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TERAGO's Strategic Shift to Profitability Amid Regulatory Tailwinds: A Buy in Canada's 5G Future

Theodore QuinnTuesday, May 13, 2025 6:51 pm ET

20min read

Investment Thesis: TERAGO Inc. (TSX: TGO) is positioned to capitalize on Canada’s 5G infrastructure boom, leveraging its dominant mmWave spectrum holdings and operational discipline to drive margin expansion and sustainable growth. Despite modest revenue growth, its focus on high-margin enterprise services, regulatory tailwinds, and a robust backlog of future revenue positions it as an undervalued buy for investors.

The Trade-Off: Prioritizing Profitability Over Top-Line Growth

TERAGO’s Q4 2024 results reflect a strategic shift: revenue grew just 0.6% year-over-year to CAD $6.6M, but Adjusted EBITDA rose 16.9% annually to CAD $4.0M. This divergence signals a deliberate pivot toward profitability over scale. Management has slashed operational costs—salaries and administrative expenses fell significantly—while focusing on high-margin enterprise contracts (e.g., a multi-million-dollar deal with a major Canadian retailer).

The move is paying off: EBITDA margins expanded to 15.3% in 2024, up from 13.2% in 2023. While revenue growth may lag in the near term, the focus on profitability aligns with TERAGO’s goal of reducing its net loss (CAD $13.3M in 2024, unchanged from 2023), a critical step toward long-term sustainability.

Backlog MRR: A Leading Indicator of Future Success

TERAGO’s Backlog Monthly Recurring Revenue (MRR) surged to CAD $111.9M as of December 2024, doubling from CAD $65.4M in 2023. This metric is a goldmine for investors: it represents contracted but unprovisioned revenue, indicating strong demand for its 5G Fixed Wireless Access and SD-WAN solutions.

The jump reflects successful execution of its “Value Creation Strategy,” which prioritizes large, multisite enterprise contracts. With a 91% stake in Canada’s 24 GHz and 38 GHz mmWave spectrum bands, TERAGO is uniquely positioned to deliver low-latency, high-capacity connectivity—a critical asset for industries like healthcare, logistics, and retail.

Regulatory Alignment: ISED’s Green Light for mmWave Dominance

A key risk for TERAGO—uncertainty around spectrum licenses—was eliminated in May 2024 when Canada’s Innovation, Science and Economic Development (ISED) renewed its mmWave spectrum licenses annually until new rules are finalized. This decision removes regulatory overhang, allowing TERAGO to invest confidently in 5G infrastructure and private wireless networks.

The move aligns with Canada’s Spectrum Outlook 2023–2027, which prioritizes mmWave for 5G expansion. With 6,420 MHz of exclusive spectrum, TERAGO now faces reduced policy risk, enabling it to scale its hybrid network (mmWave + fiber) and outcompete traditional telecom players reliant on buried cables.

Churn Optimization: Retaining High-ARPA Customers

TERAGO’s focus on high-ARPA (Average Revenue Per Account) customers is paying dividends. Connectivity business ARPA rose 5.2% annually to CAD $1,184, while churn fell to 0.9% from 1.1% in 2023. This combination of higher revenue per customer and better retention creates a virtuous cycle: reduced customer acquisition costs and increased lifetime value.

The strategy targets mid-market and enterprise clients—segments with sticky demand for critical infrastructure services. With over 1,800 customers in sectors like manufacturing and healthcare, TERAGO is building a recurring revenue engine that will fuel growth even as it reduces net losses.

Why Buy Now? TERAGO’s Undervalued Play on 5G Demand

TERAGO is undervalued relative to its strategic assets and growth trajectory:
1. Spectrum Dominance: 91% of Canada’s mmWave spectrum positions it as a first-mover in private 5G networks, a sector expected to grow at 20% CAGR globally.
2. Margin Expansion: Cost discipline and high-margin contracts are driving EBITDA growth, with estimates pointing to CAD $4.7M in Q1 2025 (up 21% annually).
3. Regulatory Tailwinds: ISED’s support reduces execution risk, allowing TERAGO to scale without regulatory hurdles.
4. Backlog MRR Pipeline: CAD $111.9M in unprovisioned revenue ensures visibility into future top-line growth.

Risks to Consider

Debt Management: TERAGO’s CAD $102.5M term debt requires disciplined refinancing.
Competitive Pressure: Larger telecom players may encroach on mmWave markets.
Interest Costs: Elevated borrowing expenses pressure net income.

Conclusion: A Compelling Buy for 5G Investors

TERAGO’s strategic shift to profitability, regulatory clarity, and a robust backlog of future revenue make it a compelling buy for investors betting on Canada’s 5G infrastructure boom. With a 16.9% EBITDA margin expansion in 2024 and a pipeline of high-margin contracts, the company is primed to convert its spectrum advantage into sustained growth.

The stock’s current valuation—+2.59% year-to-date—lags its fundamentals. Investors should act now to secure exposure to this undervalued mmWave leader before the market catches on to its value proposition.

Action: Buy TERAGO (TGO) ahead of its Q1 2025 results on May 13, 2025, with a long-term horizon aligned to 5G adoption.

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