Pentanet Limited (5GG) Earnings Call Transcript & Summary

Okay. I'll probably get started now. So yes, welcome, everyone, to the Pentanet FY '23 full year results. We've got myself on the call, Stephen Cornish, Founder & MD; Tim Cornish, as well; and Mart. Tim is Executive Director on the Board and Mart is our CFO. Yes, obviously, we're here for the full year results. A lot of the stuff that we're going to cover today is actually we've been talking to, due to the nature of our 4C, at the end of our last financial year. We do like to report and report quarterly, obviously. So the last quarter that we reported, did give a bit of an overview for the full year. But naturally, this is the full year presentation together with hopefully, a bit more color and the opportunity to give more color to anyone who -- with some Q&A at the end. So for anyone for us joining the call, obviously, we're Pentanet. We're a telecommunications company, but we also do cloud gaming. So these 2 businesses are under the umbrella of Pentanet, but act quite independently within the business. Our telecommunications company, primarily we're a fixed wireless provider. So everything we do is all about bringing users on to our what we refer to on-net technologies or onto our wireless network. Now that wireless network has evolved over the years, we've got a legacy or traditional fixed wireless element of that business. We've got our mesh technology of that business. And now we also have a 5G element of that business. All these technologies are in the effort of increasing capacity and the ability for us to add users on to our on-net network, which we'll talk to you later in the presentation, we extract quite good GP margins off the back of that network. From the cloud game business, we're the exclusive provider of NVIDIA GeForce now in Australia. We have operators -- customers out of New Zealand, connecting into our service here in Australia also. And what that technology is basically a large supercomputer of gaming processing ability. So users that want to play games, how that industry is moving forward into the future is that you won't necessarily need a computer or a console to play. So we're effectively that digital infrastructure provider for that cloud-based service, and we're quite close and have that relationship with NVIDIA to be able to deliver that. But I could touch on that all later on. What I'd like to do in this presentation, I'm going to hand the floor over to Mart, our CFO, and I just kind of spend a bit of time running through the financials for the year in a bit more detail. So Mart, I'm going to hand it over to you now.

Thank you, Stephen. And if you can go to the financial highlights slide Okay. Let's delve into the highlights and insights of our financial performance for the financial year ended 30 June 2023. So as Stephen said before, we've definitely faced some technical challenges with scaling neXus and that delayed the expanding of our network capacity to accommodate subscriber growth. But we've also achieved some notable milestones this year, which Stephen will cover off a bit later. In terms of the financial achievements, despite these challenges, our financial achievements has been noteworthy. We achieved 17% year-on-year growth in revenue, which totaled to $19.7 million. And both our segments contributed to the overall growth. So we saw 43% year-on-year increase in the gaming subscription revenue. And then in telco, the revenue rose by 16% year-on-year to $18.7 million. In terms of our gross profit, we had a 15% year-on-year increase in the consolidated gross profit, reaching $8.5 million with a gross margin of 43%. Now I would like to highlight here the telecommunications segment's gross margin increased by 4.4% year-on-year to 47%. And this improvement was mainly driven by higher margin on-net customers, some -- the neXus customers that did come online. And then we also had off-net price increases. Then a very exciting development for our company and shareholders would have been the EBITDA performance for the year, where we achieved 29% year-on-year improvement in our EBITDA loss. And we also achieved our EBITDA breakeven in June 2023 exit. So let's now take a closer look at our profit and loss summary. So our revenue growth of 17% was supported by the 25% year-on-year increase in off-net recurring revenue, driven by the price increases. And then other income increased by 307%. We had that $670,000 cash rebate for the research and development grant. And then although our gross margins decreased slightly to -- that was due to some of the early investment in the gaming segment, but we've seen improved margin with the June exit run rate as well as the gaming segment came into form with the EBITDA breakeven. Overhead increased by 6% year-on-year, and that's primarily due to the staff expansion in the first half of the year. But it's also important to highlight here that we've managed to reduce our overhead as a percentage of revenue from 72% down to 65% due to successful cost management strategies that we brought in on the back of the [indiscernible] subscriber growth. Then the EBITDA loss, this was due to the strategic initiatives that was implemented to boost profitability and revenue growth and then effective overhead management. We can now move on to our balance sheet. So we closed the year with a cash balance of $7.4 million. And I would just like to highlight here that the $7.4 million excludes a $2.5 million term deposits set to mature in October 2023. And the term deposit is a security for the Westpac loan facility as well. And then you'll see there's quite a significant increase in trade and other receivables. But as I just explained, the $2.5 million term deposit is sitting in that trade and other receivables. Then in terms of the investment that's sitting on our balance sheet, it's a 13.4% interest in Canopus Network. And then our write-off use assets and liabilities has also seen a significant increase due to us extending the leases on our towers to 10 years under a new Master Access agreements. Then we've got borrowings on our balance sheet and our borrowings increased due to the drawdown on the Westpac facility. Now the Westpac facility was used to acquire Gen 3 infrastructure, and this aligns with the gaming segment's growth strategy. As we move forward, our focus will remain to expand our coverage and then deliver higher speed tiers and attractive price points for our subscriber base. The tone that was set in 2023 was to set the business up to resume growth into FY 2024. And despite the challenges that we have faced in FY 2024, we believe the business is now very well positioned to assume the growth trajectory into FY '24. Thank you. I will now hand back to Stephen.

Thanks very much, Mart. So I'll touch on the telecommunications, obviously, walk through a bit of the strategy. But yes, as Mart touched on, last year was all about kind of getting the business a bit reset, getting the operating cost reset, working out the strategy moving forward. We obviously had a bit of hurdles due to some technology constraints. We constrained our ability to bring on-net users on. So last year, it was all about how do we keep the business moving forward, which we have demonstrated the ability to do with the increase in revenue, but also how do we position the business to now resume the growth. So we're quite proud of the team for being able to achieve the results given the tough circumstances of the year. But we have been able to exit now FY '23 at EBITDA breakeven across both gaming and telecommunications. The business is well capitalized for growth, and there's a strategy in place to achieve that growth. So just talking through that strategy, obviously, with the telecommunications, what we need to do is expand our on-net coverage. So the -- using our traditional wireless, that network is the network that's been full. We obviously have our neXus and our mesh technology, which is certainly applicable out there in the market, and we have a lot of stock to do so. But due to the nature of it being a very short-range device, we can't build the coverage as quickly as we could, say, with our 5G. And we obviously have this 5G spectrum that we can utilize to upgrade our towers. We've been able to have that network as a service vendor financing put in place with the vendor, Cambium Networks that reduces our cost of capital to deploy that network. So it's very much in our interest now and our non objective for the telecommunications business to grow and build that 5G network. I've spoken to it a bit on calls before, but in case anyone's seen this for the first time, give you a bit of an insight. This is some software that we built that runs the business, runs the network. And apologies, I see my camera is a bit glitchy there, that's why I switch that off in the Mart segment. So bear with me here. But what we're looking at here is the Perth market. It's obviously where we've invested where our capital and infrastructure exists. We talk a lot of our sites. We have over 50 towers here servicing the Perth region. This is the overlay of our traditional fixed wireless network. Now it looks like we have a lot of coverage. But again, just running through the history of the network, everywhere here now that I'm showing in red is where we are ineffectively stop-sell. So we did have to move away from this technology to -- because it's kind of reached a saturation point and need to move on to these other technologies that we've been working towards. If I overlay now, this is where we have coverage. So this mix is live and whatnot. And now this is where we also have the 5G coverage. So as we have said, to end FY '23, we've installed and have operated 4 5G towers, they're all online. They're working. The speeds and plans that we're going to be able to deliver to the market, utilizing the 5G technology is basically an ultra-class broadband product. So very, very viable in the current market and a lot better than what we can get. NeXus is like a step above. The neXus is like a fiber competitor. So it makes sense for us to get these sellers on 5G, it's the quickest way that we can get coverage, so that we can resume our growth from an EBITDA breakeven to EBITDA positive foundation. And just to explain what I mean by that, to give you an example of this have a look down here at this blue coverage. This blue coverage that's created from neXus meshing is a lot of nodes that are built, you can kind of see the same thing happening here. These nodes get installed and each node to project 200, 250 meters of coverage around it. We are -- with our neXus deployment, we are in the process of planning our next greenfield neXus deployment to continue these grids getting built. But in essence of speed to market and speed to coverage, speed to on-net users, that's why we're leaning heavily into the 5G. And you can see why -- which I'll turn on to 5G tower here, you see the day that we turn on that tower is the day that we generate this green coverage. And again, the 5G isn't as fast as neXus, but it's certainly viable in the market today, which is why we're very keen to get it out there. So we're obviously upgrading towers to 5G, building that coverage faster. The question raised maybe why haven't we launched the 5G yet. We -- these are the customer acquisition costs and the way that we market, it's far more expensive to target market very specifically. But let's say, if we only had 1 5G tower and wanted to sell in that suburb, we're actually going to have quite an increased customer acquisition cost if we just wanted to target users in a suburb. So the thinking is here, which we've promised that is going to be happening in first half FY '24, we're going to bring at least 8 towers online with the 5G, and that will enable us to have a stand-alone 5G launch. That's also going to coincide with better automation. We've got new websites launching. We're really trying to streamline the sales and automation process to bring users on. But in the interest of not having an increase in marketing costs, the decision has been made to bring 8 towers online. We've run the modeling, and that's a good number of towers to be able to kind of begin your blanket marketing strategy and campaigns rather than increasing our customer acquisition costs, trying to target these towers as they come online. Naturally, we do have a lot of leads and a lot of users in the pipeline, who are waiting to connect, which we can kind of bring on and bring on to these towers. But we are looking at consolidating all of our plans and simplifying the process. We are aware that we have lots of technologies in the market, lots of different plans. We have received the feedback to try to simplify that, both to the market and to the end user. So that work is underway and being done. And we expect that all to happen in the first half. Just to kind of -- hopefully, this gives a bit of clarity, as you can see from here, why we're leaning towards the strategy of just getting these towers online with 5G? [Audio Gap] to resume our growth. So's as I've said, the strategy that we're looking to do -- well, I'll move forward here. Well, okay. I'll do it on it. So yes, we want to bring 4 new towers online, we've demonstrated and shown that we're at EBITDA breakeven for the June exit. We want to continue into the first half '24 as EBITDA positive. That's the method that we're going to be able to do that from the telecommunications business. We have a lot of leads waiting there. We still have customers coming in and asking for services, obviously, but we just need to have that coverage and capacity to support it. So that's all underway and in line. So the things to look out for that, we're going to be announcing over that first half as these towers come online, is that 5G is ready and going to market. These are the catalysts that you should be watching for to see that everything is working towards the strategy that we've laid out. We do have -- with our cash at hand, we have -- and as well with the Cambium Network as a service facility, if we grow in a nice economical fashion and return to our growth rates that we've had in the past, the business is well capitalized to maintain and grow EBITDA positive and then get to that cash flow positive point. Obviously, the nature of our business being heavily CapEx. The faster we grow, the bigger that cash flow positive gap is to cover. So we're just -- we're coming from a strong foundation in our EBITDA breakeven. We want to grow on that into EBITDA positive, and we want to do that in a nice economical way, and then we'll start to also dial up and ramp up those growth rates when we're getting closer to that cash flow positive point. On to the cloud gaming business now. So this is also now a business that's starting to hit a lot of its catalysts that it needed to do to succeed. We've been operating this close to 2 years. If you're just looking at cloud gaming independently, it's a brand-new segment, brand new market with a very strong reputable business that we're aligned doing that. But for us to have brought that technology to a brand-new market that didn't exist and get it to a position that is now EBITDA positive, we're quite proud of that achieving and hoping that shareholders and the ones that have followed the journey are so, too. But that business is now reaching some pretty interesting catalyst points. So we've been able to sign on Optus. Now we always wanted to be the digital distributor of this technology. We're a telecommunications company, but we don't want to let telco hold the cloud gaming back, because cloud gaming, we effectively want to be selling that to -- we want to get that into the hands of gamers, no matter what network they're on. And so the mark of that Optus deal on its -- signify that, that was the first advancement in this digital wholesale model. We expected that Optus relationship will go live. The work is very much being done now to integrate GeForce NOW to SubHub, but that will be going live in first half '24 also. We've also been installing our Gen 3 infrastructure. So at the moment with cloud gaming, with what's live today, you can game at 1080p resolution. And again, cloud gaming is -- you no longer need a computer. You no longer need a console, you just sign up and you have a subscription, and we stream that to you. So we've been able to power a 1080 resolution, which is kind of like it's for your casual gamers and it's the basic entry level of cloud gaming. But Gen 3 is powered by 3080 RTX graphics cards from NVIDIA. So that will actually allow us to launch 2K and 4K resolution gaming stream into the market and also allow us to power a high refresh rate and high FPS plans to the market. But we do talk to the number of CloudGG users in the hundreds of thousands. There's certainly not all the users, active users, they're not all paying, but that is kind of a bit of a dip stick for us to see what the market is. These are users, who have signed up and want to be involved and want to have a cloud gaming account and want to eventually pay for it, which is where the industry is heading, but not necessarily the plan that suits them. And they might not necessarily have a tier on the platform or the game they want to play on the platform yet. So the 3080 is going live in the first half, will be a [indiscernible], because we're going to be able to open up all these new plans for all these users, who are potentially waiting for that higher tier of performance. The other catalyst of that business is now the titles that are coming on board. User obviously wants to come on the platform and they want to play the game that they're playing. There's obviously another major player in the cloud gaming space, and that's Microsoft. And our Microsoft strategy was to be buying up the publishers and buying up that content to bring on to the xCloud platform. GeForce is a much more powerful platform. We can do the higher refresh rates, high resolutions with what we're launching. But now the great catalyst that's coming is that all that Microsoft content is coming to the GeForce NOW platform. So in the first half '21, we're going to see these catalysts be introduced, where you can have your higher tier speeds, your higher tier of resolutions and there's going to be a lot more content coming to the platform. And we're entering these points in the business from a position where we've already got that business EBITDA positive. So we're quite proud of that looking at that business independently. Within that 2 years, we've got all that infrastructure out there. We've got our first wholesale customers signed on. We've got the new technology coming through, and that deal has come now through with Microsoft to bring all the content. So we are expecting big things for cloud gaming in the short to mid-term future. So -- and so that slide kind of just touches all that. It's all the content and everything that's coming. So that kind of is a bit of an overview of -- I've obviously touched on the financials. That's on a bit of the strategy. So I think from here, we can probably go into a bit of Q&A, give people an opportunity if they need to get a bit more color.

So I'm getting asked, can I clarify the first half of 5G mid first half of FY '24 or first half of calendar year? It's first half of FY '24. So it's within the next 6 months. Okay. I've just seen that it's been answered. Yes. Look, I haven't got a lot more Q&A coming through. Obviously, we'd like to leave the kind of the back end of these prisons to deal with some Q&A questions and whatnot. So I'll give a minute or 2 to see if anything else comes in. So the OpEx is relatively flat in inflationary environment. Where do you target cost initiatives? And how sustainable going forward? Look, we did tighten up a lot of the OpEx in the last year. You have to understand that a lot of our OpEx in the business, say, 2 years ago was geared towards this growth that we couldn't actually get because of these technical constraints. So there was a lot of OpEx in the business that was geared towards the growth that could actually come out that assisted us getting to that EBITDA positive point. As Mart touched on before, we did some tinkering with the off-net plan pricing. We've got a bit better margin out of that. The operational cost of the business have gone up in the last year, but we're quite comfortable that we can still grow EBITDA positive. There's going to be some incremental operational and OpEx costs. But for the most part, the operating costs of the network are all kind of in check. We did a lot of like recontracting and again, just sharpening everything that we possibly could in the network. And the operational costs of the cloud gaming that got honed a lot as well. We've been operating that for 2 years. Cloud game is all about oversubscription. So we've been able to a lot more effectively bring our operating costs of that platform down. We've introduced the new hardware. There will be slight operating cost increases as new hardware comes online, but it's all significantly lower than it has been operating in the past. And now we hope all that new potential revenue coming on to the platform from those catalysts that I spoke to with the cloud gaming. So what subscriber growth trajectory for telco, can we expect going forward? Again, we need to do it in an economical fashion, but we do expect that we can get back to the growth rates that we've had historically. We know that we can do those growth rates. We've got the same size team in place that could achieve those growth rates. We've got the capital to achieve those growth rates. So if you can look at what we've done growth-wise historically, that's kind of where we've positioned the business to be able to do in the immediate future. That can obviously increase from there, but we do want to just move back into that historic growth rate before we go and dial it up again. But looking at it, we still want to be growing those double digits percentages. I'm getting a question, can I give some potential -- some idea of potential cloud gaming users and ARPU. Yes. So that's all in there. I think, Mart, if you want to touch on what was the cloud gaming ARPUs about...?

$13.

Yes. So look, NVIDIA don't like us. I don't -- we kind of now allowed to talk about the pages on the platform. But once a year, you kind of get a look in, we have -- which showed the ARPU we can kind of back solve how it's looking there. But potential cloud gaming users, you have to understand that this is where the industry is going. So there will be a point in time where people do not own a computer anymore alone like a Chromebook or something like a dumb device and that dumb device will connect into the cloud. So the same is for computing as it is for gaming. So the potential market for cloud gaming is everyone who gained and then some because it's also going to open up actability for people that can't game, who now can because I don't need to have a computer. So the market size is significantly more than what we have seen today. But again, we -- the CloudGG uses is kind of like what we look at in terms of like the potential market size today, who are aware of gaming. It's our job to start converting more of those users into revenue and how we do that is introducing new tiers, new plans, new prices, new content and new mediums to the market through wholesale, which are all things that are happening at the end first half. So I'm getting asked the cloud gaming uptake, exit monthly revenue. Yes, that's -- yes, it's a lot higher. So if you were to look at our cloud gaming revenue for the year, it's obviously not factoring in the exit, which is a lot higher. Mart, I'm not sure if you want to chat to the cloud gaming exit revenue?

Sure, the Cloud exit revenue was just below that $80,000 mark, the recurring revenue. And then we've also got some one-off revenue for the Optus development funding included in the June exit run rate.

That's probably -- That $80,000 is probably the 1 year after the person asking, because that gives an indication of the recurring revenue. We do find with the paid users, it's -- because you can come in for a month and play your game and come out and whatnot. The overall trend is that those paid users are growing, but it's also quite seasonal in nature. So we expect we'll probably see a bit of a surge in uplift in paid users over the Christmas period of the different holidays. And we see that same surge happen as new titles, maybe a new game launches that comes to the platform that someone wants to play. The nature of cloud gaming page users [indiscernible] come in and churn once they're finished playing the game. But the overall trend is increasing. And we're seeing the spikiness of that churn reduce the more optionality that we bring to the platform. So I like the more content that's on there and whatnot. They might not necessarily be coming in just for one game, maybe they're coming into play 2 games that they want to play or 3. And there are some substantial titles that will be coming to the platform on the Microsoft side that have ongoing user base, games like Call of Duty and the Halo and the sort of games that people play as opposed to like a story-based game where you come in and you can pay the game and you can complete the game. So it's actually -- it's really interesting when you look at all the data and analytics. But because we've been operating for 2 years, we have a lot of this data and analytics, and it's allowing us to really honing out operation of that and try to think in the mind of the end user to what they're actually wanting to be able to become a paid user. So do we expect the speed of neXus rollout to increase over FY '24? Yes, we do. NeXus didn't really have much built in '23. So we have -- Again, in the effort of not increasing the OpEx costs, we have our team and our network team and installation team are working on the 5G deployment now. But we expect to have that plan for the greenfield neXus deployment ready for second half, which will allow us to utilize that stock that we have on hand. So that will be a low-cost deployment to build, because we have all that stock in hand. And on the balance sheet, but it's just getting engineered in a slightly different way to allow for a much better deployment. It's not to say that where it's deployed now isn't working, but we are aware of some better efficiencies now that we can utilize to deploy that stock. But we'll be able to talk to that more in second half. So I'm getting us can the GPUs be leased for AI research 3D rendering simulation. Like all of that workload, AI is certainly a big word and whatnot. That work and workloads and these simulations and 3D rendering are all done on these chips. So hypothetically, yes, they can do that. And if you're looking at where we're positioned in that market, we will have a very, very substantial deployment of this compute power that is not running at a loss. So there are potential big opportunities coming from our gaming deployment, but I prefer to speak to those a bit down the track. How long on average of people holding on to subscription of cloud gaming? It's a sea of data. But some people will just play for the month. Some people play for the 2 months. Some people have had their subscription all the way from the beginning. It's quite a mixed bunch. But the overall trend, be it churn here and there by whatever time period, the overall trend of paid user base is trending up. How am I going to try to reduce the churn in the gaming industry, given that most games are released towards October? I think -- all right. Like you say, games come out October, November, how we reduced the churn. The churn is ultimately up for the user. There are things that we can do to try to improve the experience of a paid user. But ultimately, it's up to a user if they want to churn after playing their game. The only thing outside of that we can do is kind of get rid of the 1-month plan, certainly in our capability that we can do that, but we feel that, that wouldn't necessarily be the best user experience, because although a user might churn because of the positive experience at the pad, they will just come back to play the next game or title when they're ready. But again, the titles that you're potentially referring to, the ones that might be coming October, November, those are titles that are more in line with the game that again, we would just consistently play like Call of Duty, for example, has a story, but people just come and play Call of Duty every day, whether they've completed the story or not as opposed to say, like an RPG title, someone might take 1, 2, 3 months to complete that game and then they don't necessarily need to pay that game again. So hopefully, with these the new titles that have repeat gameplay and that kind of user, we should see that churn reduce. But overall, paid users is growing in the right way. So 5G versus current NBN plans [indiscernible] pricing. 5G will be much faster than your normal sort of NBN plans, so it's in the ultrafast space. So to compete with our 5G plans that will be coming to the market, you would need to have all electric fiber to the home to achieve these sorts of speeds. We expect -- we want to -- in terms of our pricing for our on-net services, you can kind of see it in the presentation there, we want to retain our current on-net ARPU, and we want to retain an on-net GP margin of over 85%. So on the back of that, you can kind of see that even if we wanted to retain our on-net ARPU today, we can launch a very aggressive price plan in the market to still maintain what we've said we're going to keep to shareholders, which is substantially lower than what you'd be playing to similar speeds on the NBN. And the reason being is because we've built this network and capitalize this network, and now we're able to extract good margins of this network. So we're able to be really competitive with what we offer in the market, because we have those margins as opposed to, I'd say, if you were just NBN reselling, you're always kind of hitting this glass ceiling of what you can extract margin-wise from the plans. It obviously translates to higher cost end users. So we're quite excited about what we'll be able to do in the broadband ultrafast broadband space and aggressive we can make our pricing and that value offering that we can to end users. And can I -- last question, can I talk on videos communication on current cloud game strategy? Have there been any changes since the recent increased demand for AI? I would not expect to the NVIDIA, obviously we are very close with NVIDIA. But to maybe go through the NVIDIA if you would like to we're certainly not a [indiscernible]. Okay. Look, I think just to clarify, yes, I think we've gone through all the questions. So I might give it another 10 seconds if there's anything. But while that's wrapping up, I want to thank everyone for coming in and joining me on the call. Obviously, if you're a shareholder, thank you for your support being a long ride so far. I'm really confident in the year ahead. I know we've had our challenges, but I think that how we've positioned the business now, I think it's potentially a little bit of what we thought we're able to do. But we're moving into FY '24 now. We've substantially reduced our operating cash burn, obviously, moving to EBITDA positive territory. So really, the cash to have on hand is all there for growth. I think we have a pretty clear strategy to achieve that growth. And we're really taking it to the try to simplify that messaging on how we're going to grow, which hopefully I've done on this call, and we're also trying to simplify what our offering is to the end user to remove any potential sales friction to get these users on to the network. We're proud of our network. It's a good network and we have the benefit of the work that's been put in to date by them doing so and then also enjoying these catalysts that are coming now with the cloud gaming. Because, again, if you've been a shareholder through the journey, we've taken 2 years to get there. And cloud gaming was nothing by any means that we'll just switch on day 1 and start producing cash. We had to build that as a business, but we're pretty proud of what we've been able to do in the time period to get it where it is today. So thanks very much for your support. And to any new potential people looking at the business, hopefully, it could potentially have a good entry point into our business, because from our perspective, the business is at a highly, highly most derisked point today than it was even a year ago that we've been able to get the business in a position of. So yes, really excited for the year to come. Keep an eye out for these announcements, we've obviously said what these catalysts are going to be over the next half year for us to succeed. So as we work day and night to get these things done, we'll obviously bring it to attention to shareholders as these things are complete. So we certainly keep an eye out for these catalysts. And yes, thanks very much for joining today, and I look forward to chatting to everyone again at the next one and see how we're going.