). Proceeds net of commissions, legal, accounting and listing fees were $9.2 million. The Offering was carried out pursuant to an underwriting agreement with a syndicate of underwriters led by National Bank Financial Inc. and TD Securities Inc. and included Cormark Securities Inc., PI Financial Corp. and RBC Capital Markets.
The Company allocated $9.2 million of the intended use of net proceeds from the equity offering as follows:
As of December 31, 2016, $3.3 million of the net proceeds from the equity offering were used. The Company''s intended use of these proceeds has not changed.
Contractual Obligations
The Company is committed to leases for premises, office equipment, network real estate access, automobiles, telecommunication facilities and radio spectrum licenses. Annual minimum payments over the next five years and thereafter are as follows:
Off-balance Sheet Arrangements
As of December 31, 2016, the Company had no off-balance sheet arrangements apart from operating leases noted above.
Transactions with Related Parties
Two former Directors of the Company, who retired effective June 23, 2016, also served as Chairman of the Board and a Director of a customer of the Company. Revenue from this customer for the year ended December 31, 2016 and 2015 was $40 thousand and $79 thousand, respectively. Accounts receivable from this customer as at December 31, 2016 and 2015 was nil and $3 thousand, respectively.
The terms governing these related party transactions are consistent with those negotiated on an arm''s length basis with non-related parties.
Share Capital
TeraGo''s authorized share capital consists of an unlimited number of Common Shares, an unlimited number of Class A Non-Voting Shares and two Class B Shares. A detailed description of the rights, privileges, restrictions and conditions attached to the authorized shares is included in the Company''s 2015 Annual Information Form, a copy of which can be found on SEDAR at .
As of February 23, 2017, there were 14,258 thousand Common Shares issued and outstanding and two Class B Shares issued and outstanding. In addition, as of February 23, 2017, there were 660 thousand Common Shares issuable upon exercise of TeraGo stock options.
Financial Instruments
The Company initially measures financial instruments at fair value. Transaction costs that are directly attributable to the issuance of financial assets or liabilities are accounted for as part of the carrying value at inception (except for transaction costs related to financial instruments recorded as FVTPL financial assets which are expensed as incurred), and are recognized over the term of the assets or liabilities using the effective interest method.
Subsequent measurement and treatment of any gain or loss is recorded as follows:
The following is a summary of the Company''s significant categories of financial instruments as at December 31, 2016:
Impairment of Financial Assets
A financial asset carried at amortized cost is considered impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flow of that asset that can be estimated reliably. An impairment loss is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset''s original effective interest rate.
In assessing impairment, the Company uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management''s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. Losses are recognized in the consolidated statements of loss and reflected in an allowance account against the financial asset.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets currently are comprised of cash and cash equivalents, accounts receivable and restricted cash.
Other financial liabilities
The Company recognizes debt securities issues and subordinated liabilities on the date that they originated. All other financial liabilities are recognized initially on the date that the Company becomes a party to the contractual provisions. The Company has the following non-derivative financial liabilities: current and long-term debt, accounts payable and accrued liabilities, and current portion and long-term portion of other long term liabilities.
Such liabilities are recognized initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.
Interest on loans and borrowings is expensed as incurred unless capitalized for qualifying assets in accordance with IAS 23, Borrowing Costs. Loans and borrowings are classified as a current liability unless the Company has an unconditional right to defer settlement for at least 12 months after the end of the year.
Derivative instruments
The Company uses an interest rate swap contract to manage the risk associated with the fluctuations of interest rates on its long-term debt. Management does not apply hedge accounting on the interest rate swap contract. As a result, the interest rate swap contract is marked to market each period, resulting in a gain or loss in net loss for the year.
Financial Instrument Risks
Fair value of financial instruments
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies. Where quoted market values are not readily available, the Company may use considerable judgment to develop estimates of fair value. Accordingly, any estimated values are not necessarily indicative of the amounts the Company could realize in a current market exchange and could be materially affected by the use of different assumptions or methodologies. The Company classifies its fair value measurements within a fair value hierarchy, which reflects the significance of the inputs used in making the measurements as defined in IFRS 7 - Financial Instruments - Disclosures.
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 - Unobservable inputs for the asset or liability which are supported by little or no market activity
The fair values of cash and cash equivalents, short-term investments and restricted cash, which are primarily money market and fixed income securities, are based on quoted market values. The fair values of short-term financial assets and liabilities, including accounts receivable, accounts payable and accrued liabilities, as presented in the consolidated statements of financial position, approximate their carrying amounts due to their short-term maturities. The fair value of long-term debt approximates its carrying value because management believes the interest rates approximate the market interest rate for similar debt with similar security. The fair value of our interest rate swap contract is based on broker quotes and therefore, these contracts are measured using Level 2 inputs. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments.
Credit risk
The Company''s cash and cash equivalents and restricted cash subject the Company to credit risk. The Company maintains cash and investment balances at Tier 1 Canadian financial institutions. The Company''s maximum exposure to credit risk is limited to the amount of cash and cash equivalents.
Credit risk related to our interest rate swap contract arises from the possibility that the counter party to the agreement may default on their obligation. The Company assesses the creditworthiness of the counterparty to minimize the risk of counterparty default. The interest rate swap is held by National Bank Financial.
The Company, in the normal course of business, is exposed to credit risk from its customers and the accounts receivable are subject to normal industry risks. The Company attempts to manage these risks by dealing with credit worthy customers. If available, the Company reviews credit bureau ratings, bank accounts and industry references for all new customers. Customers that do not have this information available are typically placed on a pre-authorized payment plan for service or provide deposits to the Company. This risk is minimized as the Company has a diverse customer base located across various provinces in Canada.
As at December 31, 2016 and 2015, the Company had no material past due trade accounts receivable.
Interest rate risk
The Company is subject to interest rate risk on its cash and cash equivalents and long-term debt. The Company is exposed to interest rate risk on its operating line of credit since the interest rates applicable are variable and is, therefore, exposed to cash flow risks resulting from interest rate fluctuations. As at December 31, 2016, the operating line of credit balance was $nil. The drawn term facility as at December 31, 2016 was $41.3 million, $41.1 million of which was held in a Bankers Acceptance. In 2015, the Company entered into amended interest rate swap contracts that matures June 29, 2018. The interest rate on the Banker''s Acceptance at December 31, 2016 was 3.99%. The remaining $150 thousand drawn under this facility bears interest for the period at prime rate plus a margin.
Liquidity risk
The Company believes that its current cash and cash equivalents and anticipated cash from operations will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future. As at December 31, 2016, the Company had cash and cash equivalents of $13.0 million. The Company has access to the $34.3 million undrawn portion of its $85,000 credit facilities after consideration of outstanding letters of credit.
SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Key areas of estimation and information about critical judgments in applying accounting policies that have the most significant effect on amounts recognized in the consolidated financial statements are:
RISK FACTORS
TeraGo is exposed to a number of risks and uncertainties that are common to other companies engaged in the same or similar businesses. The following is a summary of the material risks that could significantly affect the financial condition, operating results or business of TeraGo.
Revenues and Operating Results Can Fluctuate
Our revenue in past periods may not be indicative of future performance from quarter to quarter or year to year. In addition, our operating results may not follow any past trends. The factors affecting our revenue and results, many of which are outside of our control, include:
Transition of the Company to a Multi-Product IT Services Company
In the past, the core business of the Company was to provide internet access services. The Company has recently transitioned to a multi-product IT services company focused on the management of its customer''s data flow. In doing so, TeraGo is offering colocation services through its data centres and is offering cloud storage and cloud computing services. If TeraGo is unable to execute on its new business strategy and to grow the business, either as a result of the risks identified in this section or for any other reason, the business, prospects, financial condition and results of operations will be materially and adversely affected.
Integration and Anticipated Benefits Pursuant to Recent Acquisitions
On March 27, 2015, the Company completed the acquisition of RackForce, on September 18, 2015, the Company completed the acquisition of BoxFabric and on May 26, 2016 the Company completed the acquisition of the Hosting Business (collectively the "Acquisitions"). The Company may not be able to fully realize the anticipated future benefits and synergies of the Acquisitions on a timely basis or at all. The Acquisitions involve challenges and risks, including risks that the transactions do not advance TeraGo''s business strategy or that the Company will not realize a satisfactory return. The potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges with respect to assets of RackForce, BoxFabric and the Hosting Business including customer contracts, condition of the equipment acquired, intellectual property, revenue recognition or other accounting practices, taxes, corporate governance and internal controls, regulatory compliance, employee, supplier or partner disputes or issues and other legal and financial contingencies could decrease or eliminate the anticipated benefits and synergies of the Acquisitions and could negatively affect the Company''s future business and financial results.
The overall success of the Acquisitions will depend, in part, on the Company''s ability to realize the anticipated benefits and synergies from combining and integrating the RackForce, BoxFabric and the Hosting Business businesses into TeraGo''s existing business. In particular, the Company''s offering of cloud services is relatively new and the limited experience of management in providing cloud services prior to the Acquisitions may limit the full benefits or continued growth of such business. Integration of RackForce, BoxFabric and the Hosting Business requires significant management attention and expansion of TeraGo''s staff in operations, marketing, sales and general and administrative functions. The Company may have difficulties in the integration of the acquired company''s departments, systems, including accounting, human resource and other administrative systems, technologies, books and records, and procedures, as well as in maintaining uniform standards, controls, including internal control over financial reporting required by Canadian securities laws and related procedures and policies. If we cannot integrate the Acquisitions successfully, it could have a material adverse impact on our business, financial condition and results of operations.
As part of the Company''s business strategy, TeraGo may also continue to acquire additional companies, assets or technologies principally related to, or complementary to, our current operations. Any such acquisitions will be accompanied by certain risks including but not limited to exposure to unknown liabilities of acquired companies, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating operations, systems, and personnel of acquired companies, disruption of the Company''s ongoing business, inability to retain key customers, distributors, vendors and other business partners of the acquired company, diversion of management''s time and attention; and possible dilution to shareholders.
Price Sensitive Market
The competitive market in which the Company conducts its business could require the Company to reduce its prices. If competitors offer discounts on certain products or services in an effort to recapture or gain market share or to sell other products, the Company may be required to lower prices or offer other favourable terms to compete successfully. Any such changes would likely reduce the Company''s margins and could adversely affect operating results. Some of the Company''s competitors may bundle services that compete with the Company for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, limit the prices that the Company can charge for its products. If the Company cannot offset price reductions with a corresponding increase in volume, bundling of services or with lower spending, then the reduced revenues resulting from lower prices would adversely affect the Company''s margins and operating results.
Market Demand for Available Capacity
The Company currently has available capacity in its data centres and intends to expand its footprint in the cloud and data centre market. There can be no assurance that the existing or future market demand will be sufficient to fill this capacity. Should the demand for the Company''s cloud and data centre services decline or fail to increase, this may negatively affect the Company''s ability to capitalize on its high operating leverage and may adversely affect the Company''s future financial performance.
Reductions in the amount or cancellations of customers'' orders would adversely affect our business, results of operations and financial condition.
Cyber Security Risk
Our network security, data centre security and the authentication of our customer credentials are designed to protect unauthorized access to data on our network and to our data centre premises. Because techniques used to obtain unauthorized access to or to sabotage networks (including DDoS attacks) change frequently and may not be recognized until launched against a target, we may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome our network security and obtain access to confidential, customer or employee data on our network, including on a device connected to our network. In addition, because we own and operate our network, unauthorized access or sabotage of our network could result in damage to our network and to the computers or other devices used by our customer. An actual or perceived breach of network security or data centre security could harm public perception of the effectiveness of our security measures, adversely affect our ability to attract and retain customers, expose us to significant liability and adversely affect our business and revenue prospects.
The Company aims to mitigate and manage certain cyber security risks by employing specific policies and procedures, carrying out IT security-related audits, obtaining IT security-related compliance certificates, designating a security officer that oversees the IT security of the Company, designating a privacy officer that is accountable for the Company''s compliance with applicable privacy laws, using DDoS mitigation, tools and services, utilizing back-up and disaster recovery services and maintaining specific cyber liability insurance coverage to insure against cyber security incidents.
Excessive Customer Churn
The successful implementation of our business strategy depends upon controlling customer churn. Customer churn is a measure of customers who stop using our services. Customer churn could increase as a result of:
An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenue. Given the current economic environment, there is risk that churn levels could increase in the future.
Insufficient Capital
The continued growth and operation of our business may require additional funding for working capital, debt service, the enhancement and upgrade of our network, the build-out of infrastructure to expand the coverage area of our services, possible acquisitions and possible bids to acquire spectrum licences. We may be unable to secure such funding when needed in adequate amounts or on acceptable terms, if at all.
To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than the market price at the time of such issuance. Similarly, we may seek debt financing and we may be forced to incur significant interest expense. If we cannot secure sufficient funding, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, spectrum acquisitions and other investments.
Reliance on Credit Facilities and Restrictive Debt Covenants
The Company relies on its Credit Facilities to operate its business, including for the maintenance of a certain level of liquidity and to carry out its strategy. There can be no assurance that the Company will continue to have access to appropriate Credit Facilities on reasonable terms and conditions, if at all beyond the maturity date of June 30, 2018 for the existing Credit Facilities. An inability to draw down upon the Credit Facilities could have a material adverse effect on the Company''s business, liquidity, financial condition and results of operations.
Covenants in our Credit Facilities with our lenders impose operating and financial restrictions on us. A breach of any of these covenants could result in a default under our Credit Facilities. These restrictions may limit our ability to obtain additional financing, withstand downturns in our business and take advantage of business opportunities. Moreover, we may be required to seek additional debt financing on terms that include more restrictive covenants, may require repayment on an accelerated schedule or may impose other obligations that limit our ability to grow our business, acquire needed assets, or take other actions we might otherwise consider appropriate or desirable.
Key Competitors are More Established and Have More Resources
The market for internet access, data connectivity, cloud and data centre services is highly competitive and we compete with several other companies within each of our markets. Many of our competitors are better established or have greater financial resources than we have. Our competitors include:
Many of our competitors are well established with larger and better developed networks and support systems, longer standing relationships with customers and suppliers, greater name recognition and greater financial, technical and marketing resources than we have. Our competitors may subsidize competing services with revenue from other sources and, thus, may offer their products and services at prices lower than ours. We may not be able to reduce our prices which may make it more difficult to attract and retain customers.
We expect other existing and prospective competitors to adopt technologies and/or business plans similar to ours, or seek other means to develop services competitive with ours, particularly if our services prove to be attractive in our target markets.
Acquisitions and Other Strategic Transactions
We may from time to time make strategic acquisitions of other assets and businesses. Any such transactions can be risky, may require a disproportionate amount of our management and financial resources and may create unforeseen operating difficulties or expenditures, including:
If we do not successfully address these risks or any other problems encountered in connection with an acquisition, the acquisition could have a material adverse effect on our business, results of operations and financial condition. In addition, if we proceed with an acquisition, our available cash may be used to complete the transaction, diminishing our liquidity and capital resources, or additional equity may be issued which could cause significant dilution to existing shareholders.
Changes to Technologies and Standards
The industries TeraGo operates is characterized by rapidly changing technology, evolving industry standards and increasingly sophisticated customer requirements. The introduction of new or alternative technology and the emergence of new industry standards may render our existing network, equipment and/or infrastructure obsolete and our services unmarketable and may exert price pressures on existing services. It is critical to our success that we be able to anticipate changes in technology or in industry standards and ensure that we can leverage such new technologies and standards in a timely and cost-effective manner to remain competitive from a service and cost perspective.
Investments in Development of New Technologies, Products and Services
The Company has and will continue to make significant investments in the development and introduction of new products and services that make use of the Company''s network, infrastructure and equipment. There is no assurance that the Company will be successful in implementing and marketing these new products and services in a reasonable time, or that they will gain market acceptance. Development could be delayed for reasons beyond our control. Alternatively, we may fail to anticipate or satisfy the demand for certain products or services, or may not be able to offer or market these new products or services successfully to customers. The failure to attract customers to new products or services, cross-sell service to our existing customer base or failure to keep pace with changing consumer preferences for products or services would slow revenue growth and could have a materially adverse effect on our business, results of operations and financial condition.
Expanding, Upgrading and Maintaining Network and Infrastructure
We expect to allocate significant resources in expanding, maintaining and improving our network. Additionally, as the number of our customer locations increases, as the usage habits of our customers change and as we increase our service offerings, we may need to upgrade our network to maintain or improve the quality of our services. If we do not successfully implement upgrades to our network, the quality of our services may decline and our churn rate may increase.
We may experience quality deficiencies, cost overruns and delays with the expansion, maintenance and upgrade of our network and existing infrastructure including the portions of those projects not within our control. Expansion of our network or infrastructure may require permits and approvals from governmental bodies and third parties. Failure to receive approvals in a timely fashion can delay expansion of our network. In addition, we are typically required to obtain rights from land, building and tower owners to install the antennas and other equipment that provide our internet access service to our customers. We may not be able to obtain, on terms acceptable to us or at all, the rights necessary to expand our network or existing infrastructure.
We also may face challenges in managing and operating our network and existing infrastructure. These challenges include ensuring the availability of customer equipment that is compatible with our network and managing sales, advertising, customer support, and billing and collection functions of our business while providing reliable network service that meets our customers'' expectations. Our failure in any of these areas could adversely affect customer satisfaction, increase churn, increase our costs, decrease our revenue and otherwise have a material adverse effect on our business, prospects, financial cond
Themen in dieser Pressemitteilung:
Unternehmensinformation / Kurzprofil:
Datum: 23.02.2017 - 17:18 Uhr
Sprache: Deutsch
News-ID 1488779
Anzahl Zeichen: 2480
contact information:
Contact person:
Town:
TORONTO, ONTARIO
Phone:
Kategorie:
Networking
Typ of Press Release:
type of sending:
Date of sending:
Anmerkungen:
Diese Pressemitteilung wurde bisher 304 mal aufgerufen.
Die Pressemitteilung mit dem Titel:
"TeraGo Reports 2016 Year End Financial Results
"
steht unter der journalistisch-redaktionellen Verantwortung von
TeraGo Inc. (Nachricht senden)
Beachten Sie bitte die weiteren Informationen zum Haftungsauschluß (gemäß TMG - TeleMedianGesetz) und dem Datenschutz (gemäß der DSGVO).
