Pentanet Limited (5GG) Earnings Call Transcript & Summary

I'll probably kick things off now. So yes, thanks everyone for joining. Again, appreciate everyone making the time. I'm excited to present our full year results. Naturally, we report each quarter. So our last quarter did kind of give some color on the full year, but again to get more into the detail on everything today. So without further ado -- what I'd like to do typically at the start of this call, I guess there's anyone new coming in, just to give a bit of an understanding and recap who Pentanet are? What we do? So we do primarily fit in the telecommunications space. But we have a private fixed wireless network here in Perth. We use multiple technologies on that on-net network. It's what we always refer to as on-net. We have over 50 towers in the Perth metro area, generating our on-net coverage. We've got multiple technologies to connect users to those towers. We have our traditional fixed wireless produces 5 gigahertz. We've got 5G licensed spectrum, which connects us to 5G. And we also have our Nexus product, which is a distributed mesh. So users that connect to our on-net services are the users that we have our higher margins, but they do have the higher up-front CapEx cost to connect, and so that's typically where we see a lot of the CapEx that gets deployed, it's bringing us on-net users onto that network. And then we also connect users off-net. So off-net we refer to any user that's on an nbn service or an Opticomm network. So that's a different -- that's a third-party last-mile network that we used to facilitate a connection to an end user. nbn and Opticomm users are -- like a lower cost to connect, but they do have a kind of limited margin given that it's not coming through our network. The other part of our business is our NVIDIA business unit. So we've been working with NVIDIA very closely for several years now. When we first engaged and built out with NVIDIA, we did so through gaming. So we run the NVIDIA GeForce NOW platform, which is a technology called cloud gaming. And effectively, what it does is, you no longer need any hardware to play games, sort of turn any screen or laptop or Macbook or TV like into a high-powered gaming rig, and we charge subscriptions for users to use that, thus putting all of that compute power in the cloud. We have a quite a significant scale of user base. So that's on our CloudGG platform, where we have around 600,000 user mark on our CloudGG platform, which I'll talk to you later. And we're in the process of kind of capturing that new market, which is the cloud gaming market. We see a huge, huge upside in the years to come. So we're kind of capturing that market at the moment, and we work on converting those users into a paid tier. The other part of our business is all around software development. In telecommunications, it's quite novel what we do. So we needed to build [ all of our in ] software to everything from a lead turning into the network and how that network -- how that user operates in the network and what technology type and everything that they're on. We had to build all of the software to support that, which is called Mission Control. And then we also have -- we've very hands-on with the CloudGG platform, obviously running the NVIDIA side of the business. It does require a lot of software and implementation around enabling that infrastructure to give the user a certain type of plan and through the billing, and enabling certain characteristics around that plan, like frame rate per second or resolution that we're streaming to them, and that sort of thing. So that's all under our CloudGG brand, that's [ part of ] the business. So from there, I'm going to hand over to Mart, our CFO. And she is going to run through the financials, and then I'll come back and talk about the last 12 months, but specifically also what and -- look what our machine and objective is going to be for the next 12 months looking forward. So thanks for that. And Mart, I'll hand over to you.

Thank you, Stephen. Good morning, everyone, and thank you for joining Pentanet's financial year 2024 results call. Today, I'll provide an overview of our financial performance and just discuss our progress across our Telco and the Gaming segment. So in terms of the FY '24 financial year, it was a pivotal year for Pentanet as we navigated some challenges in the competitive landscape. But despite these challenges, we adapted quickly and laid a strong foundation for future growth. So I'll begin with the consolidated financial update. So in FY '24, our total revenue increased by 6% year-on-year to $20.9 million with recurring revenue now accounting for 96% of total revenue. Our gross profit increased by 13% to $9.6 million, and our gross margin increased from 43% to 46%. We achieved a reduction in our EBITDA loss, bringing it down to $1.3 million. This is reflective of our disciplined cost management and revenue and margin improvements that we've seen across both segments. So next slide, please. So moving to the profit and loss statement, I'll be breaking this down per segment. So telecommunication revenue increased by 2% year-on-year to $19 million. This was driven by a 2% increase in our subscriber base. And while growth in the Telco segment was slower due to the competitive pressures from nbn, also well fiber-to-the-premise offerings, our strategic initiatives in response to this like the Fibre Connect campaign and the simplification of our wireless plans began to deliver positive results in the second half of the year. Another key development in the second half of the year was the shift of subscribers to higher ARPU and revenue plans, which this led to a further improvement in gross profit. The Telco segment's gross profit increased by 5% year-on-year to $9.2 million with margins increasing from 47% to 48%. Our Gaming segment delivered an impressive 80% year-on-year growth in revenue to $1.8 million, and this reflected a 79% increase in that paid membership base. And then our overall gross profit improvement was also supported by the strong performance in the Gaming segment, where we have seen an expanding base of paying subscribers now effectively covering that platform's fixed monthly costs. Gross profit from the Gaming segment increased by 199% year-on-year to $400,000. Then in terms of our operating expenses, this decreased significantly by 10% year-on-year to $11.5 million. This was driven by cost savings across employee-related expenses, marketing expenses and our general overheads. And these cost savings combined with the planned restructuring, growth in revenue and gross profit contributed to a 59% reduction in our EBITDA loss, bringing it down to $1.3 million. Just want to highlight, we did see some cost increases in Q4. We've targeted investment in Telco marketing for end of financial year promotions, and capacity expansion in the Gaming segment with the installation of the NVIDIA RTX 4080 servers. While this investment had a short term financial impact, they are geared towards future growth. So in summary, these results reflect our commitment to improving profitability and reducing cost to better position ourselves for sustainable top line revenue growth in the future. Next slide, please. So looking at the balance sheet. Total assets are at $41.6 million as of June 30, 2024, down from $48.1 million last year. A primary factor in the reduction was the impairment of our investment in Canopus. And this was based on our best estimate of the investments fair value and Canopus not yet generating meaningful revenues. So we recorded a $3.18 million impairment. Just want to highlight. Despite the impairment, Canopus remains fully funded for FY '25. We continue to believe in the innovative technology, which could provide a strategic advantage for Pentanet in the future. We will continue to monitor Canopus' progress and future developments, and we believe this could potentially lead to a revaluation restoring the value to our balance sheet. Then there's other two key areas I would like to highlight. Firstly is regarding our 15-year spectrum license acquired during the April 2021 ACMA auction. We have made consistent payments over the past 4 years, and we now only have one final installment left, and that's due in July 2025, around about $1.6 million. And just highlighting again the spectrum is a key asset for supporting the expansion of our 5G network. Then secondly, we invested $2.7 million to purchase the NVIDIA RTX 4080 servers. The servers are not only increasing our capacity to deliver cloud gaming services but are also now integrated into NVIDIA's graphics delivery network. And our ServiceNow for deal capability that allows us to extend our infrastructure beyond gaming and into new industrial and commercial applications. Then our cash and cash equivalents are at $5.3 million, and we have available financing facilities allocated for our 5G network expansion. Then finally, our liabilities decreased 7%, mainly due to that $1.6 million spectrum payment at the beginning of the financial year, along with the reduction in other liabilities. All of this provides us with a pretty stable foundation for executing our strategy. Next slide. Now looking at the Telco update. So our Telco segment remains the main revenue driver for Pentanet, generating $19 million revenue, up 2% year-on-year. This growth was achieved despite facing competitive pressures from nbn wholesale FTTP offering. In response to these competitive pressures, we did realign our service offering to better match the competitive landscape. We launched the Fiber Connect campaign, as mentioned before, and to attract customers who wanted further upgrades. We have also simplified our wireless plans and introduced a more competitive pricing strategy, which is already delivering positive results. For FY '24, we also launched our 5G wireless plan. Our 5G service is definitely one of the most competitive on-net offerings in the market for speed, service and deployment pace. And in preparation for this 5G launch in September 2023, we upgraded 10 towers in high-demand areas to expand our 5G wireless network footprint. And as the end of FY '24, we added 400 new 5G subscribers to our network. So those are those higher margin, higher ARPU subscribers. These combined efforts also helped us manage our churn, effectively reducing it from 1.46% in Q1, down to 1.31% in Q4. We also saw key metrics in the Telco improve as subscribers shifted towards higher speed and higher revenue plans. This shift drove our blended ARPU increase to $92, up from $91 in last financial year. And then our on-net ARPU remains steady at $88, but our on-net margin improved to 89%, up from 87% last year. Additionally, we also saw an improvement in our off-net margin from 19% to 17% -- from 17% in FY '23. So this all reflects just improved profitability across the board for our Telco plans. So now looking ahead, we do have strategies in place to further reduce churn, including targeted retention initiatives and promotional offers, but our focus will remain on leveraging these positive trends that we've started seeing coming out in FY'24 to strengthen our position in the market and drive continued growth. Thank you. I'll now be handing back to Stephen.

Thanks very much, Mart. So look, I'd really love to get into the strategy. So what we've been doing over the last few quarters, the results we're seeing on the back of that and what are we going to do specifically in the Telco space, what is the plan of attack for the next 12 months? So what this graph is kind of showing the picture rather, you can see that all of the orange to the right, that's all the 5 gigahertz coverage. So that's the traditional fixed wireless. That's where the majority of our on-net user base are. The little pockets of green are where we are live with 5G. Specifically with 5G, the plans that we can offer, they labeled as an ultrafast product in market. And what we're seeing is probably over the next 3 to 4 years, most of the market are going to be shifting on to an ultrafast plan, be it -- whatever is available to them, predominantly nbn. But we are seeing a really strong trend of users moving from 50 mega plans up and they're moving to the 100- and 200-megabit per second space. So 5G is a product offering. It serves that space really well. Again, it's on-net. So we have good margin on-net product. And really what we're doing across the last quarter was sort of doing some price testing. Now I kind of consider where we've got the green kind of like we can, we're playing in a pond kind of thing, but the rest of the coverage is our lake. We were testing what sort of run rates and what sort of growth we could get with 5G, where we can service, the viability of 5G in areas, where there is fiber, viability where there's fiber upgrades. Kind of just sampling the run rates we can extract across different areas and what they service by. And we can say that 5G is very competitive across all of those areas. So naturally the next step that we need to do is the businesses. We need to start expanding that pond, so that more of our coverage is covered by our 5G, which means everything can become easier in terms of the marketing, what product we're marketing. If it's very specifically around 5G, it becomes easier to put that product to a consumer. And the more coverage that we have, we can basically amplify those run rates. If we have double the coverage, triple the coverage -- could triple the coverage, we can naturally expect to be able to multiply the 5G run rates that we're able to see in Q4 very positive. So that's our approach. We do have multiple technologies to leverage, but it is proving to be the case that 5G is really -- it's going to be our fastest way forward to get our on-net growth back. Again, it services where the market is shifting to. We can build coverage very quickly. We have the licensed spectrum. So it really makes sense now. And especially for the next 12 months, our big business is going to take a very sharp focus on just what we're doing around 5G. We see that as the best positive way forward. So how are we going to manage that? Obviously, very conscious of the cost of capital and conscious of our cash. Expansion of 5G does require cash, but we do also have that network as a service facility. So that's our vendor financing in a way with the vendor who produce the 5G gear that we can lean into to accelerate that 5G growth without eating too much into the cash to do so. So we're going to be working very closely with the vendor over the next few months to do this. And taking a really sharp look inside the business at how we can better put our resources towards this 5G expansion, and the goal is basically to increase that level of coverage, which makes everything easier from there in terms of marketing and onboarding and installations. You get that level of volume back with the installations, which we've had in the past, which does just get a higher level of operational efficiency within the business. So that's going to be the focus. Again, the other side to that is being able to reduce our churn. So primarily with on-net churn, like off-net churn, like that's the nature of them. But with that on-net churn, we are finding that that's coming from areas where people are wanting to move to these ultrafast products, but we don't have the coverage to support that. So we're kind of churning outside of the pond, again, that we can operate in. So naturally we just need to increase the size of that pond to be more in line with the size of our coverage like, and then we can mitigate that churn better, and we can also improve that net gross and net on-net run rate. But that's the plan moving forward, at least the next 12 months. Happy if anyone -- I've got the Q&A open. If anyone wants to ask any question, happy to deal with them at the end. But I'll move into just our NVIDIA investment recap. So yes, look, as I said at the start of the call, we've been partners with NVIDIA for several years. We -- very similar to have NVIDIA aim to be who they are today, especially, they were heavily involved in gaming, making Graphics Processing Units. So they're building these chips. Chips are able to be used for variable other things now. So that's also how our NVIDIA business is evolving. So we got involved with NVIDIA primarily in at our core. We're gamers. We love the technology. So we're building out scale and building out scale for the gaming applications, which is GeForce NOW. But NVIDIA has started to now bring us more into their enterprise and commercial ecosystem. The step that we'll talk to now is what we've announced, which is the Graphics Delivery Network. So it's kind of the first entry into like the enterprise commercial opportunities. The Graphics Delivery Network is basically using our rendering compute for things like digital twins and say there's businesses out there that want to have a digital twin of their industrial environment. And if we can get more into the specifics around digital twin, but it's basically just generating quite a realistic 3D models, high resolution. So it's -- what it does for gaming, but there's a strong emerging commercial and industrial use case for Graphics Delivery Network. And the main one that you'll see surfaced and talk to -- spoken to GDN's digital twins. There's interactive 3D experience. There's movie studios and that sort of thing who need their graphics rendered and scenes rendered and that sort of thing. All of that sort of workload can run through our platform. And where we fit is effectively, we can find those opportunities ourselves directly, but we're also a part of the global Graphics Delivery Network. So there's international opportunities that are coming to NVIDIA. We're effectively a part of that compute pool, which can get distributed down to us with a commercial arrangement in place between ourselves and NVIDIA. So more specifically on the gaming. Yes, what we've been doing over the last few years. When we first launched, we could stream at 1080p resolution at 60 frames per second, then we've been moving and evolving our technology through the generations. So now we have basically the full suite of generation capacity. So we can make plans that stream from that 1080p resolution, all the way up to 4K, and introducing ultrawide and high frame rate per second. So kind of where we sit with our cloud gaming technology at this stage is we can stream like the most high-end computer available through the cloud. But there isn't really any resolution of frame rates for that, that we can't power from the cloud, which is very exciting, and it's been received really well for this consumer base because that's basically what they want to get to is being able to completely replace the need for them to have that computer or that horsepower sitting on their desk. And our model makes it really easy for them to access that because it takes that high CapEx cost away from the end user and puts it into that streaming model. And that's really where we're going to see a lot of technology moving, which we saw similarly to when broadband came out, and we saw all these over-the-top applications comes through like Netflix and YouTube and streaming services. It's actually all the OTT, over-the-top providers that had these really great business models on how to extract more revenue from the network, and the next phase of that is all going to be its cloud computing, cloud gaming and just having all of that infrastructure sitting in the cloud, which you can subscribe to. So it's a very proven model and we're very encouraged by the growth that we continually see coming onto the platform. But we do see ourselves in that adoption phase, but we're going to be doing over the next 12 months is we're going to look to refactor our plans. And of course at the moment, a lot of the users can primarily just use the service for free and that does align to our adoption phase. But over time, we're going to be able to -- convert more and more of those users and it ties similar to the paid tiers. And we're looking at ways to give [ 3 years ], there's more exposure to the high-end plans but on a time-limited basis. So there's a few really exciting interest in catalysts coming up even just in the GeForce Now cloud gaming space, and what we're going to be doing over the next 12 months to namely improve the revenue and profitability and margin from our gaming users. Just next phases. Just to try to give everyone a deeper understanding around GPU optimization. So we have our cloud gaming users using our graphics cards. We're going to be introducing commercial and enterprise opportunities. But just to kind of try understand it. So effectively, we have this really -- it's a hyperscale infrastructure of compute. It's GPU-specific compute. So here on the left you can see -- if you kind of understand that this box would represent our available capacity. We have users who are coming in and out of the platform. It's peak and off-peak. So we have our capacity that's getting utilized by paid users. And then we have all the capacity available that we allow free users to utilize, again, as part of that adoption strategy. And then over time, what we want to do is, where it's light green, that's all the free use of our platform. We want to be converting more of that into the dark green, which just basically increases the revenue on the platform. And over time, as we get more, we optimize that platform more and more. The GPUs will constantly be cycling between -- playing a certain game or this sort of plan or this sort of resolution. And then when the GPU goes idle, that GPU will then be able to be -- it will have some other workload introduced into -- like these commercial and enterprise opportunities. So over time, if we view a snapshot where we want to grow that business to -- or effectively just be consistently utilizing our GPU infrastructure with revenue-generating activities. So you kind of see this represented the paid gaming subscribers are all coming in and that sort of certain incremental revenue per hour and margin. And so that kind of uses a lot of the capacity in its peak. And then as that comes off the void and the excess compute power substituted with the commercial and enterprise revenue. Obviously, the revenue and the margins are different across these 2 measures, but they continually and continually get more and more optimized. And the gaming revenue and margin is going to be sort of fixed. That increases with higher volume and optimization. And then the commercial and enterprise revenue would see that as kind of being -- that's like a dynamically price thing based on the use case, based on the time. That's sort of how our NVIDIA business is evolving and how we're going to better optimize and monetize that investment with our GPU infrastructure. And we're really -- we're equally as excited on this side of the business because we feel we're really positioned well. Given the timing of when we got involved with NVIDIA, we increased our scale in line with the gaming. Now we are sitting quite firmly as one of the strong partner. Again, we have exclusivity for GeForce NOW in Australia. So we feel we're really well-positioned as business to grow in this area as well, because this is a highly evolving application and just all the capabilities of this compute. So we're really excited about where this can go. But just to try to give everyone an understanding again, this is how we do the business. This is sort of its current level of optimization and use but the eventual use on optimization, this means we can have far bigger revenues flowing through the platform. And the more volume that's flowing through, it means that we can optimize -- just continually optimize the platform. What HTP here is doing, what sort of use case it's doing, what sort of revenue that GPU is generating at a certain time a day, like just the level that goes into for optimization is very complex. But the simple side to that is, once you're there, you can start to really get some very interesting margin uplifts from that revenue based on that efficiency, and we worked really closely with NVIDIA on the current efficiency and certainly, the efficiency that will come to be running down the line. So look, in summary, Telecommunications, we're really going to be focusing internally on how do we build the most [ NVIDIA ] coverage as economically and efficiently as we can because that's going to unlock our ability to multiply our on-net run rates. So really keen to get that moving quite quickly. So keen over the next few quarters to show and demonstrate what we're doing in that area. And then, with the NVIDIA side, we are focused on doing these conversions. So bringing more paid users onto the platform and we're also going to be looking at how we can better get more enterprise and commercial opportunities coming on to that platform and using our capacity, which we'll be doing both ourselves on the ground here and hand in hand with NVIDIA globally, and where we fit in that global distribution base. So 2 very exciting and strong areas for growth in the business. But where we're at today, we're going to carefully manage our cash and again, most of our revenue and margin, at least for the next 6 months is primarily coming from Telco. So it's about how quickly can we put ourselves in a position where we can get our on-net growth back to levels and beyond that we had historically which you'll see us just get back to strength, and more strength. So that's really the summary. I haven't had any questions come through. I know it's a relatively quick one. We had an hour, but we kind of got through in half an hour, and again we've -- might be a lot of repeating information for a few people because our last Q4 gave a lot of color here. But if there's no questions that pop up, I'll end by saying -- I appreciate anyone that's been, along with the journey the whole time, and I appreciate people who are just joining the journey now. I do really see this as a great time to be involved with Pentanet because as a shareholder, because I'm very confident about what we're going to be doing over the next 12 months. We have had to -- especially for the Telco, we've really looked to that productization information around, where are the profit centers of the business, what's coming through -- and just how do we put more attention on those. Given our cost to capital, it's just how we're going to get back to being in a position of strength and really look forward to delivering those results around that strategy over the next 12 months and more specifically quarter-on-quarter. We came to get things moving quite quickly. So like all end of year timings, we're happy to have any one-on-ones if anyone is interested in reaching out. And wants to have some one-on-one time, we'll be setting some time aside probably over the next few days or at a time and speak to this. But outside of that, yes, really appreciate everyone's time and look forward to demonstrating the plan moving forward as quickly as we can delivering those results. Thanks, everyone.