Good morning, ladies and gentlemen. Welcome to TeraGo's Q1 2023 Earnings Call. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session with pre-qualified analysts on the call. Instructions will be provided at the time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded. TeraGo would like to remind listeners that the company's remarks and answers to your questions today may contain forward-looking statements that are based upon management's current expectations. All such statements are made pursuant to the safe harbor provisions of and are intended to be forward-looking statements under applicable Canadian securities legislation.
When relying on forward-looking statements to make decisions with respect to the company, you should carefully consider the risks set forward in the Risk Factors section in the Annual MD&A for the quarter ended December 31st 2022, which is available on www.sedar.com and also consider other uncertainties and potential events, except as may be required by Canadian security laws. The company does not undertake any obligation to update any forward-looking statements. As a result of new information, we would also like to remind listeners that TeraGo uses certain non-GAAP financial measures to arrive at adjusted results to assess its risks and to measure overall performance. These financial measures provide readers with a better understanding of how management views the company's overall performance. I will now turn the conference over to TeraGo's Chief Executive Officer, Matthew Gerber. Sir, please go ahead.
Thank you, Ina. Good morning, everybody, and welcome to our 2023 Q1 Earnings Call. Our team is pleased with our operational performance this past quarter and the financial results that Phil will take you through shortly. Our revenues, gross margins, operating expenses, Adjusted EBITDA, and capital expenses were all within our expected ranges. We were also able to again deliver positive results with our key leading indicators, namely Net Monthly Recurring Revenue, which is the difference between bookings and churn, and net provisioned monthly recurring revenue, which is the difference between provision monthly recurring revenue and churn. These indicators reflect whether or not we are booking more business than we are churning, and whether or not we are provisioning more business than we are churning. Both indicators are positive in Q1 and reflect our team's ability to add customers.
We have also seen a rise in our average revenue per customer as our customers continue to request increased levels of service and higher-end products. Since we did a fairly extensive update in our 2022 Q4 and full year's earnings call two months ago, I don't have much more to offer in terms of additional information to share with you before turning the call over to Phil to take you through the Q1 numbers. I will do that now. Phil, over to you.
Thanks, Matt. Starting on slide five with connectivity revenues. Connectivity revenues totaled CAD 6.5 million in Q1 2023, compared to CAD 6.4 million for the same period in the prior year. The revenue improvement was a result of increased customer count and increased connectivity ARPU compared to the same period in 2022. The prior year results included connectivity revenue that was subsequently sold as part of the divestiture transaction. Moving to slide six for a look at our connectivity KPIs for the first quarter of 2023 and the prior four quarters. Our backlog of Monthly Recurring Revenue, or MRR, in our connectivity business increased year-over-year to CAD 132,929 as of March 31st 2023, compared to CAD 126,631 for the same period in 2022.
The increase in backlog MRR is a result of a strong sales performance throughout the last four quarters in signing up new customers, particularly through our channel partners. Backlog has decreased when compared to the year-end balance of CAD 178,948 to CAD 132,929 as a result of both provisioning results having exceeded sales bookings, also the result of having to debook some customer orders within our backlog. The majority of the debookings were due to technical issues, such as not having a direct line of sight to the customer's facility, therefore preventing us from servicing the customer.
Next, our Average Revenue per User or ARPU for our connectivity business was CAD 1,101 in Q1 2023, compared to CAD 1,063 in Q4 2022, and compared to CAD 1,061 for the same period in 2022. The increase in ARPU was a result of our ongoing focus to attract mid-market and large-scale, predominantly multi-location customers requiring higher-end products to meet their needs. Finally, connectivity churn was 0.9% compared to 0.9% in the prior quarter and 0.7% for the same period last year. The increase in customer churn from the prior year was due to a continued execution of our strategy to focus on mid-market and large-scale customers. We will continue to focus our service and support activities on customer retention and keeping churn low.
Turning to slide seven to go through our broader Q1 2023 financial highlights. Total revenue decreased to CAD 6.5 million for Q1 2023, compared to CAD 7.9 million for the same period in 2022. The decrease in revenue was driven by the divestiture transaction of the cloud and colocation business and some associated connectivity revenue. Again, when looking at just our connectivity revenues, results totaled CAD 6.5 million in Q1 2023, compared to CAD 6.4 million for the prior year period. Net loss decreased to CAD 2.5 million in Q1 2023, compared to a net loss of CAD 3.1 million in the same period of the prior year. The improved net loss position was a result of higher gross margins combined with year-over-year reduction of Operating Expenses as a result of the divestiture and the new operating structure of the business.
Adjusted EBITDA was CAD 0.8 million in Q1 2023, compared to CAD 1.1 million for the same period last year. The decrease was a result of lower revenues and lower gross profit in the current year, and the add back of restructuring and divestiture costs in the prior year. Turning to slide eight. Capital Expenditures totaled CAD 2.0 million or 32% of our revenue. CapEx expenditure continues to be predominantly success-based spend associated with the onboarding of new customers. Spend increased in the quarter as a result of purchase timing as we took advantage of available discounts while still aligning our purchases with our backlog and our pipeline opportunities. Turning to the balance sheet, we ended the first quarter of 2023 with CAD 1.8 million in cash and CAD 1.1 million in short-term investments.
The company is also fully compliant with the covenants under its long-term debt facility. With that said, I would like to turn the call back over to Matt. Matt, over to you.
Thanks, Phil. Before we close this call, I do want to reiterate the points I made about our near-term focus during our call a couple months ago, and also touch on a couple of other topics, including the news that we just released about our leadership change. As we look into Q2, our team remains focused on the two initiatives that I spoke about on the last call. The first area of focus for us remains our Fixed Wireless Access business. We continue to see increasing interest from our enterprise and mid-market customers for Fixed Wireless Access connections. There are a few reasons why we see growing interest in Fixed Wireless Access. The first reason is the success of Fixed Wireless Access as a connectivity option continues to grow internationally.
If you look just south of us, Verizon and T-Mobile reported record Fixed Wireless Access growth in 2022, both expect growth like that to continue. The second reason is that enterprises and mid-market companies continue to look for ways to bolster network redundancy, Fixed Wireless Access is a logical choice for that. The third reason is that SD-WAN continues to gain share in our customer base, pairing a Fixed Wireless Access circuit with a fiber connection for SD-WAN connectivity is a logical choice, we're seeing more of our customers doing just that. The second area of focus for us remains 5G mmWave Private Networks. At this point, the information we have from our vendor ecosystem is similar to what we shared with you during our last call.
We expect to see standalone 5G mmWave equipment that operates in Canada on our 24 GHz and 38 GHz spectrum become available in the next three to six months. At that point, we can begin engaging customers with pilots and trials, which are a necessary step to take before taking orders. You may also remember that on the last call, we mentioned our 5G mmWave private network deployment at McMaster University. We're heading to McMaster right after our call this morning to participate on a panel discussion on the benefits of 5G Private Networks for Canadian businesses. Some of you may have also caught the webcast that The Globe and Mail did on April 27th on the benefits of 5G for Canadian businesses.
We were invited alongside Telus and Ericsson to lead a panel discussion, and were put forward as experts on private network applications for manufacturing and warehousing. It's great to see this type of interest building. We continue to remain very excited about where the market for 5G Private Networks is heading and our ability to provide these types of innovative solutions to our existing customer base. Now, one other point I want to make is that while we continue to see healthy demand for our products and services, as evidenced by our strong bookings and churn performance over the past year, we also recognize that recent overall market conditions are changing and influencing customer decision-making, which can impact our business. We will continue to watch these trends closely and make any necessary adjustments if there is an impact.
Lastly, as you may have seen in the earnings release, we announced that there will be a transition to a new CEO. Effective June 12, 2023, Dan Vucinic will be appointed as TeraGo's Chief Executive Officer. I'm truly excited about the opportunity to pass the leadership role to Dan as he brings a wealth of relevant operating experience and is the right person to take our company to the next level. Dan and I will be working together in lockstep over the next few weeks to ensure a smooth transition for our customers, our partners, and our team members. That wraps up the prepared remarks for us today, and we can now open the call up for questions. Ina, back over to you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please keep the handset before pressing any keys. One moment please for your first question. Your first question comes on the line with Matthew Lee from Canaccord. Please go ahead.
Hey, morning, guys. Thanks for taking my call. Maybe we can start with ARPU. Nice acceleration in the quarter at 4% year-over-year. Can you maybe help us understand the sustainability of that number for the remainder of the year?
So I'll take a shot at that, Matt, and thanks for posing the question. Phil, you can chime in if you felt I missed anything or wanna add more context. We see that continuing, Matt, 'cause when you look at the strategic focus we've been executing on, it's to move upmarket. As we gain midmarket and enterprise customers, they tend to buy higher speed services. We've seen a step up the ladder in service speeds and service prices that we're delivering to these customers. We think that that is sustainable.
Okay, that's helpful. Maybe we can talk about the success CapEx you've been deploying. You know, when do you think the timing is in returns on that investment, and can you maybe frame how you think about spending from an ROI perspective?
When you look at our business, our business is very typical of what you'd see with a capital-intensive communications company like we are and the infrastructure type of business we have. We typically expect to start seeing returns on any investment we make on average at about 18 months. On a cash-on-cash payback basis, it takes about 18 months. For us, that's a great thing because most of our customers will sign three-year contracts or longer. We lock them in for three or four or five years. After 18 months, any investment we make to service that customer will start generating cash for us as a company. Phil, did I miss anything that you wanna add to that?
No, that is correct. Yeah. It's 18 months payback. The timing of our expenditures is really based upon the backlog, the pipeline, and then in some cases, we have advantages to take purchases a little early for beneficial pricing. Again, it's equipment we know that we need to deploy to our customer sites.
All right. Thank you. I'll pass it on.
Thanks, Matt.
Thank you. Your next question comes from the line of David McFadgen from Cormark Securities. Please proceed.
Oh, hi. Yeah, a couple of questions. Just on the cost structure, you know, the revenue was pretty much in line with what we're looking for, but EBITDA was a bit light. Just wondering, is this a new level of cost that you would expect going forward, or is there some one-time items in there that, you know, maybe made the cost a little bit higher in the quarter?
Phil, you wanna comment on it?
Yeah. Yeah. We do expect the cost structure to be fairly consistent. Any really change in the structure will be driven by, you know, new customers, and things like that requiring perhaps, you know, scaling up support as the number of customers scales up. It has, it's stabilized, in terms of what we expect our recurring run rate to be.
Okay. Are you seeing any slowdown, let's say, in the sales funnel or sales bookings in light of a, say, more difficult macroeconomic environment that we're all facing here?
That's a great question, David, and I alluded to seeing signals. We haven't been impacted by those signals yet, but we certainly have heard from our customers that they are paying more attention to how they're spending their money. We see that in the form of them scrutinizing what they're paying us for services. We also see it in the form of we've heard from a number of our bigger customers that budgets are on hold, and that could potentially impact project timing. We're keeping a close eye on those signals, but we are certainly hearing much more of that and have heard much more of that over the past quarter or so.
Okay. Just lastly, I was just wondering what precipitated the CEO change?
Great. Great, great question. you know, we've been discussing or having discussions like this for me personally, for going on seven-ish years, I joined the TeraGo Board seven years ago, I stepped into the Chair's role, as you remember, six years ago. I had stepped into this role as an operator recognizing that the company needed to make a significant strategic change. We as a business have a great team of people. We have a blue chip list of customers, the customer base is a who's who of Canadian businesses for us. We have a unique position in the marketplace as the only provider of Fixed Wireless Access connectivity for businesses across the country. As you know, we have this amazing spectrum asset.
My mandate from the Board was to create a play connectivity services company for Canadian businesses that could not only build a Fixed Wireless Access product line, but also step into 5G Private Networks when it's appropriate. I have delivered on that mandate, and the time had come to bring in somebody who could take the business to the next level. We as a board looked for an operator, a Canadian operator, and somebody who has a lot of experience in working within telecommunications, understood Fixed Wireless Access, understood how to deploy private networks, and Dan is the right guy to do that. He's got a much better fit for the skill sets that are required going forward than I do.
My, my work at TeraGo is done, I'm really happy to pass the baton to him. Does that give you some context, David?
Yeah, no. That was great. Okay, thanks. Thank you.
Thanks.
Thank you, Mr. Gerber. There are no further questions at this time. Please proceed.
Okay. Well, I don't have any other closing remarks beyond saying thank you to all of you for supporting the business. It's been a really great run for me as an operator, and we have a terrific team, terrific group of customers, and it's been very enjoyable. Appreciate it. Appreciate your time today. Thank you.
Thank you. Ladies and gentlemen-
Okay. Ina, we can close the call.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.