Pentanet Limited (5GG) Earnings Call Transcript & Summary

Okay. So yes, good morning or afternoon to everyone, depending where you're dialing in from. Welcome to the 5GG Q1 FY '25 update. So as always, I'll sort of -- for anyone new coming into the call, I'll give you a bit of an understanding about what we do, who we are, where we're currently sitting. We've had a very busy Q1. There's been a lot of restructuring and focusing on the 5G strategy, which we'll talk to in depth. But again, to anyone just joining the call or coming to follow 5GG for the first time, a bit of a recap what we do. So we're a telecommunications company. That's where majority of our revenue comes from. So we own and operate the largest fixed wireless network in Perth. So that consists of circa 50 towers. We have multiple technologies that we use for our on-net services. So basically, our on-net users have a dish on their roof that connects to our private network. And those users, we enjoy quite high margin on, but they do come with a higher CapEx cost to install those users. And then we also have off-net users on the network, which are nbn and Opticomm users. So they are lower acquisition cost in terms of CapEx to get the user online, but we -- there's a certain limit on the margin that we could make on those users. We're also the -- we're the exclusive operator of GeForce NOW in Australia. So we operate NVIDIA's cloud gaming platform. So where we sit today, we have the largest deployment of NVIDIA GPUs in Australia. And what cloud gaming is, replaces the need to have a console or a computer to game. So it's turning the whole gaming industry into that streaming model where users pay a subscription, and they're able to play their games on any device, be it a Lenovo laptop or a MacBook or a TV. It's certainly where the future of gaming is heading. It's all going to be streamed from the cloud, and we are that exclusive operator for that technology in Australia. So what we've been doing with that business is sort of adopting market and getting users on to the platform through a freemium model. But slowly but surely, we're converting those users on to multiple tiers, ranging from your lower ARPU plans up until the higher ARPU plans up to the $30 mark. A bit on that, in Q1, we actually removed our $3, our low ARPU plan. So we've been able to see users start to uptake the higher plans, which is great to see. A bit more on that later. And then we're also heavily involved with software development. So everything that we do is quite novel in terms of telecommunications and the gaming that we have to build our own software that manages everything from the telecommunications business, and we had to build our own software called CloudGG, which manages our cloud gaming subscribers. So some of the Q1 highlights. As you can see, and as I've been talking to for some time, we've really been shifting our focus and strategy. We want to get our growth back into the business. We can see and we identified last financial year that 5G is really our quickest way to market in terms of getting on-net users. So when we bring a tower online with 5G, we've got several kilometers of coverage. It delivers an ultrafast speed product to market, which is very suited to where the market is moving to. So that's 5G. It's the quickest way that we can build on-net network coverage, which is the first thing you need to get that on-net growth up. So continuing growth in line with that strategy, we're able to add another 51% quarter-on-quarter to our 5G subscribers. So growth in 5G is promising and continuing to demonstrate that that's the future area with the immediate growth in the business. The next question around the 5G because obviously, it all relates to where we actually have catchment and coverage. So building the 5G network is -- it's quite CapEx intensive. But in line with the strategy to move the business into 5G, we've looked at all of our inventory and that sort of thing on the balance sheet, and we're able to successfully negotiate what I refer to here as the stock swap. So we actually were able to sort of swap some of our neXus stock. That was inventory of the balance sheet into 5G hardware. And so what that does is position our business to be able to scale and grow. And effectively, we'll be doubling the 5G network this financial year without that cash outlay for the hardware. So we're just aligning our inventory in line with the company strategy. We were able to reduce our on-net churn. Obviously, a big part of telco, especially when you get to scale, churn is something you certainly want to keep on top of. The EBITDA loss decreasing, continue to come down, and we'll talk more on that soon. And then we're also seeing that gaming revenue growth coming in. So not only do we have the gaming users moving into higher ARPU plans. We're starting to see, if you recall, when I was talking to it last update, we've actually been able to bring ad revenue onto the platform. So all of the free users, as part of our adoption strategy, we're now able to collect advertising revenue from those users. And the CloudGG membership continues to grow. It's just continually growing every day, and that was up 5% quarter-on-quarter to now over 620,000 users. So the 620,000 users, that's how we view -- that's the current cloud gaming market. Those are users that have made an account. They're there. They come in and out. They're active users. Some of them are paid users. But as you can see, when you back engineer the revenue from the gaming, it's a very small percentage of users who are on the paid subscriptions currently. But we see that user base as that's our growth potential in terms of just making those single-digit percentage of paid users into double digit and bringing an incredible amount of scale onto that platform over time. So I'll come back to the call, but what I'm going to do now is hand off to Mart Derman, our CFO, to talk through the financials for the quarter. And I'll get back to talking about more highlights from the strategy and what we're looking to do moving forward. Thanks, Mart.

Thanks, Stephen. Next slide. Good morning, and thank you for joining us today for today's update. I'll be highlighting Pentanet's financial performance for Q1 FY '25 with a focus on revenue growth, the profitability improvements we saw and cash flow management. So in terms of revenue and gross profit in Q1, we saw revenue growth across both core segments. Our consolidated revenue increased by 3% quarter-on-quarter to $5.4 million. And this includes a 2% increase in telco revenue to $4.9 million, and this was driven mainly by subscriber growth. Our recurring revenue now constitute 96% of total revenue, and we saw recurring revenue was up 3% quarter-on-quarter. This was mainly due to price adjustments on the lower-tier off-net services to offset wholesale cost increases. Then in terms of GeForce NOW gaming revenue, that was up 10% quarter-on-quarter to $0.5 million. And this was supported by, as Stephen mentioned earlier, by ad supported revenue and then that shift of users to higher tier ultimate plans following the removal of the basic plan. Then gross profit increased by 2% quarter-on-quarter to $2.4 million, and telecommunication gross profit remained stable at $2.3 million, while the gaming segment grew significantly with a 56% quarter-on-quarter increase to $0.1 million. While telecommunications margins dipped slightly from 48% to 47% due to higher wholesale cost, we did manage to minimize that impact through price adjustments on off-net plans. Then in terms of our expenses and EBITDA improvements, overhead costs decreased 10% quarter-on-quarter to $2.8 million. And this was inclusive of an 8% reduction in employee expenses and a 52% reduction in marketing costs, with most of the promotional campaign expenses occurring in the prior quarter. Then EBITDA loss improved by 52% quarter-on-quarter to $0.4 million, and this was inclusive of a $0.25 million one-off restructuring costs. This restructuring aligns with our 5G expansion efforts that will focus the business on targeting profitable on-net customers and sets us on the path towards breakeven. Now moving on to cash flow and capital expenditure. So regarding our cash flow for the quarter, there were quite a few one-off items that were included, and I would like to just highlight them now. We've got this table over here. You can see our cash used in operating activities was actually down 15% quarter-on-quarter to $0.6 million. Excluding the restructuring cost, the net cash outflow would have been $0.4 million, and we expect the restructuring cost to deliver another $375,000 quarterly cost saving for the rest of FY '25. Then in terms of cash outflow from investing activities totaling $2.4 million is including that fourth annual Spectrum payment of $1.7 million. And just want to highlight this is still the last payment for the 15-year Spectrum licenses to do in July 2025. Then in terms of capital expenditure, which was $626,000, that was property, plant and equipment. And $200,000 of that $676,000 was 5G equipment purchase that was actually funded through the Cambium NaaS facility. Then on financing activities, we made a onetime $0.4 million repayment to close out the Westpac Business loan facility. And then we've closed the quarter with $1.8 million in cash and $6.8 million in financing facilities for CapEx. So looking ahead, we are focused on expanding our 5G network and increasing on-net subscriber numbers while carefully managing cost through strategic CapEx outlay and operational cost efficiencies. So our recent restructure strengthens our commitment to 5G, and it positions us for sustainable organic growth. As we progress through FY '25, we remain committed to driving top line growth and targeting EBITDA breakeven in the second half of the year. Thank you. And I'll hand it over to Stephen.

Thanks, Mart. So yes, as Mart was saying, and as I touched on before, telecommunications is growing. We obviously do want to get growing quicker, but that's going to be a result of bringing up more 5G coverage. So I'll get on to it in this slide. But effectively, we've demonstrated with our current 5G network. It's 10 towers. We've got coverage. We're able to compete against fiber upgrade areas, Opticomm areas, all the different off-net technology types. 5G is successful. We are able to sell in the coverage. But if you look at the run rates that we're doing now, it's effectively from fishing from that small pond. And our network across Perth is sort of our lake. So what we want to do is start expanding that pond or that 5G coverage so that as we're marketing 5G, we're able to say yes to more users because more of them are in coverage. So it's a very, very critical piece for us to be able to expand that 5G network. Again, we've demonstrated that we can bring our on-net run rate up within that coverage, but we just need to expand that catchment zone. So yes, we now have enough inventory coming in from that stock swap that we're able to effectively pay for all of these tower upgrades. There's going to be 9 new towers that are already underway, getting built with minimal cash cost. And so we don't need to buy the hardware, and we're also covered for the first several hundred dishes, so users who will be coming online. The CapEx cost involved in this is really the installers that are all in-house. They're rigging, getting the framework, steelwork, all built for those. Those costs will still be in the picture, but the brunt of those costs, which is all the hardware to expand, that's going to be covered now throughout the financial year. So that's the ongoing strategy really for telco. Another big thing we did in Q1, as we've touched on, was a restructuring. So the way we view the business, it's -- as we've been saying, we want to get the business moving on its own steam. We're really focused now on that 5G strategy. That's where the growth is going to come from. So we set about doing a bit of a restructure in Q1 to fully align our business and our overheads just towards this strategy, which is our immediate and midterm future. So that all happened in Q1. So as you saw from the financials, there are a few one-off costs involved. But that has put us now on a good heading to get EBITDA breakeven and into positive for the financial year. We obviously got to make up in Q2 for a bit of the additional costs from Q1 because we are sort of in the EBITDA-positive territory now, but we've got to make up for that to get our breakeven after first half and then finishing the financial year EBITDA positive, which is -- we're very, very excited and great to see that strength coming back into the business again on our own steam. So that -- or the CapEx requirement to do that is mostly covered. We've really tried to minimize the cash requirement for that growth to give us a nice, clear runway this financial year. With that, we're also still -- we are building and onboarding 5G users. But we still have our ongoing strategy with the off-net users. So we're still able to add nbn users, albeit they're just a smaller margin. And as Mart said, and we identified on previous calls, the profit center of our business is from on-net services. So all the energy and resource that we can direct into that, the better. But there's always going to be better -- slight margin improvements and that sort of thing that we can extract from our off-net users as that continues to get more and more scale. And then just to recap now. And again, if people want to put some Q&A, I can -- we'll handle the questions at the end. But a recap on our NVIDIA investment. So as I've said before, we got involved with NVIDIA back -- some people might recall years ago, we were having to explain who NVIDIA were. So we got heavily involved with NVIDIA deploying their technology, deploying their GPUs in Australia. When we first launched, we launched gen 2 GPUs. So that was -- users were able to stream 1080p at 60 frames per second. Subsequently with our technology upgrades, we can now deliver 1080p, 2K, 4K resolution. That opened up the higher ARPU plans, which are seeing users migrate to. The strategy around the adoption of this business is still the freemium model. So we're continuing to do that. But we are looking now -- in Q2, there's a deep focus on the NVIDIA side because we do have a quite high scale number of users. The 620,000 users, we really want to adopt more users with the freemium model, but we are looking to refactor and restructure our NVIDIA plans to better monetize those users because as I said before, it's a single-digit percentage of paid users. And the primary reason behind that is because users can still pay for free, which we need to endorse so we can grow the market size. But we do consider now that we have a substantial amount of scale to further and increase monetization of those users. And it's all in line with the -- we're getting the business moving and moving forward on our own steam. Telco is doing its thing. Telco expansion is all sorted, got the inventory to do that. And now we're going to look to add another layer of growth into the business from Q2 onwards with further monetization of these users. You would have seen as well in Q1, we started to see some material revenue start to come from the advertising of the free users. So we're not going to completely remove free because we are still -- we do get revenue from the free users, but we're going to look at new creative ways, which I'll be able to talk to in the following weeks, about how we're going to better monetize the brunt of the CloudGG user base, 620,000. The other part to our NVIDIA business. Obviously, following the same line where NVIDIA, they came to be by building gaming cards and they were called GPUs, so that's how we launched, and we started building our GPUs. But now we're starting to unlock more and more use cases for our GPUs. I mentioned before, we operate the largest deployment of NVIDIA GPUs in Australia. And that's -- operating that is substantial, takes a lot of experience, which we are at the front of. And there are some interesting use cases coming online for what else GPUs can do. One of the ones we spoke to in -- a few quarters ago was when we joined the NVIDIA Graphics Delivery Network. So that's basically rendering commercial enterprise opportunities in real time for our Australian market. You might have heard the term digital twin. That's sort of an emerging sector, rendering of graphics and that sort of thing. I will mention you might have seen the other day Denza BYD, which is obviously, a big EV -- Chinese EV brand that's really dominating the Australian market. They're launching their Denza brand, which is like the Lexus is to Toyota. It's their luxury brand. And if you recall on our -- one of our last pressers when we were talking about GDN and then showing those videos of the examples, one of the use cases is like an interactive real-time 3D rendered car configurators. And Denza was actually one of the brands that was on that GDN POC with NVIDIA. So we're starting to see now the announcement of Denza coming to Australia. You can see that companies that were originally involved with POCs are coming to market. We're excited to see where that goes. And we still think that's just sort of scratching the surface of what's actually going to be achievable from GDN tasks and others. So yes, GFN gaming revenue grew 10% quarter-on-quarter to $0.5 million. That was driven by new titles getting launched. GFN is very seasonal. So you'll find a new title will come out, and everyone will come in and activate their accounts and start paying to pay the title. As we remove the lower-tier ARPU plans, the users when they do that and the ongoing continued users, they have to land on the higher ARPU plans. That's good to see and an interesting thing to watch out for to any keen observers when there are big titles that are launching and coming to the platform, we see a direct impact from that. We saw good revenue increase from ARPU increasing, users wanting that better experience on the new cards. And then we're also seeing that advertising revenue start to come in quite steadily and growing healthily. When users are using the platform for free, they have to queue. So while they're waiting for a rig, they'll be queuing up and we'll be able to show them ads. So we had some interesting campaigns come through. That's all managed by a third party through NVIDIA, people wanting to advertise on the platform. But the amount of hours that get played every month, it's huge. And the amount of impressions that are in there in terms of advertising, it's quite substantial. So we're keen to see what that revenue does over time again. But really, the core focus of the revenue growth from our GFN platform is going to be from getting at single-digit pay user base up until -- even doubling that would have substantial impact on the business and further fuel and grow what we're trying to do, especially this financial year, which is build the business on our own steam, further monetize what we have and continue to do so. So that's really the plan for NVIDIA. I look forward to having a few more updates around that this quarter. That's when we're looking to make a few changes around the NVIDIA side with our plans, prices, restructuring timing and that sort of thing. I guess what we're trying to do is align because as the GPUs operate, whether it's enterprise, commercial or gaming, that GPU or a portion of it is taking up time. So different activities on the GPUs will extract certain revenues and certain margins. So we're trying to get a lot more granular and optimize that platform, which I've spoken to in the past, optimizing exactly what revenue we can predict from gaming. And then when the GPUs aren't getting used for gaming, obviously introducing the additional revenue streams onto those cards. So look, in summary -- and I know it's a relatively short call. I'll get some Q&A. We're seeing the 5G growth coming back which is great to see. That's what we said we were going to do. And I hope that we're showing that we're delivering on that. And we're really just trying to break down each quarter and say, look, this is what we're going to do, what we did and deliver on that quarter-by-quarter, just get that steam back into the business. So we're delivered on 5G growth. We expect that will continue. We're expanding the 5G coverage. So our catchment to add 5G run rate will expand, and we should be able to see our 5G run rate multiply by the amount of coverage that we have. Building that coverage is now covered. We have the inventory coming onto the balance sheet for that expansion. So we can expect to see that telco growth come in. We'll continue to grow off-net users as they come in. Obviously, it's second prize to putting some on-net, but we'll welcome them onto the network all the same. Over time, we'll be able to get better margin uplift on our off-net users as well. In Q1, we did the restructuring. So we should be able to see the company reach EBITDA positive in the second half, and we're on track to do so as a result of that. And that was just really structuring the business purely around -- from the telecommunications division at least, structuring that just purely around what we're aiming to do with a sharp focus around 5G and with the gaming. As I've just touched on, elevating the ARPU, plan restructuring, increasing the marketing revenue from the impressions and just really interacting more with that 620,000 user base to get more of the users on to paid plans because you've got to remember that vast, vast majority of those users are using the platform for free, which has been our strategy because we have to adopt the market. People need to go and try cloud gaming and see that it works first, and the best way to do that is offer it for free. But now we're getting to that position where we want to start furthering the monetization of those users. So that's all set to happen in the first half as well. So I look forward to talking more on that in the future. There's obviously also the commercial enterprise opportunities coming through into the platform to be able to talk to you soon as well. So yes, we're positioned for growth. We did have a lot of the one-off costs, which we tried to explain in detail in Q1, but it's kind of given us a free runway for the rest of FY '25 to grow organically and to finally get the business EBITDA positive, which is a great next step in terms of where we want to be positioned and demonstrating to the market that the business is derisked at that point. And we do have that $6.8 million in financing facilities that can further fuel once we have used all of our new inventory in 5G that can fuel the ongoing organic growth without that large cash impact, obviously, leveraging the vendor finance. So thank you.

Look, I'll get on to some of the questions now. So when do we expect to be EBITDA neutral or positive? Good question. So we had some of the additional one-off costs coming into Q1. So they're all cleared out now. I don't want to look too far, but we are now comfortably -- we've entered Q2 EBITDA positive territory. But getting EBITDA neutral for the full year, that will be coming, I'd say, early second half and with a view to be able to finish the financial year EBITDA positive. So yes, we've got a bit of making up to do from Q1 and Q2 and then give us a nice, clear, positive trajectory for the second half. Another question, what was the split of cloud revenue attributed to [ ad queue ] versus paid subscribers? So yes, the material revenue from cloud gaming is still from the paid users. We just have seen the marketing spend, but the marketing revenue has started to go from something very immaterial to something more material, but it's single-digit percentages of the overall cloud gaming revenue. And in terms of, yes, the total investment made in the cloud, yes, it's a considerable size investment with NVIDIA. And when do we believe that it will pay for itself and be of strategic value? We believe it's a significant strategic value today. And our agreement with NVIDIA has been of significant strategic value from its inception. We were able to negotiate exclusivity for this platform and a path to maintain it, which we have, back before anyone was really talking about GPUs or trying to get GPUs from NVIDIA. In terms of where we're strategically sitting today with NVIDIA, we have the largest deployment of NVIDIA GPUs by a mile in Australia. So we are in a world where GPUs are becoming more and more relevant for more and more things. So we do -- we're strongly behind that this strategic investment where we sit with NVIDIA will come to be a very a substantial part of our business. The thing immediately that we have is obviously our cloud gaming users. We're getting that revenue in. And the next step is really growth hacking those 600,000 users to bring more of them into being paid. We do find -- and from what we've modeled, the highest margin -- like the highest margin that we see today without further optimization of the platform is from gaming. But the good thing about the enterprise and industrial applications, they're coming in and using the GPUs when the GPUs aren't getting used for the gaming. So where we sit today with NVIDIA is still very, very in its infancy, albeit we do have substantial scale infrastructure. We have substantial scale in cloud gaming users. But where that opportunity sits for the business is still in its infancy because I'll say again, we own and operate the largest deployment of NVIDIA GPUs in Australia. So what we can go and build that business into being is -- it's a very, very significant and substantial position to be in. So yes, we would consider that. We're quite well placed strategically for that. It's just about we need to navigate the consolidated business into clear profitability territory, get the business on its own steam, get the business standing on its own feet so that we can move forward and get out of a bit of the market that the stock sort of in at the moment. We've got to move forward out of there and then start really taking advantage of these -- of where we're placed strategically. So yes, hope that answers the questions. So look, that's all the questions for today. I'll give it another 30 seconds. I know it's been a short call. But we're really just sorting -- just cracking on, getting things moving quarter-by-quarter. And really do appreciate the support. Appreciate people coming into the call to hear and listen. And we want to move forward and keep delivering just kind of what we're saying quarter-by-quarter. So the next thing to look out for, especially to the last question, will be some updates around the NVIDIA side because we're really starting to look at how we can better monetize that user base. We've been building up the user base for years. Now it's time for users to start coming in and paying for the service, which ultimately we could control based on what limitations we put on the users -- the service being used for free. So look, with that, if there's no more questions, again, appreciate everyone's support. Look forward to our next update, and continuing to deliver. And this financial year is a big one for us because as we've said, we're quite confident we're going to be moving to EBITDA positive from here on forward. Thanks, everyone. And also if anyone wants to have any one-on-ones, feel free to reach out. Myself, Mart and Tim are always available, especially around this time. If anyone wants to do a bit of a deep dive to understand a bit further and update in models and that sort of thing, obviously, happy and open to have the one-on-ones. So thanks, everyone. Enjoy the rest of your day and look forward to catching up again soon.