Pentanet Limited (5GG) Earnings Call Transcript & Summary

Okay. It looks like we're all ready to go. I think that's enough time. So again, welcome, everyone. Yes, as I said, it's our Q4 FY '24 Update. So I'm just going to give a bit more color around what we did in Q4, what the strategy is, recapping that, how we went with the strategy, what the strategy is moving forward. And also more importantly, our Q4 gives an intensive color around the full year. So with that, let's begin. So as always, I really like to give a bit of a recap and a deeper level of understanding about what we do because we're not just a telco. We're not just a gaming or this or that, we do a considerable amount of things. So long and the short is, we are a telecommunications company. We have multiple telecommunications technologies. We connect to users over the nbn and Opticomm but more importantly, we have our own wireless network. So that network consists of what we call our traditional fixed wireless technology. We also have our neXus technology, which is a high-speed mesh like fiber competitor. And we also have our 5G on that network as well. So our 5G utilizes our licensed 5G spectrum. It's kind of what the focus of the business is at the moment to get our growth and our net growth back, which I'll touch on later. All those different technologies come at different CapEx costs and payback periods. Then we also heavily invested with NVIDIA. So we do our cloud gaming through GeForce NOW. So basically, we have a lot of GPU compute, and I'll touch on it later, giving a bit of an understanding how it all works. But basically, it's -- cloud gaming means that you no longer need a computer or the hardware to play your games. So it's basically a subscription model for gaming. We've been growing that over the last few years. We have close to 600,000 people who have signed up to the platform, a collection of those that are paying. Most of them are using it for free, while we go through our adoption phase and whatnot. That hardware is also now proving to be more capable of other things as people are probably seeing and what's happening in the global market. GPUs are not just things for gaming anymore. They're useful for many different other solutions. So very invested and focused in the NVIDIA business as well and what that can grow to being, which I'll touch on. And then the other arm about what we do is our software development. So a lot about what we do, whether it's telco or gaming or cloud. It's very novel, very new. The software doesn't exist for what we do. So we are deeply embedded in building the software around, what we do and how we support our business, and that goes across with mission control, which is everything that runs our telco. And then CloudGG, which is our software and user management platform that we had to build to make all the NVIDIA hardware work because when we got involved with NVIDIA it was so early that this software didn't exist yet. So we had to build it ourselves. So that's the CloudGG platform that you'll hear me reference. So Q4 highlights, just touching on a few other points. We're able to get our growth coming back into the business, which we said we were looking to do in Q4, absolutely. We did that through some end of financial year deals and promotional deals. With the off-net services like nbn, we have to kind of align our deals in line with market and competitors, which is quite aggressive. And then we also have the flexibility to run our own deals on our on-net services because they do run at 90% margin. So we can kind of flex the pricing on that. And the reason why we did that is to kind of see what we can do with the price compared to run rate in terms of our on-net growth just to kind of start testing the market in different price points and honing in on what run rates can be achieved in the coverage we have. I'll talk to more of that later. Year-on-year, we saw our gaming subscription revenue grow 114%. So gaming revenue, not as material as the telco, but certainly on its way in growing. And I'll talk to that later as well. GP was up on the gaming, the CloudGG paid membership -- everything is trending in the right direction. We just want to start making all those trends happening at a bit higher scale. So what I'll do now, I'll pass on to Mart because we're going to go into the consolidated financial update, Mart is our CFO. And then I'll come back once Mart is done.

Thank you, Stephen. Good morning, everybody, and thank you for joining us today. In terms of the financial update. We did see some good year-on-year growth across revenue, GP and improving our EBITDA loss. In terms of the Telco revenue, we've seen that go up 2% year-on-year, and that's in line with the subscriber trend as well. And then we did see quite a big jump in the cloud gaming revenue, which is up 120% year-on-year. And then consolidated, we've managed to get 6% up year-on-year to $20.9 million. In terms of our gross profit, we've also seen a 13% year-on-year improvement there, mostly driven by the gaming gross profit that came in. And then we've also seen our gross margin improve from 43% to 46% for the year. Also notably in the telco, we've seen a 2% year-on-year revenue growth, but our gross profit in the telco is up 5%, and this is mainly as we've started noticing that subscribers go for the higher speed tier plans, which has a higher revenue GP and GM, gross margin, at the end of the day. Then in terms of our EBITDA loss, we've maintained on that breakeven line throughout the year. In Q4, we saw a little bit of an increase in cost. That's just mainly due to increased advertising and marketing expenses, and that is mostly upfront costs. So we do expect that's a short-term financial impact and we should see that coming down in the following quarters. Thank you. Next slide. So this is just more to talk about the quarter-on-quarter. What we've seen, as you can see there, we've started to see some revenue growth come back into the business, 5% up on the prior comparative period. Also noting that our recurring revenue now makes up 96% of total revenue. And then in terms of our gross profit, with the end of financial year promotions we've seen that remain mainly flat. But we do -- like I said before, we did see some margin improvement on the back of that. And then in terms of the EBITDA loss, also as I stated before, we did see a bit of an increase in cost in Q4, but that is the upfront investment that's focusing on the long-term growth. So we do believe that will come down going forward. Thank you. And in terms of the telco subscriber growth, we are happy to report that our subscriber growth, we started seeing some good growth coming back on the back of the end of financial year promos. So 263 subscribers were added in Q4, and we've ended up the year with 17,383 subscribers. More notably, so our 5G subscribers is captured in that on-net bucket. But I wanted to just highlight that we're seeing good growth on our 5G product. That's up 46% quarter-on-quarter. We now have a total of 400 5G subscribers on the network, and we're very happy with that result. We've also noted that in terms of the 5G subscriber growth that do tend to go for the higher tier plan. And that's also once again at that higher ARPU and higher margin for us as well. Then throughout the year, we've implemented various initiatives to reduce our churn. And happy to report that we've seen a declining trend in our churn for fourth consecutive quarter in a row. So we are very happy with that result. Then in terms of overall metrics, that has remained stable. We've seen our blended ARPU increase to $93 quarter-on-quarter. And then our on-net ARPU decreased by $1 to $88. That's just in line with the end of financial year promo and when that cycle is out, do you expect that to go back on. Our net margin, still a very strong margin at 89%. And then off-net margin remained stable at that 19%. So that's not really -- we didn't see a big impact for -- from the end of financial year promo. So we're very satisfied with that result. Thank you.

Thanks very much, Mart. Yes, so I'll pick up again. So let's just go back to the end of Q3, kind of we came out. We're trying to really -- we understand that our business is very complicated. There's a lot of different technologies, lot of strategies, a lot of things that we can and can't be doing. And we identified that there are certain things that we just should be doing and just doing with a more laser focus now. And that was in -- leaning a lot more strongly into 5G. We know that the core and bread and butter of our business right now and what's material is the GP that are on-net network producers. There's different ways that we can produce GP from our on-net network based on the technology type, and they're all a little bit different in terms of speed, CapEx cost and the rate that they can be deployed. Our 2 future technologies are 5G and neXus. But what's been identified and what was identified and we spoke to at the end of Q3, 5G is just the easiest thing for us to build at speed because when we turn to 5G tower online, it's got a few kilometers a range from the tower, which makes capturing and creating coverage a lot easier. At the end of the day, for us to grow and scale on that run rate, we need coverage, and we need to know we have a viable product in market that we're covering. And with that, that's where the attachment to the speed and what the download speeds can do. So at the moment, our 5G, it's an ultrafast product. So what we really wanted to do, we wanted to flex the sort of the run -- the 5G run rate in Q4. We do that with the pricing initiatives but at the end of the day, we're only -- we're kind of fishing from a very small pond comparatively to the size of our network because we're just trying to be very economical with how we're deploying cash and growing. So we haven't been able to convert the whole network to 5G, but we've been able to target the best pockets that we can. And what we've been doing is starting to get -- we're getting a lot more data. And the data that we got over Q4 was, yes, we can flex and make our run rate grow. 5G is competitive against other offerings in market, and that's across all other off-net offerings. So we were able to outsell nbn fiber upgrades. We were able to outsell nbn fiber to the [ prem ] existing technologies or technology because that's really the main question, right? It's -- if everyone eventually has fiber, which we need to be competitive for that day, can our high-speed products be competitive in that market? And we have demonstrated in Q4 that, yes, they can. And yes, we can bring that growth back. But we -- the thing that we need to do is obviously start scaling that growth and how we do that is by building more coverage. So we do intend to do that. But still, we are -- we need to do things in a responsible way. So really good results from what we intended to do in Q4. We're going to keep continue doing it. And really, at the end of the day, if we have on-net churn, it's not coming from 5G areas, it's potentially coming from everywhere in oranges where we're less competitive because we don't have the ultrafast products, right? So if you're seeing on-net churn in the numbers, it's coming from outside of the areas where the network has kind of been updated. The other metric and trend that we're seeing in the market, and Mart spoke to before, there is a big shift for people -- a lot of -- most of the market with nbn and Internet in Australia at the moment are all on the 50 meg plans. There's a big trend where people are shifting up to the 100 and [ 200 ] meg plans. So you're seeing 50 megabit per second really decline. 100 and 200 meg plans are starting to really increase, which is great for us because that's this area and space that 5G plays in. We just -- at the end of the day, we need to have more 5G coverage. We're going to proceed, and we're going to keep building 5G coverage. But as I said, we've got to do it in a really measured manner just given that we are trying to be really conscious of cash and growth. We're trying to be really conscious of filling up the towers and the capacity that we have currently. But as you can see there, what's been identified is for every dollar that we spend on 5G, we can get $3 back plus at scale. So it's absolutely somewhere where you'd be deploying capital in our business and we intend to do so. And with all of the growth, I'll just reiterate for everyone on the call, we can grow 5G through our NaaS facility. So that's a Network-as-a-Service facility we have with the vendor. So we're actually able to deploy any 5G infrastructure without the upfront CapEx costs. There is an upfront CapEx cost, but it's about 30%, and then we pay off the remainder over the 4 years. So we have that facility in place. We can flex that facility. We can use it or not use it. At this point in time, we will be leaning into it and using it, just to be more conscious and preserve the cash that we have. But what's really been identified is 5G can be a strong player in the market and it is. And it's a really good return on investment for our capital in the business right now. And it's demonstrably the fastest thing that we have to deploy and the speed that it delivers is where the market is moving to want. So again, if there's any questions and that sort of thing on that, we can answer them in the end. So yes, I mean, that kind of summarizes telco and I'll try to keep everything short and sharp. That's really what the focus is and what we should be looking at doing. And our investors and stakeholders are looking at what we're doing. It's from telco, it's laser-focused 5G. Get -- spend $1 and get $3 back over time. Let's now move on to NVIDIA. So the investment for -- NVIDIA investment recap. So we've been involved with NVIDIA for several years now. When we first deployed GFN. Again it's cloud gaming, you stream your games to any device. So we could turn an old laptop or a Mac book or something that can't play games into a gaming PC. So -- and you pay us for the privilege. We're not at the moment, it's free. But when we first launched, you could stream at 1080p resolution. So it's kind of like -- it was a high def service. We went through multiple upgrades and iterations of it. But now what we have deployed, we could safely say, we are fully now deployed from an NVIDIA and compute perspective because we can stream 1080p, 2K, 4K resolution, higher refresh rates and different attachments to different things. I could get a lot more granular with it. But basically the infrastructure that we have and the plans that we can offer in market are ones that can completely replace the highest in gaming PC because now we've also got like a 40/80 graphics card equivalent plan. So it's very -- you could probably relate it to when say you're getting your Netflix, you can get the 1080p Netflix or the 4K Netflix. They have different ARPUs or different costs, else follow that same manner. Trying to capture most of the market, but also we had to progress our technology in that phase because we're the first people doing cloud gaming in Australia. Australia has a very unique and different network and infrastructure to the rest of the world. So we had to make sure 1080p worked because when we first started or before we did, a lot of people said, well, cloud gaming can't work on the Australian networks. We proved that wrong and proved that it did and worked well, and now we've stepped through and now we can deploy and service all of the technologies because obviously, different technologies like 4K uses a lot more bandwidth than the 1080p service. So that's where the infrastructure sits with gaming. And now I've also said that NVIDIA is starting to open up more pathway for us to generate return and revenue on that infrastructure because GPUs, which is the core thing inside all of this infrastructure or graphics processing unit. They do a lot more things than just gaming, which you can probably see how -- what NVIDIA has done, NVIDIA historically always built these cards and chips and they got to where they were because they were building gaming chips. And then eventually, all of the technologies get starting to be used for other things. So we announced that we have joined the NVIDIA Graphics Delivery Network. Again, I think I've kind of gone into that quite deeply. So I won't go too much into exactly what the technology is everything, but it's -- you could create digital twins. It streams real-time graphics, like a game would, but for like commercial and enterprise activities. That commercial and enterprise market as well can be broadened, and we are looking to do that. We're just kind of bringing technologies one by one onto our GPU compute. So a very exciting space. As Mart would have said earlier as well, NVIDIA gaming update. This just goes into a bit more granularity with the paid users. So obviously, we're seeing revenue increase. ARPU is remaining consistent. Let's just keep in mind as well that the strategy right now for cloud gaming, like yes, we have paid users on there, but we are still in our adoption phase, and I'll probably talk to that here on this slide. So cloud gaming is quite novel. It's quite new. There's a huge market out there. There's a big market that hasn't been tapped. So far, we can safely say that the known market is 600,000 because that's how many users are on the platform, but they're not all paying. And probably the main reason for that is because they can still kind of do it for free. But we are trying to still entice them to better tier plans. So we have the flexibility to create our plans, create our ARPUs. But at the phase of the NVIDIA business, we're still looking to capture market adoption for the technology. So we're trying to not have too many barriers for people to come and actually try out cloud gaming. As every month goes by, more and more people hear about cloud gaming, but when you first hear about cloud gaming, you think I will -- that sounds cool, but I don't think cloud gaming works and that sort of thing. And eventually, people try the platform. You have to let them try it for free and they're like, "Oh, I don't think there's really any bad reviews about the platform." It is really seriously impressive technology, especially if you're playing on the higher tier plans are the only barriers, you got to be paying for the higher-tier plans. So what the plan is for this, we want to start introducing ways for people to trial the high-end plans. At the moment, people can only trial on like the very basic membership, but very similar to, say, you're going to build in your home and you go to the display home village. Most of the builders are showing you the best homes and all the options and all the fruit and you kind of work your way back from there. Just given the nature of how we've got to where we are, our display home is like the basic version. So we would really love to try. There's things we can introduce like day passes, hour passes, this sort of thing, different sorts of plans, different ARPUs, different trials. We are going to look to see how to create like an ultra trial, which is the -- the top tier, but a trial. And we just have to be cognizant of gamers being gamers and the market being the market. We don't want people making multiple accounts and that sort of thing. So we're just implementing like 2-factor authentication and all this stuff. I won't get too technical with it, but it's a balance for us to introduce doing these things. But anyway, what I've done is create this sort of graphic because there's obviously a lot of interest in the NVIDIA business. It is quite complex, but at high level, to try and understand the commercialization around the NVIDIA business, I've created this, and I hope it represents it well. But as you can see here, let's just say, this box here is our build capacity or it's our board capacity. It's all confined in this box. We can turn on and off that capacity to reduce operating costs. We can -- if we turn on capacity increases operating costs. If we turn off capacity, it reduces operating costs. We can deploy CapEx and increase the size of our box. So that's another metric, but that's not what we're doing right now. But to give you an understanding about what's happening inside the cloud. So here in the dark green, you can see this is sort of our paid use. And what this chart is sort of reflecting is, I suppose it's cross 3.5 or so days. Obviously, with gaming, very similar to Internet, there are peak hours and off peak. We're not gaming right now. We're on this 5GG webinar, but that could be a different story come night time when people are home in their gaming. So you do see those peak hour peaks and troughs, which means you do have to have like a -- you have to have a floor or a ceiling kind of set quite high to facilitate your peak time loads. But what that means is that you have excess capacity and the capacity isn't always getting used and so on and so forth. So the current state of our business is we have x amount of paid users on the platform. We have capacity turned on for the majority of the use of our infrastructure for free users. Again, we're capturing that market. So as you can kind of see here, the pale green would be like the free user base, where that's us capturing market and our cost. But where the business, where we want to take it to and what we're targeting to get a better understanding about optimization, it's increasing the paid user base to use this capacity, which is converting users more across from free into paid. We should see the graph sort of start reflecting now more solid green. And then we'll probably in parallel to doing all this, you'd be introducing the commercial and enterprise revenue in all our gaps. So a really well optimized GFN or GPU deployment. And what we're working towards with our NVIDIA business, is to have our box and our capacity always doing something and more so importantly, always doing something that's revenue generating. But it has to be growing. It has to be built. That's what we're doing. We're on path to do so. But as you can see, if you have your box, which is effectively your deployed investment, you deployed capital or your servers, you want to have them fully turned on all the time producing revenue. And so in terms of the purple, that's the commercial and enterprise revenue. Sales channels for that can either be direct. So we are in the process of assembling what our sales and sales channel looks like for national, commercial and enterprise GPU compute customers that we're going to be pouring in to the top. And then there's also deals and that sort of thing that can be bought from NVIDIA. So -- because we're part of the NVIDIA global network, global NVIDIA deals that need to be run in real-time, in Australia and New Zealand, they come to us. So again, just summarizing on the left is a snapshot of what that business is now, snapshot on the right is what we're looking to build that business into. So as you can see, it's -- right now, currently, it is in early phases, but it has huge, huge potential, and we are an absolute front runner. And not only that, but we have the exclusivity for the GFN platform. So all of these other applications and revenue opportunities, they fall under that GFN banner. So yes, very, very exciting future there for us. So look, in summary, we've still got a relatively strong cash position. We are being -- we're trying to be quite preserving of cash. We're not going and building too much. We did obviously invest in the NVIDIA infrastructure in Q4. So that came out. But at the end of the day, like what's the investment thesis and value like with Pentanet, it's -- we are a serious telecommunications operator, albeit we only play in the Perth market, but we got 2% of the Perth market here. The reason why we only play in our local market here is because we have our own infrastructure here, that can produce very, very strong margins when we deploy that CapEx onto that network. There's $31 million in assets on that telco network, generating that $19 million revenue. We are not like a little telco anymore. We have licensed 5G. We've got over 50 towers. We have all the ingredients that we need as a telco to be really, really successful. We're just in a -- spot in our journey right now is that we just got to be really preserving of cash. So we can't -- the more we deploy cash, the more we can grow quickly, but we've got to be really cognizant and there's a delicate balance right now. But fundamentally, we have all the ingredients that we need to be a really successful telecommunications business, very cash flow positive telecommunications business, right? And then we also are really, really well positioned in a completely new market with NVIDIA. So -- and all that investment is done. It's been invested in. It's online. It's there. We've got everything in place with NVIDIA. We've got the user base growing. As I said before, we're still early stages in that journey, but everything from here is like really, really good, exciting upside. We have a place in the future of telecommunications and the technology that you need to have a spot. And then we are really, really well placed in -- I know it's a very different business. They have their synergies, but where we're placed with NVIDIA very, very exciting place to be. We're very excited by it as well. We're excited about all the things, but that has huge, huge potential. And I really look forward to being able to demonstrate and show what more can be done in that space. But for the time being, we're just, like I said, economically, methodically doing what's logical and reasonable for the business right now. And with that, thank everyone for coming with us on that journey and look forward to the journey ahead and whatnot. With that, I'll just chat to some questions.

Yes. So can I chat a little bit about the competitive pressure in telco and how we're navigating that? Yes, as I said, like the competitive environment for telco is it's heating up. It does heat up a lot more at the end of financial year, from being honest. But what we are finding, and you can probably see, if you're looking at the other telcos who are more just only or specifically focused on off-net. A lot of them are kind of just giving it away at cost. So unfortunately, we do -- for us to be competitive at off-net, we have to kind of do similar. So what's happened is we've had to compete in that market. The deals that were out there and align with market was 3 months off at this price or 6 months off at this price, which we've had to align our deals to. So we had growth in the business now. From the back of those deals, we mitigated some churn, but we didn't see a huge revenue uplift from doing it, but we will expect to see that come back into the business after that deal is up. In our case, it's the 6-month time. So in terms of off-net, sure, we can keep answering around doing that and aligning ourselves and competing. We do have some differentiators in market even with off-net. We are local. We're focused here strongly in Perth. The other side to that is, we do generally 10 games and stuff can gravitate to us and that sort of thing. In terms of how we can compete with the competitive pressure in telco with our on-net services, we can obviously flex the ARPU. So at the end of the day, we can -- we could provide faster Internet for cheaper and still have a bigger margin than our competitors. It's just the level and rate that we can flex that lever in the businesses comes down to the cash and the rate that we want to grow. So I hope that answers that. The other question I have is when do I expect or imagine the cloud gaming demographic to move to a paying segment? Yes, it's a great question. I think that we do see really good data that I think it's about 80% of the paid users do start as free. So it's definitely a good way to capture that. There are different levers that we have and mechanizations to create these events and catalysts like making free users becoming paid. One of them would be -- we can -- well, we can turn off the free if we want. But all these things just have to be balanced and measured and done with a lot of the consumer market analysis. But we're just -- we're seeing it grow. I think one of the big catalysts to have a higher level of adoption would be working out, which we're doing now like the day passes. So at the moment, you're paying per month, but we want to introduce a new plan, which is you can pay per day. So it's a lot more -- it's a more premium plan for a day rate, but say someone wanted to try one of the higher-end plans or play on the weekend with their friends. They don't necessarily need the whole month. They just want to turn it on for a few days. They can -- they could buy a day plan. And when we do all of that integration and implementation for day passes, while we're doing that work, we can also look to do like a very short version of an ultra trial. We like the very high ARPU plan, we could introduce the half an hour trial on that, so people can go and experience the best that the platform has to offer. And the plan that we see the users over time, gravitate towards just trying to expedite that process. If we give them the plan that everyone eventually ends up on to try first, we don't have that time lag of them trying all the different ones and they laid up to wanting more and more from the platform. So yes, there's a collection of different catalysts. We are working on all of those across the first half this financial year. Really looking to work towards this whole picture. I'm not saying this will be the picture by the end of the first half, but there's 2 very sharp focuses in the business right now, which is 5G on-net growth and optimizing the NVIDIA business in terms of growth and conversion. The other part to that is, over time, we do expect that ARPU to grow. And I probably should have mentioned as well, you can see here in the last line. Once we do reach this level of optimization, the margin for the business actually climbs as well because there's -- I mean this is super, super high level optimization [ 101 ], but there's so much more granular optimization within the platform around SKUs and seat types and what games are running on what GPU and how GPUs are carved up, like what it gets date. It's cool stuff. But basically, what it means for the market and stakeholders that aren't interested in the technology as much is that we can get a really significant margin uplift from what we have today once the platform gets more and more optimized. I've got another question. Are we using AI in the business? Yes. Yes and no. Like we do -- like we've obviously got our AI use cases in terms of what we do or don't. AI is a different story. Like AI will tend to just tell you what you wanted to hear. So do you have to be really careful with using AI, but super, super powerful technology. Yes, we use AI in different areas of the business day to day. I wouldn't say we're a fully blown AI organization. There's a lot of organic intelligence here. But yes, that's interesting question, but yes, yes and no, okay? So, yes, thanks, everyone, with that. I think that's all the questions we have today. As always, if anyone wants to reach out, this is a really good window. We've obviously done our Q4. We'll have our full year and everything as well following. Most of the information is captured here on our Q4 reporting. But if anyone wants to have one-on-ones and reach out like that, this is a good window probably over the next week to do so. So please feel free to do that over the investor e-mails or you have our direct contact, do that. But in the interim, thanks very much for everyone joining the call. I look forward to what we can be doing over the first half again. And thanks, everyone, for your support and attendance.