Pentanet Limited (5GG) Earnings Call Transcript & Summary

Good morning and good afternoon to those joining from where you are. I'll just give it a minute. I see a few people have joined. I'll just give it another minute and then we'll get started. All right. Well, that's the minute. We should be good to go. I see a few more people have joined. Yes, look, thanks, everyone, for joining. Obviously, it's our 4C update. But given it's the Q4, it's more or less a bit of an update on the full year. Yes, I'm really excited and keen to present this. As most of you have probably seen by now already, we're pretty proud of the financial position we've been able to bring the business into. It's been an incredibly challenging year. As a lot of people know that with the network constraints and the historic hurdles that we face with neXus, which was our product that was going to bring on net subscriber growth, there was a challenge in where we're going to get growth. But the team and us are really proud that we've still been able to produce some good strong revenue growth and getting things all on track. What we try to -- want to do here with this presentation, you might have noticed is we're just trying to kind of simplify the messaging, kind of talk to the financial side of the business currently and then kind of to set some goals about what we want to achieve moving forward. I know our business is very complex and complicated. There's a lot of moving parts. But as we move forward and kind of get out of this seeming rut that we've been in for the last year, we just really want to simplify that messaging and be very clear and concisive about what we need to do to achieve the outcomes that everyone is looking for. So the first thing I'll talk to -- I'll get rid of my head there. I see that's all coming through. Yes, we were actually able to achieve a Q4 EBITDA-positive result. Now the Q4 was EBITDA positive. I don't want to spend too much time on it because as you would have seen and read by now, it came through an R&D grant, albeit that's good revenue for the business, but when we're looking at what we're doing moving forward, we do when I look at the consolidated results. So although Q4 was EBITDA positive, I should probably talk to here, on a normalized basis, we were still able to get EBITDA breakeven for the June exit. So revenue was still able to grow 17%, 18% through the year. And as you can kind of see, historically, the EBITDA for the consolidated business is really starting to get good momentum now. If you look at historically over the last few years to now where we're sitting at breakeven, I think we're in a really good position moving forward into FY '24. So really, the key highlights, what we did, obviously, we achieved that EBITDA breakeven for the month of June. So that's -- telecommunications did that independently. I know it's sometimes challenging because there are the 2 businesses and there's -- people are wondering, okay, which element of what business is potentially supporting the other and whatnot. I do want to be really clear that both of these business units achieved EBITDA breakeven independently for the first time, which is something we're, again, incredibly proud of. Again, consolidated revenue was increased by 17% year-on-year. That was due to we had some planned changes when we couldn't build capacity for neXus to bring users on, we're looking at other ways that we could kind of fill and bring in that revenue through higher ARPU enterprise services that we put a bit of focus on. And through the trials of the last year, we've actually uncovered some really good potential growth areas that we're going to continue to move on to in the new financial year. Our on-net gross margin still is very high at 87%. So it's obviously -- we do want to focus on that on-net product, and I'll kind of talk to that in a moment. A few months ago, people would have seen as well, we did recapitalize the business. So the cash balance for the business exiting Q4 is sitting at $9.9 million. So considering that we're EBITDA breakeven now and moving into EBITDA-positive territory, you could consider that, that cash is there to fund our growth. Our 5G tower upgrade initiative is on schedule and on track. We've got 4 towers live now. And I'll just kind of run through here. The reason why we had to do this -- just to kind of go through it again -- I'll bring my head back. So this here is the Perth market. And with our normal fixed wireless coverage, we've got ample coverage, all of our tower network, which is about 55 towers, it does give really high coverage across all of Perth, but this network and the technology that we use, which is kind of what we refer to as our traditional fixed wireless, it was at capacity. So this is why we went down the route of neXus and 5G and these new innovative technologies to introduce better capacity and faster speeds onto the network because -- and I know I've covered this before, if there's a few return callers, looking at the network here, everything in red is where we can't sell any more on the traditional network. So this is what was causing that constraint. So following the journey, we started to build out neXus. And as you can see here on the graph, the blue areas are where we have neXus coverage. So we are able to install users into neXus in these grids. But because neXus is a very short-range product, it is much slower to build out and build coverage. And what we needed to do, we just need to get good coverage for a better product than what we have on the legacy network and do that as quickly as possible. And the medium for us to do that was going to be leveraging our 5G spectrum. The 5G spectrum also comes into play that can help power and build neXus faster, but it's also a very good stand-alone product itself. So as you can see here, this is the 5G coverage that we've built so far. So in a few short months, as you can see, the green on the map, and hopefully, this is coming through on the Zoom. In a few short months, since we started upgrading the towers to 5G, you can see the coverage that 5G projects is just -- it's much more broad because it does have that multi-kilometer range from the tower. So in a few short months, our 5G coverage is actually larger than our neXus coverage now. And everything that we've done in the last year, we haven't actually begun selling on 5G yet. So the plan for 5G is we want to bring a few more towers online, around 7 to 8 towers. And with that, you can kind of make out here, if I double that green coverage, then I've got a bit of an ample amount of coverage to go and launch a stand-alone 5G product in the market. Shifting to a new product like 5G, it does come with its increased marketing costs and that sort of thing to build brand awareness around a new product. So what we'd like to do is kind of get a bit more coverage so that when we go and -- go down that journey of marketing and creating the 5G product, we're not wasting marketing dollars in areas where we don't have coverage. So that's the thinking there. And I'll talk to what the future road map is for 5G. But yes, really, really proud that the 5G network is on track. We backed the decision to have shifted into that. In regards to neXus, we're still -- that's still a product, and it's something that we offer. But what our thinking around neXus now is we want to plan a -- taking the learnings from what we know about the product, we want to plan and build new grids in a different sort of fashion to what we've done. We have worked out a lot of bugs and nuances with the technology. When it works really well, it works really well and it is working quite well in the areas. But if there's any like sort of little dropouts and stuff, we know what's causing those. But again, we're kind of like -- we are focusing on 5G to give us that growth. That's what we've done to kind of get EBITDA positive. We're going to grow profitably using 5G. And then in a few short months, we'll be able to reemerge with neXus. The 5G offering that we're going to be able to bring to the market is still extremely competitive and better than what's currently available in market. So it just makes sense to build that coverage quicker, lean on that products to get us out of where we've been and then move forward into the market with both the products and have a complete offering for services that are very competitive because, as you can see, we've got a large margin to play with. But that's just kind of touching on the mapping if you guys can kind of work -- have a look there. It's easy to see if you're visualizing the coverage that each of these products produces. So yes, we still have a lot of the neXus stock in hand. So when it comes time to engage those new grids, that's all going to be coming from stock at hand. We don't have to deploy much CapEx to do that. And the growth of our 5G network and new users is all going to come from our -- the vendor facility we have in place with Cambium. So we were able to reduce the cost to deploy and grow into 5G. But now we're also well capitalized to kind of move those things hand-in-hand and again, back to the point that we are operating breakeven now. So I think as of today -- what's been announced today, I think the profile of the business has shifted quite a bit. And a few of the risk factors of the business are now mitigated with the fact that we've been able to do that. And I think it's just a -- it's -- again, I'm very proud of the result because we've done all this off the back of not being able to work with our core product. But now these core products are returning and they're going to be ready for the market very soon. So what the plan is with 5G, although we are launching 5G as a stand-alone product in the following half, we are going to start leveraging those towers just to bring on new on-net subscribers through our normal fixed wireless plans. I'll just quickly revert to this slide here again. Bear with me there. Yes, we are looking to kind of like simplify our plans and our offerings. I know we've got a lot of technology and everything in the market, but we're rebuilding our website, and we're going to overhaul our plans. But in the buildup to doing that, we're just going to be leveraging our existing plans and leveraging the 5G coverage that were built to bring users on to what we already do. That way, we can get our growth still going this quarter, up until the launch of the 5G, which is going to be around getting these 8 towers live. I'll quickly just touch on the gaming side of the business as well. Gaming is -- yes, it's been a big journey and it was obviously a sizable investment that we moved into, but really proud of the growth that's coming from there. For us to take cloud gaming, it's a brand-new technology. We brought that to market. And if you were just looking at that business on its own, for business to come and state that they're going to bring that to the market, a brand-new technology, a brand-new market, and within 2 years of a brand-new technology, get that business to operating breakeven, I think that's quite a good result. And again, we're like proud of doing that. We also have a really good understanding now of our cloud gaming oversubscription rates and operating costs and that sort of thing. And so this is kind of the first time that we're talking about what our actual capacity could end up being. It's -- the commercials around cloud gaming have always kind of been a bit -- we had to -- we knew there was an industry there and there was something to uncover. But how it equated to our market, we're the first ones doing it at this sort of scale we had to go and work that out. But so far on what we're seeing, we're estimating that we have over 5x more capacity from what we've invested to bring on paid subscriber growth. So the margins that this business will eventually be able to produce are looking even more impressive than what we had first kind of theorized. But yes, if you consider that the investment that we've made has enough infrastructure to have over 5x more paid subscribers than we already have and that business is at EBITDA breakeven, it's actually a bit in the EBITDA-positive territory, that business is really poised to be a pretty successful business unit on its own. And again, we've done all that in under 2 years since our commercial launch of that product. Our go-to-market to bring on more retail users for cloud gaming is going to become -- is going to come from us leaning into more being like the wholesale distribution. So really, where we envisage ourselves is becoming like the digital wholesale distribution for NVIDIA like compute down here where we operate. And you can see that now with the signing of Optus, which we announced a few months ago. So Optus coming on board, and they're going to be doing what they want to do marketing-wise with the product. But the work that we need to do, which is the integration with their SubHub is well on track, and we're expecting that Optus SubHub launch to happen in first half FY '24. There's some other big catalysts now to come with cloud gaming. People might have seen the Microsoft and NVIDIA partnership that was announced. That's really exciting in the cloud gaming space because obviously, Microsoft -- or xCloud is another big cloud gaming operator and their model was around content. Now they didn't have as good -- and I could say that, they didn't have as good cloud gaming horsepower in terms of resolution and frame rates, but they did have pretty good content. And as a lot of people will know, they've been acquiring that content. And a lot of that -- those acquisitions now recently have been getting approved and moving through. But with the relationship now with Microsoft and NVIDIA, we're expecting that, that content will now be coming to the GeForce NOW platform. So all of these large catalysts that will really increase that growth in the cloud gaming space right around the corner. And we've also got the launch of our Gen 3 coming live. So you'll be able to stream at 2K and 4K resolution, high refresh rate. It really is -- GeForce NOW Gen 3 is best in class by a long mile when it comes to cloud gaming, which we're big believers of being the future of the gaming industry. So these big catalysts are all just around the corner. And what we've been able to do in preparation for these big catalysts is to actually get that business unit to EBITDA positive, just off our own backs with the paid subscribers that we have. And from the investment that we've made, we expect at least 5x more capacity that we can add, which should start to produce some pretty interesting margins. But again, we'll see how that all goes in the next few months, but incredibly proud of where we brought it to so far. So again, I do want to keep things like simple. And I know in the past, it's been very complex. I'm not even talking here about CloudGG and other gaming things that we're doing in e-sports. I just want to keep very clear and concise about these -- the catalysts that ourselves and the market need to be accountable to and what we're kind of putting our hat on, what's going to happen. But looking at first half FY'24, the things that we can say are going to be achievable is that telecommunications will become EBITDA positive. We're going to deploy those 8 towers. Obviously, some of these hurdles and metrics can be brought forward, but these are the things that the market should be looking out for in terms of when we complete them because they're all catalysts to bring the growth and come together. We're going to have a brand-new neXus deployment plan around how we're going to deploy the infrastructure that we have in hand and those grids. And I won't speak too much into it because it's probably some pretty interesting IP about how we're going to do it, but it's taking all the learnings and lessons that we have and deploying it in a way that we can get that growth back from that product and into levels that we haven't experienced before. And from a telecommunications perspective, we are going to be moving to overhaul and simplify those plans. So there's going to be a new website. We've got a very impressive development team that are working on a lot of optimization and automations in the business. So like any good business, it should be very heavily automated, especially in a space like ours where it's very consumer-driven and lots of volume of orders and whatnot and processes. So that is coming as well, and that will also be like a major catalyst for us to be able to grow without necessarily increasing our overheads like we have had to do historically where we've just had to put more people at tasks and that sort of thing because there's a lot happening. But that won't happen moving forward with the automation. From the cloud gaming perspective, we expect that business to grow and remain into EBITDA positive. We're going to be installing the Gen 3 servers. We have those. We have them on hand. That installation process is underway. And we're obviously trying to get that done in line with an Optus launch to have that capacity there ready for a larger retailer there coming off of that service. And again, we are planning to have the launch of the Optus SubHub integration. I won't speak too much on the Optus front and what they're planning to do with it and that sort of thing, but it's looking really exciting. And I think they're pretty excited about the prospect of being able to offer GeForce NOW to their users. That kind of marks the 20-minute mark. I did want to kind of go into a bit of Q&A. Sometimes, it's better just to kind of answer some questions and if there's anything people would like to know over and above what's going on. But the long and the short of the operational side, I know I keep repeating it, but we're very proud of what we've been able to achieve in the last year. It's a big milestone for us getting EBITDA neutral and covering our costs and now having the business that we can facilitate growth off the back of, it should mark for a good year moving forward, and we're happy to be in this position. So thanks to obviously the team and everything and especially the stakeholders and shareholders that have been along up to now. I know it's been challenging, but I think we've got our heads above the water now and very keen to start swimming again. So I'll just have a look if there's a bit of Q&A. I'll also invite Mart Derman, our CFO, to come in at this point. Okay, so I've got the first question. Can I change the font next time? Very hard to read. Yes, we can explore that.

It sounds like neXus is a legacy product? Yes. No, neXus is certainly not -- so the question is, it sounds like neXus is a legacy product, why would you build out new grids when you can get better coverage with 5G? NeXus is certainly not a legacy product. It's probably actually more of a -- it's a future product. It's a lot more advanced. Where we see neXus, that's the speed and latency that can compete with a fiber world, like in a world where there's fiber everywhere. We can get better coverage with 5G faster, but the 5G that we're deploying, it's not as fast as what neXus can ultimately support when built in the way that we want to build it. What 5G can do in the current market, it's very impressive. So we do want to get that 5G coverage now, get it on -- get our on-net growth back because what we're going to be able to offer with 5G is going to be very competitive in the market. But we still want to have neXus in the market because neXus can go over and above because that's a fiber competitor, you might say. So that's the thinking there. We have our legacy wireless, which is our traditional fixed wireless, it's the 5-gigahertz network that could kind of do like your typical NBN speeds and a bit more. 5G can compete with the ultrafast products in the market, and neXus can compete with the very -- the higher-tier gigabit-type fiber services or whatever their typical evening speeds are. NeXus does have a range of speed that users can get anywhere from 300, 400, 500, 600, 700. And the important thing to note about neXus as well is that it's very fast upload. So there's no middleman between us and the end user. And we're actually able to produce some pretty impressive upload speeds from the neXus network. So that's also a bit of a differentiator for that product from a fiber network where everyone on fiber, it's kind of going through the NBN and that will determine upload speeds you can get on that product. So a question, how long is our agreement with NVIDIA last? We've got a few more years. Well, I have some news out around that as well. We -- historically, when that agreement was struck, we were -- we weren't known to NVIDIA or anything like that. But what we've grown to be is actually one of the most successful alliance partners for NVIDIA. Globally, they are very happy with us and I'm sure they're more than happy to come and speak to that in calls if people are curious about that. But how that -- how the deal was struck was around -- we had to keep deploying this CapEx and that sort of thing. We are obviously going to be continuing that agreement with them, but I do want to kind of look at ways that we can just get that CapEx profile in line with our growth. And I think the feather in the cap for us with NVIDIA about what we've been able to do and they're very happy with us. I'm sure those things will be able to be worked out, but I'll be able to talk to those things down the future. Is it deliberate to not report GFN sub numbers anymore? The sub numbers for GeForce NOW is -- it can be a bit confusing. We've got our CloudGG subscribers what we deem to be like, that's the market size. Those are the people that have subscribed to CloudGG. But then you've got -- from that number, you've got monthly active users. You've got trial users, you've got paid users, you've got users on different accounts. It can become quite complicated to be reporting, sorry, my head's just dropped. Yes, it's very complicated to report those numbers. And what we wanted to focus on here is just that, that business is EBITDA positive and what -- and focus on the areas that we're going to have more paid users come in. The other big key reason is that NVIDIA don't allow us to talk about the paid user numbers. So there are certain numbers that we can talk to, which are our CloudGG numbers, those are users on our portal and platform so we can talk to those. But the feedback we had was it was a little bit confusing because people didn't know if they were paying or not paying or how many people are on which accounts and that sort of thing. So we can certainly start talking to it again down the track, but I just wanted to have a bit of a simplified message here. But how we look at those CloudGG users is like that's what we see to be the overall market, which is -- it's in the 350,000, 360,000, 370,000 range at the moment, and that number grows all the time. But the seasonality of the paid user base and the active monthly users is -- that goes up and down, but it's just always tracking up. But what we really just wanted to focus on here exiting the financial year is that, that cloud gaming business is not burning cash anymore, it's EBITDA positive. So can we expect FY '24 to be EBITDA positive? Yes. Look, we wouldn't talk to it unless we're comfortable that we'll be able to do that. There's still like things that we need to do to make that happen, but we're confident that those things are happening. So yes, we do expect now to be able to move forward as a business and remain EBITDA positive. Marketing and advertising expenses were down 20%. Will they be coming back? Look, what -- the market income obviously increased. If we increase marketing, we do increase growth. But we're EBITDA positive, and we know that we can move forward and grow using our cash and stock and whatnot in an economical way that can keep us growing and just kind of stabilize and bring some comfort back into the business. So we could go and increase our marketing spend, but that would increase the growth and we'll need to know that we can manage that. And -- yes, it makes sense, why don't you just go and grow in that now? We still just need to be conservative around our cash and deploy that cash in a nice economical fashion that gets us -- sure, we're EBITDA positive now, but we want to get that journey to cash flow positive. And the faster we're growing, it's obviously a lot of CapEx and that just creates that bigger cash flow gap that we need to close. So we shouldn't expect the marketing to change too much unless we want to change our growth profile. But the thinking now is that we kind of just want to remain on this trajectory because it's a comfortable way to just get into toward cash flow positive trajectory. If we go and change that dial, we're just kind of creating a bigger gap to get cash flow positive and albeit, the market is -- I should expect that they're excited to see we're EBITDA positive and our next step is cash flow positive. And how we get there is dependent on our growth rate, which does come back down to that marketing spend. So I'm just getting asked, can I give a further breakdown on cost base going forward and the point on Slide 4 about consolidated EBITDA being breakeven on a normalized basis? Yes. So when we're talking about consolidated EBITDA breakeven on a normalized basis, it's without that R&D. So if we just said, we're EBITDA breakeven and we're EBITDA positive and it's R&D, obviously, the next question is, what happens if you take that out? Is it still EBITDA negative? We just wanted to be clear that on a normalized basis, without the R&D, we're still able to get to EBITDA positive exit run rate in the month of June. So do I envisage that next year, FY '24, the cash balance will be higher than the $9.9 million by some margin. Look, we need to use that cash to grow. So there's still a bit of growth to come. I would expect that the cash balance will be higher than $9.9 million. But again, with careful management of that cash, we can start to have positive cash flow quarters. But to get there, it's going to come through careful management of that cash. So we still need to deploy a substantial amount of that cash to get the growth, but that's going to be done in a way that we do each month in an economical fashion and not do anything too quickly. But we just want to restore a lot of comfort and derisk the business by getting closer to that cash flow positive. And obviously, with that opens up various mediums that we can engage to go and dial up and accelerate that growth. Will neXus be tailored price for residential users? Yes, like we do -- we like to be and pride ourselves as being a value-driven telco. We are a challenger telco. The whole reason we exist is because of -- I was frustrated with telecommunications, so we do want to maintain a product in the market that is highly value-driven. We can be quite aggressive on that value and that price point because we built everything up to here to be able to extract these margins from the network so we can be viable in the market to a consumer. So yes, we do -- we would like the neXus plans to be priced around what's affordable for residential users. Bringing more users on to the neXus network helps us because that grows the network. And so yes, we do plan to have that price point for neXus in the residential market, albeit a bit of a premium. When we look at our on-net ARPU, what we want to do moving forward, we just want to make sure that our ARPU remains the same, if not slightly higher. And we want our GP margin to remain the same, if not slightly higher. And we want to bring down that CapEx cost per user to bring on to the network. And if we can keep those things in line, it should be pretty easy to model and track and see what the business is doing and what it's capable of doing, deploying X amount of CapEx. So yes, the focus around planned prices is to retain our ARPU at the levels it currently sits, if not slightly higher. I'm getting asked, do I have a view on what month or quarter we might be able to launch 5G given the current progress? We do have like a date in mind. Again, it's one of the catalysts for growth. We are stating that it will happen in the first half, but keep an eye out for things happening sooner. Things are on track, and they're progressing, but would like to under-promise and over-deliver when it comes to those things. But things are on track and not too far into the -- maybe like a midpoint in the first half. I'm getting -- what keeps me awake at night? Yes, not much, I do try to get a good night's sleep. We're very -- I know like there's challenges in a business like there's special challenges in our business, there's challenges in any business. I'm more of a person that just will look at those challenges and try and figure out a way to fix them and move forward. That's just probably how and why. So what keeps me awake at night is not too much because I'm very confident in the plan that we have. And when I see things internally ticking along and we're getting the results that we finally were set out to achieve, I can get a good night's rest. It's funny I get asked that. Are you happy with the cost base now? Have enough resources at your disposal to affect growth without having to bring on too much more cost? Just to repeat, are we happy with our cost base now? And do we have enough resources at our disposal to affect the growth? Yes. Look, we are happy with our cost base now. We've obviously budgeted for a bit of an increase in that cost base. There are some inherent things that grow in line with growth. We did have -- at the end of last calendar year, we had a bit of a reduction in some of those overheads for areas that we're focusing around growth. But we're confident in what we have today, and we have budgeted for what we do need to reintroduce into the business and bring back. And we're confident that we can do all those things within the grounds of what we've stated here today around we do want to maintain EBITDA positive. Yes. And there's a question. Mart, can't be heard on the webinar. His audio -- Mart's actually a female, Mart-Marie. Her audio -- Mart, is your microphone okay?

Yes, my microphone is on. It's just my camera is turned off, but that's internally I can't turn that back on. Yes.

Maybe we can't hear Mart. But hopefully, I've been able to answer the questions put forward. Look, there's no more questions. I'll give it another minute or two. I'm here on the floor, if anyone wants to throw anything, I'll do my best to answer. But unless that happens, I want to obviously take the time again to thank everyone for joining us. There's quite a bit of volume on the call today. I know it's been a very challenging year, especially to the team and the stakeholders that have been involved in the business and supporting the business. But we hope that the market and the stakeholders are impressed and proud of what we've been able to achieve because these things, we do want to bring credibility back into what we're saying we're going to do. And back at the beginning of Q4, we did say that we're going to be able to do these things. There were very big hurdles and mountains to climb, but we're able to do it. So as a starting point, we did that. And what we're saying we're going to do moving forward very much like keep us accountable to that, but we're confident that we can do those things. So yes, I want to thank everyone, obviously, for being a part of the journey and taking time to come into the call and hear about what we're doing. And yes, I've got a question. We'd like to hear from NVIDIA and how they think things are going. I'll try and think of a way to do that. They have historically come into some like desk briefings and whatnot with us to share their sentiment and to back what I'm saying. I'll have to think if there's a way that we can do that on a larger scale to people that are unable to attend those meetings. And on R&D grants, would we expect to see any further upside there moving forward? Yes, look, it was quite a sizable R&D last financial year. But we certainly still do R&D and what we do in R&D changes each year. So I can't speak too much more on what the R&D is going to look like this year. Again, we're trying to not put too much emphasis on the core business around R&D. We do want to put the light on, but the normalized business without that R&D is EBITDA breakeven. The normalized business without R&D is moving into EBITDA positive. And anything that we do on the R&D front comes over and above. But yes, I'd imagine there's going to be some sort of R&D for this year, albeit it's probably won't be as substantial as the last financial year. Okay. Well, I think that's everything. And apologies if Mart's mic wasn't working. But again, hopefully, everything has been answered. I will be available and the team over the next few days, if anyone wants to reach out for any more like one-on-ones or potential desk briefings, just get in touch. We're here at the ready to do that and provide any more clarity to anyone out there where it's required. But with that, again, thanks everyone for your time, and that concludes the webinar for today. And I hope everyone enjoys the rest of their day and week and hopefully chat to some of you soon.