TGO TeraGo Inc

TeraGo Reports First Quarter 2014 Results; Solid First Step in Transition Year

- Immediate Improvements in Churn and Customer Additions

- Signs Commitment Letter for Credit Facilities of Up to $50 million

- Data Center Operations Expanding

TORONTO, ONTARIO--(Marketwired - May 7, 2014) - TeraGo Inc. (TSX:TGO) (www.terago.ca) today announced financial and operating results for the quarter ended March 31, 2014.

Stewart Lyons, President and CEO, TeraGo Inc., commented, "TeraGo made a solid start to what is planned to be a transitional and transformational year. We further expanded our data center capability and now operate three facilities, including a new Data Center in downtown Vancouver where we are now up to 14,000 square feet of space. In our access business, we moved decisively to implement enhanced customer retention programs that generated a marked improvement in churn and customer additions, with some expected decrease in ARPU."

Mr. Lyons concluded, "TeraGo's objective remains to transform our leadership in broadband services into a multi-product IT services company, controlling more of the value chain to serve the growing business need for data center and cloud services, and enhance the loyalty of our unique base of small and medium businesses across Canada. With the progress made in Q1, we are well-positioned for Q2 and are moving onto our next steps in in rolling out our strategy. In short, we are focused on achieving growth in data centers; establishing a presence in cloud services, and creating stability in access services to drive improved returns on assets for our shareholders."

First Quarter 2014 Financial and Operational Highlights

• Total revenue for the three months ended March 31, 2014 was $12.9 million compared to $12.6 million for the same period in 2013, an increase of 2.4%;
• Gross profit margin for the three months ended March 31, 2014 was 77.7% compared to 78.0% for the same period in 2013;
• Adjusted EBITDA for the three months ended March 31, 2014 was $3.8 million compared to $4.3 million for the same period in 2013, a decrease of 12%. The adjusted EBITDA decrease was due to a decrease in access revenue and selective investments in sales and marketing;
• Net loss for the three months ended March 31, 2014 was $1.1 million compared to net earnings of $1.3 million for the same period in 2013, a decrease of 182%;
• For the three months ended March 31, 2014, basic and diluted loss per share were $(0.10) compared to basic and diluted earnings per share of $0.12 and $0.11, respectively, for the same period in 2013;
• Ended the period with $1.0 million of cash, cash equivalents and short-term investments;
• As at March 31, 2014, $19.0 million of the Company's $41.8 million credit facilities remains undrawn and available for future use;
• Average monthly churn rate for the three months ended March 31, 2014 was 1.01% for access customer locations compared to 1.50% for the three months ended December 31, 2013 and 1.21% for the same period in 2013 which is a result of the enhanced retention programs now in place;
• Net access customer locations increased by 22 in the first quarter 2014 ending the period with 6,475 net access customer locations in service compared to 80 net access customers locations lost in the fourth quarter of 2013 and 12 net access customer locations lost in the same period in 2013. This increase results from management's continued focus on retention initiatives and offerings, customer service, the needs of small and medium-sized businesses ("SMB") and renewed sales activity with competitive product offerings;
• Average revenue per access customer location ("ARPU") for the three months ended March 31, 2014 was $615 compared to $624 for the same period in 2013. This is primarily the result of the retention program launched by the Company for customers coming to the end of contract term by offering them lower pricing in exchange for long-term contract renewals as well as the impact of competitive pricing on both customer renewals and new sales.

First Quarter 2014 Key Developments

• The Company announced that its Board of Directors has appointed Stewart Lyons as President and CEO of the company and a member of the Board of Directors effective January 16, 2014 and appointed Joe Prodan as Chief Financial Officer of the company effective February 4, 2014.
• The Company has received notice that a new wireless entrant customer will be disconnecting their services during 2014.
• The Company announced that it has established a fibre-optic core network in Western Canada through the acquisition of newly constructed fibre facilities in downtown Vancouver, British Columbia ("BC"). These fibre facilities connect the Company's Vancouver data center facility, as well as twelve high customer density buildings in downtown Vancouver. This will ensure secure broadband connectivity between customer locations and the data center. In January 2014, the Company drew down $0.6 million from its term debt facility with the Royal Bank of Canada ("RBC") to finance this. This facility bears interest at the rate of 4.17%.

Events subsequent to March 31, 2014

• To strengthen the Company's balance sheet and provide flexibility to pursue additional opportunities, the Company signed a commitment letter with National Bank of Canada and RBC for Credit Facilities totaling $50.0 million, consisting of a $5.0 million revolving operating credit facility, a $20.0 million non-revolving term credit facility to refinance the existing credit facility and a $25.0 million non-revolving acquisitions and capital expenditure facility (collectively, the "Credit Facilities"). The Credit Facilities would replace TeraGo's existing facility and are expected to close prior to May 31, 2014.
• In April 2014, the Company announced that it has continued to expand its data center business in Western Canada through the acquisition of an additional 7,000 square foot data center facility in downtown Vancouver, BC, bringing the total amount of its data center capacity in downtown Vancouver to 14,000 square feet.
• For the third consecutive year, the Company has earned a place in the top 100 among Canada's top technology companies on the Branham 300 list.

Key Financial & Operational Highlights

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

	Three months ended March 31
	2014			2013
	(unaudited)			(unaudited)
Financial
Revenue	$	12,874		$	12,570
Cost of Services	$	2,874		$	2,770
Gross profit margin		77.7	%		78.0	%
EBITDA*	$	3,291		$	4,333
Adjusted EBITDA*	$	3,802		$	4,333
Earnings (loss) from operations	$	(760	)	$	1,539
Net earnings (loss)	$	(1,093	)	$	1,340
Basic earnings (loss) per share	$	(0.10	)	$	0.12
Diluted earnings (loss) per share	$	(0.10	)	$	0.11
Operating
Churn rate*		1.01	%		1.21	%
Customer locations in service		6,475			6,563
ARPU*	$	615		$	624
Number of employees		190			187
*See Key Performance Indicators, Additional GAAP and Non-GAAP Measures below

The table below reconciles net earnings to EBITDA and Adjusted EBITDA for the three months ended March 31, 2014 and 2013.

		Three months ended March 31
		2014			2013
		(unaudited)			(unaudited)
Net earnings (loss) for the period		$	(1,093	)	$	1,340
Foreign exchange (gain)			33			19
Finance costs			319			188
Finance income			(19	)		(8	)
Earnings (loss) from operations			(760	)		1,539
Add:
	Depreciation of networks assets, property and equipment and amortization of intangible assets		3,288			2,846
	Loss (gain) on disposal of network assets		12			(39	)
	Stock-based compensation expense (recovery)		751			(13	)
EBITDA		$	3,291			4,333
Restructuring, acquisition-related and integration costs			511			-
Adjusted EBITDA		$	3,802		$	4,333

First Quarter 2014 Results of Operations

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 spectrum payments, annual rate increases in long-term contracts and the restart on January 1st of payroll taxes and other levies related to employee compensation.

Revenue

Total revenue increased 2.4% to $12.9 million for the three months ended March 31, 2014 compared to $12.6 million for the same period in 2013.

Service revenue increased by 3.4% to $12.7 million for the three months ended March 31, 2014 compared to $12.3 million for the same period in 2013. The increase in service revenue was driven primarily by revenue from the data center partially offset by a reduction in access revenue. Revenue from the data center was $0.8 million for the three months ended March 31, 2014.

Installation revenue was $0.2 million for the three months ended March 31, 2014 compared to $0.3 million for the same period in 2013.

Customer locations

Total customer locations in service decreased to 6,475 as at March 31, 2014 compared to 6,563 as at March 31, 2013. Net access customer locations increased by 22 in the first quarter 2014 ending the period with 6,475 net access customer locations in service compared to 80 net access customers locations lost in the fourth quarter of 2013 and 12 net access customer locations lost in the same period in 2013. This increase results from management's continued focus on retention initiatives and offerings, customer service, the needs of small and medium-sized businesses ("SMB") and renewed sales activity with competitive product offerings.

Churn rate

The average monthly churn rate was 1.01% for the three months ended March 31, 2014 compared to 1.21% for the same period in 2013 primarily as a result of the enhanced retention focus now in place. Management continues to focus on retention initiatives and offerings, customer service, the needs of small and medium-sized businesses ("SMB") and renewed sales activity with competitive product offerings in addition to monitoring customer creditworthiness and churn levels.

ARPU

ARPU from access customers decreased to $615 for the three months ended March 31, 2014 compared to $624 for the same period in 2013. The decrease in ARPU was driven primarily by lower usage revenue in the quarter as the company offers incentives in the form of free or discounted usage packages to increase our customer renewal rate, the result of the retention program launched by the Company for customers coming to the end of contract term by offering them lower pricing in exchange for long-term contract renewals as well as the impact of competitive pricing on new sales. The Company believes the current retention campaign will help long-term revenue growth by offering more complimentary services such as data center and IT services to its existing base.

Gross margin

For the three months ended March 31, 2014, gross profit margin was 77.7% compared to 78.0% for the same period in 2013. This decrease is primarily due to an increase in property access costs.

SG&A

For the three months ended March 31, 2014, SG&A expenses increased to $6.8 million compared to $5.4 million for the same period in 2013. The increase was primarily due to higher stock-based compensation of $0.6 million relating to a tax indemnity claim by a former officer, restructuring costs due to a re-aligning of Company strategy and acquisition costs, selective investments in sales and marketing and higher utility and facilities expenses from the operations of the data centre. As of March 31, 2014, the number of direct sales personnel was 32 compared to 28 as of March 31, 2013.

EBITDA and Adjusted EBITDA

Adjusted EBITDA for the three months ended March 31, 2014 was $3.8 million compared to $4.3 million for the same period in 2013, a decrease of 12%. EBITDA for the three months ended March 31, 2014 was $3.3 million compared to $4.3 million for the same period in 2013, a decrease of 24%. The adjusted EBITDA decrease was due to a decrease in access revenue and selective investments in sales and marketing as discussed above. The decrease in EBITDA also included restructuring costs due to a re-aligning of Company strategy and acquisition related costs related to searching for new opportunities. This is in line with management's expectation as the Company continued to focus on transforming into a multi-product IT services company. Consistent with prior years, EBITDA and Adjusted EBITDA for the quarter ended March 31, 2014 is impacted due to the seasonal nature of certain expenses.

Deferred income taxes

The Company reviewed and updated the assumptions and projections regarding future profitability as at March 31, 2014. Based on management's analysis, no additional deferred income tax assets resulting from temporary tax differences were recognized in the three months ended March 31, 2014.

Net earnings (loss)

For the three months ended March 31, 2014, net loss was $1.1 million compared to net earnings of $1.3 million for the same period in 2013. The changes are due to the items noted above.

Capital resources

As at March 31, 2014, the Company had cash and cash equivalents and short-term investments of $1.0 million and access to the $19.0 million undrawn portion of its $41.8 million credit facilities.

The Company anticipates incurring additional capital expenditures for the purchase and installation of network assets 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 centers and other IT services through acquisitions or expansion.

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 March 31, 2014, there were 11,552,398 Common Shares and two Class B Shares outstanding.

Conference Call and Webcast

Management will host a conference call on Thursday, May 8, 2014, at 9:00 am EDT to discuss these results. To access the conference call, please dial 416-340-8527 or 1-800-766-6630. The call will also be available via webcast at www.terago.ca or http://www.investorcalendar.com/IC/CEPage.asp?ID=172646. An archived recording of the conference call will be available until May 8, 2015 at midnight EDT. To listen to this recording, call 905-694-9451 or 1-800-408-3053 and enter passcode 8479162.

TeraGo's unaudited financial statements for the three months ended March 31, 2014, 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 and Adjusted EBITDA

The term "EBITDA" refers to earnings before deducting interest, taxes, depreciation and amortization. The Company believes that EBITDA and Adjusted EBITDA are 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. The Company believes that Adjusted EBITDA is useful additional information to management, the Board and investors as 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 imply they are non-recurring. The Company calculates 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 and stock-based compensation. In addition, the Company excludes restructuring, acquisition-related and integration costs in its calculation of Adjusted EBITDA. Investors are cautioned that EBITDA and Adjusted 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 and Adjusted EBITDA do 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.

TeraGo's method of calculating EBITDA and Adjusted EBITDA may differ from other issuers and, accordingly, EBITDA and Adjusted EBITDA may not be comparable to similar measures presented by other issuers. See "Results of Operations - EBITDA" for reconciliation of net earnings (loss) to EBITDA and Adjusted EBITDA.

ARPU

The term "ARPU" refers to the Company's average revenue per customer location. The Company believes 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. The Company calculates 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. TeraGo's 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 press release includes certain forward-looking statements that are made as of the date hereof 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. 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 set forth herein 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.

TeraGo Inc.Stewart LyonsPresident and CEO 1-877-982-3688 IR@terago.caTeraGo Inc.Joe ProdanChief Financial Officer1-877-982-3688IR@terago.caLHAJody Burfening/Carolyn Capaccio212-838-3777ccapaccio@lhai.com