Pentanet Limited (5GG) Earnings Call Transcript & Summary

Okay. Well, with that, we'll get started. Thanks, everyone, for joining the call. Obviously, always very appreciative of those that follow and join the journey. So yes, welcome to our FY '25 Q2 results, which also gives quite a bit of color for the first half. summarizing a few quarters ago at the beginning of this calendar year, we sort of set out a plan and said what we wanted to do to get the business profitable. So we looked at product -- all the different products of the business, where the profit centers were, which is obviously our on-net services, while we also grew our cloud gaming business in the background. And with that, we were able to sort of form a strategy as to what we focus on and what we can deliver. And over the last few quarters, we've been working hard at that, and we'd love to give a bit more color on that today. So the agenda for today, I'll start with myself, a bit of an intro, key highlights for the quarter and the half. I'll give a bit of an update on the strategy, just sort of recapping and what we worked on across first half and what sort of made the results come to fruition. And then I'll move over to Mark, our CFO, to do a bit more of a deep dive into the financials. And across the course of the call, if anyone wants to raise any questions, happy to address all that at the end. So as I was saying today does mark a very good positive milestone. We're quite proud of it. We've obviously been able to move the business into EBITDA positive now. quite strongly in Q2 as well, which did offset our EBITDA loss for Q1. So that's a little bit ahead of schedule, maybe what the expectation was, but we're very proud of that result. But although it's a milestone, it just sort of marks the beginning of our next step and stage. So the key highlights from first half is touching on it, but we did deliver the first EBITDA positive quarter and we're EBITDA positive year-to-date first half. That was from a $1 million EBITDA improvement from Q1 to Q2. So we did see our consolidated revenue increased by 7%, 6% quarter-on-quarter. Consolidated gross profit increased by 6% and gaming revenue is also stepping things up. That's got very strong material growth now affecting the business in a positive way. Good result there with 30% revenue up from PcP, 27% quarter-on-quarter, which I'll explain why. So I'll probably just jump to this slide, just sort of recapping the first half, what we set out to do, so we obviously looked at the productization of the on-net services. Where we have growth to come from in on-net, it's 5G, and we've got neXus. We did all the analysis, and we are seeing a trend in telecommunications, the market is shifting to ultrafast plans. So neXus services, it's much faster than that, and we do have very positive NPS on that product. But for us to get back to growth, it's about how quickly can we build coverage for a product that's viable in market. And that product is anything that's ultrafast plus, which we are seeing a trend. We'd expect over the next 3 years, the market is going to be shifting to ultrafast. So the quickest way that we can service market at scale, which is we need scale to get growth at scale again, we need to build that coverage. And so 5G for us, when we light up a 5G tower, it gives several kilometers range of coverage. It's just the quickest way to bring potential premises on net. So we knew that was a strategy. And so what we did at the beginning of the financial year, we sort of adjusted the cost base of the business to really sharply focus and align through that strategy. So we're able to very early in the first half, implement some cost efficiencies, which you would have seen from the Q1 results. The next challenge to tackle was the CapEx cost of the 5G expansion. So given that the focus is going to be on 5G we engaged with our vendor to look at doing a stock swap because we had a lot of alternate telco technologies on the balance sheet that we were able to swap out and align those to the 5G strategy. So that took place and that happened. And off the back of that, then we're able to accelerate our 5G coverage expansion. So what we promised to do this financial year was to double our 5G coverage. So that's on track to happen. So that's sort of what we got geared up and moving in Q1. And then while that was all happening, we put a focus in Q2 to improve our cloud gaming offering and the NVIDIA Cloud strategy. So we worked very closely with NVIDIA to optimize our capacity. We looked at changing some plans around. We looked at implementing the time capped SKUs, which you might have seen NVIDIA announced globally. It's where -- in the past, our cloud gaming is all you can eat sort of buffet. But moving forward from now from January, the plans now have a 100-hour time cap on them. So it sort of -- it helps us model what the GPU cost per hour is. And we actually encouraged the users that we had adopted already to maintain their paid plan and the sort of -- we label them as our CloudGG pioneers. So they're going to be able to stay on an uncapped plan, which we saw improve the uptake of the paid user base and ARPU. That was all part of the base of CloudGG monetization. We also worked hard on our network. We did a lot of reworking to get a lot of new automation in the business. Obviously, with the new cost base in place, we don't really want to move that dial too much. So a big focus for us in our future is all going to be around automation across both business divisions. So there was a bit of work on the back end to facilitate that. And that's all what resulted in the EBITDA positive first half. And we expect and plan to continue that momentum across second half because the plan from here moving forward is to start increasing our cash so that we can better deploy that in meaningful ways around the corner. So like I said, we're on track to double our 5G coverage in FY '25. So we've completed an additional -- we're on track to complete an additional 5, and we currently have 14 towers. So as you can kind of see in the map here, that's Perth, like in the bottom left corner, but all the orange is where we have our traditional fixed wireless coverage. But that speeds of 120 megabit per second. Everywhere where there's green, that's where we can service ultrafast. So we are -- we're not really marketing our telco per se in a material way because we are in sort of build phase. What we need to do is we need to expand the coverage, expand the catchment, expand the capacity and then we can actually start marketing the product in a more meaningful way. So you can see the focus of the coverage is very heavily north of the river. And that's just so we can get better at targeted advertising. We are still incrementally filling up the towers along the way. We light up the tower, it goes live. Of course, we're going to sell on the tower, but we do need to bring that most of this area into green. And that way, we can start doing broader marketing strategies that are less targeted as most on the call know, the more targeted a marketing campaign, the more expensive it is, and we do want to keep our customer acquisition costs under control. So we do plan to complete the doubling of that 5G capacity by the end of financial year. And then we're going to have a plan and a strategy in place to sort of light the boilers again in terms of our telco consumer-facing product and marketing and what that's going to be priced at. But we're very confident we can have quite an aggressively priced ultrafast 5G product in market that will be very viable and start to take more percent market share over and above what we have today. I'm sure we'd all love to see our telco get back to growth, and these are all the stepping stones to do so. So look, we're still incrementally adding users, but yes, subscribers need to be more meaningful. So we did get our churn under control. A few quarters ago, we promised a churn target of 1.2%. I think it was around 1.4%, 1.45% at the time. So we've been able to bring that down, bring our [ walkies ] down, waiting time down. There's a lot on the back end in terms of what we deliver to our consumer that assist that. But we do need to get the telco growing in a more meaningful way. So growing telco in a meaningful way off-net is going to come from automation and growing telco on-net in a more meaningful way is going to come from coverage and consumer awareness, which we'll be able to do once that coverage is in place. And when I say that, I mean broader marketing strategies can be TV, radio, that sort of thing where you're going to get a lot of leads in and you just want to make sure that you can say yes to them that they are within coverage. Just recapping again our NVIDIA Cloud strategy. So we have been working with NVIDIA for several years. A lot of people on the call are probably familiar early on when talking about NVIDIA, sort of having to explain what they did, what the GPU was, but we saw a very bright future in that area. So back in 2021, we deployed GPUs at semi scale in the country. That enabled us to lock away and retain our exclusivity for GeForce NOW with NVIDIA in Australia. And really, just sort of recapping what GeForce NOW is, anyone who isn't aware, it's cloud gaming. So what that means is if I want to play a game at the moment, I need to have a GPU. So I need to have a computer, a gaming laptop or a console. Where the industry is heading for gaming is that it's all going to become subscription-based. So with cloud computing and cloud gaming, have a hyperscaler like us that deploys very high-end NVIDIA GPUs at scale in the cloud. And then we carve up those GPUs and create different types of consumer mimicking GPU, which a user can pay us a subscription for and they no longer need a computer or a console to play. So it turns any Android or old laptop or Apple or TV into a high-end gaming PC. The highest end would be around $30 a month, but it means you don't have to go out and buy $3,000, $4,000 gaming PC. So our strategy with this business is premium adoption. It's a brand-new technology. We have to get past the barrier for people to enter and start using the cloud. So we've just -- over the last several years, we've been allowing users to play for free. So we have a mass amount of users, then we scaled our infrastructure so that now we can support 4K and high refresh rate. So it does mimic and replace the high-end gaming PC. And now what we've been able to -- what we're hoping we're demonstrating as each quarter goes on is that we can -- there are inflection points where there's margin uplift and ARPU uplift, and it all comes at scale. So we did have to start with the freemium strategy. Now we've sort of stepped up that strategy with the increase of our plans, increase of our offering, increase of the ARPU, but we are seeing the customers get sticky and retain. And the users who are using the platform at scale do add and assist to our margin because the more scale we have, the more optimization we can do on the platform. So we work with very closely with NVIDIA on the optimization of the platform. And like there's a little interesting fact that people are seeing, but to give you an idea of the scale and the amount of use on our infrastructure, every month, our free users play for over 20 million minutes on our infrastructure alone. And putting that into perspective, that's one person gaming 24 hours a day for years. So there's a lot of eyeballs on the platform, a lot of use. And today, you can see at the top of the flag, we now own and operate the largest commercial deployment of NVIDIA GPUs in the country, and we do that profitably. So moving forward from here, we obviously just got to keep increasing market awareness. even if you back in the numbers, you can still see it's a very low percentage of users that we've captured who are paying. We do expect that number to start increasing. But in order for us to do that, we just got to keep increasing market awareness, got to adopt and convert more users. As we do that, it enables us to scale, expand and optimize the platform, increasing margin. And then there's other use cases, some of which we've spoken to in the past like GDN and there's commercial and enterprise use cases for these GPUs. And again, they are our GPUs, and we own and operate them. So the really -- the good margin like does come from the gaming we're seeing come out now, but gamers aren't always using the GPUs. So there's going to be opportunity to layer additional revenue onto that GPU and get all those GPUs running even more optimally for longer, 24 hours a day. So we did see cloud accretion from all of the things I've spoken to. So we are starting to see that cloud gaming revenue increase materially. If you're just even looking at this business in isolation, it's 20% revenue growth quarter-on-quarter, very impressive. But even for the group, 5% revenue growth quarter-on-quarter, sort of puts us back in that double-digit percent growth on an annualized basis, we're glad to see. We did also see that large ARPU uplift from the cloud gaming services from everything I've spoken to about what we did. So that -- so I'm jumping the gun before I get to the slides, but that strategy that we laid out and we delivered, and that's what we want to be doing. Several quarters ago, we put forward what our strategy was, how are we going to get the business profitable, how we're going to reduce our cost of capital. Here's what we're going to do. And we're proud to be delivering on that. And by doing so, it's delivering on these financial results. So like we said, 6% quarter-on-quarter group revenue growth. There was a lot of -- we looked at a lot of like contract renegotiations from telco because the telco is similar to NVIDIA, like telco, we do operate at scale. So it's -- when you're looking through it, there are a lot of ways to get meaningful margin uplift over and above the revenue increase as well. So everything is really, really getting to a nice strong optimized state. And it resulted in, as I referred to, that $1 million turnaround quarter-on-quarter. So keeping in mind that Q1 did have some restructuring costs built in, but it's still -- for our size, it's impressive growth and a good result, and we look forward to continuing to deliver more of that. So with that, I'm going to pass on to Mart, and she can get to a bit more of the detail of the financials, and then we'll come back with some Q&A. Thanks, Mart.

Thank you, Stephen. Hi, everyone. And like Stephen said before, after 9 months of really hard work here we're really proud of. It's a reflection of the team's efforts, a clear strategy and disciplined focus on delivering results. So let's take a closer look now at how we've gotten here. Starting with revenue. In Q2 FY '25, consolidated revenue increased by 6% quarter-on-quarter, reaching $5.7 million. Consolidated revenue increased 7% for the half year to $11.1 million and 10% on the prior comparative quarter. So let's look at what's driving this. In the telecommunications, recurring revenue continues its steady growth. We saw 2% quarter-on-quarter, while nonrecurring revenue increased by 9%, helped by higher hardware sales and setup fees. On the gaming side, as said before, we saw a big jump. Revenue for GeForce NOW is up 27% quarter-on-quarter and 31% for the half year and then 50% on the prior comparative quarter, thanks to membership growth and the pricing updates we introduced in the middle of Q2. Moving on to gross profit. Next slide, please. Gross profit followed suit, increasing 17% quarter-on-quarter to $2.8 million. That's another result we're really proud of. Breaking it down, the Telco segment achieved a 48% gross margin, and that was helped by optimizing NBN margin and adding more subscribers. And for the gaming, gross margin hit a standout of 66%, mainly due to higher ARPU with the pricing adjustments and the optimization of the cost base. The pricing adjustments and operational efficiencies we implemented in the quarter have really paid off here. Moving on to EBITDA. Now let's talk about EBITDA. It's a big highlight for this quarter. We improved EBITDA by $1.1 million quarter-on-quarter, moving from a $0.4 million loss in Q1 to $0.6 million positive EBITDA in Q2. So you might ask how did we get here? Well, that's mainly due to the revenue growth in the telco and the gaming segment and then all the cost efficiencies we worked hard to achieve like optimizing subscription platforms and renegotiating supplier agreements. The restructuring in Q1 also played a role. And as you can see, we are now better aligned to focus on the key areas like 5G acceptance -- expansion and subscriber growth that the additional coverage will bring. Moving on to the cash flow. We closed the quarter with $2.2 million in cash reserves. The highlight here is operating cash flow. It's up $1.5 million this quarter, which was driven by improved EBITDA growth and improved working capital management. Our stock swap arranged for 5G equipment has been key to preserving the cash from investing activities. It allowed us to minimize the CapEx spend while focusing on expanding coverage and capacity. So here we are EBITDA positive and in a stronger position than we've been in a long time. The focus now is on keeping this momentum and building a long-term sustainable and profitable business and continuing to deliver value for everyone involved. Thank you. I'll hand back to Stephen to take us through the next slide.

Thanks for that, Mart. So yes, look, wrapping up key takeaways, and we've gone over them several times, but key takeaways, if there's anything from today, we delivered the first EBITDA positive quarter and EBITDA positive first half. We're on track, as we've said, what we want to deliver around the 5G coverage and our aim to double that 5G coverage is on track this financial year to complete. We've increased NVIDIA Cloud GPU optimization, which gives everyone a little bit of color about what the platform is and can be capable of at even more scale in the future. And we do expect financial growth to continue across the second half, we're comfortably able to talk to. In the past, we don't tend to give forecast and that sort of thing, but we are confident that EBITDA growth is going to continue across the second half, which as Mart say, it's great for the financial performance of the business. And really, that's the focus now. where telco is build mode, build coverage, keep that on track. We're going to keep getting that revenue and EBITDA flowing from both businesses. And we're just going to start building up cash in the business for all the things, obviously, that the business will need that cash for across second half. So very appreciative of everyone coming along and joining the journey. We're proud of the team and what we've been able to do as a sort of turnaround. But completely acknowledging we're still at the beginning, but this is looking like we're well out of that tunnel or at least emerging from the tunnel and into the light and I look forward to still continuing our strategy across second half and now well into the future with a derisked business.

So with that, I'll -- there's one question. So I've got a question around what -- can I talk to the impact of turning on ads for the ad revenue for cloud gaming? Yes. So what the user means by that. So part of our freemium adoption, we obviously allow users to play for free or the ones on free. While they're waiting in queue for what we call a rig or more technically, it's a seat or a little instance inside the cloud, while they're waiting for that, we do -- we show them ads -- so the impact of turning on ads is there. It's not hugely material compared to the overall revenue of the platform, but it is close to a double-digit percent of that. So we would expect ads to continue. They've only just been turned on. The people out there selling the ads on behalf of NVIDIA are building up the pipeline road map of those. Full disclosure, we did -- we had -- we switched off our free users in December while we were sort of going through this conversion. So in the past, you could play for free on a 1080p plan. So what our free plan was, was you can play for as many hours as you want in a month, in half an hour to 1 hour at a time, but you're only able to access the lower end of the Gen 2 GPUs. And so the streaming that you're achieving or what you're sort of seeing as a demonstration was the 1080p resolution plan. So the thinking is we -- although the 1080p is super impressive, we are seeing a lot of the users are shifting to the higher end plan because there is a big step change and a big jump going from the 1080p service to the 4K high refresh rate service. So it's going from that $10-ish plan, which is no longer $10 to the $30 plan, there's a big step-up in user experience. And one of the thinking was users who don't -- they don't know what they don't know. So if they're on the free 1080p plan, they'll come through and eventually convert to a paid user, and then there will be a lag between them upgrading their plan to finally get to 4K. Where I'm getting with this is we've changed our free user plan. So our free trial is now actually the ultimate. So we are offering users the ability to play for free on the top-tier plan, but we're very -- we've constrained and limited the amount of use that they can have on that. So if they are on a free plan, they can jump in and try the best of the best. So my thinking is if you're going out and building a new home, you go to the display home village, most of the builders, they've got the homes and they've got every single option in that display and people can opt to work backwards. So a very similar mindset that we want users coming to the platform, seeing the absolute best that the platform has to offer. The ultimate plan, it also has a reduced latency, so it's a much better service for the user. And the thinking is they can just jump straight into a paid plan on -- from that impressive experience. So my point around the ads, when we had -- when we're just running the free users up until we did this recalibration, yes, we did see ad revenue start to increase. We can see that it is going to be a potential meaningful addition to the cloud gaming revenue. We did put a pause on it through December, which means no revenue coming from the ads, but now we've reintroduced those free plans just in a different way. So yes, we do expect ad revenue to grow, but it's not on the back end, it's not what's delivering these results. What's delivering these results is the core capability of the platform, which is users using it and paying eventually. Look, I've only got that question. So unless anything comes through in the next, I don't know, 15 seconds, I'll let everyone obviously get back to their day, and we obviously have to get back to work. So the share price implies no more equity issuance. What are your views around the cash position? Yes. Look, our view around the cash position is we need to grow incrementally. Obviously, raising and capital raising for the business to deliver future growth is an expensive exercise today. So that's why we're -- and over the last few quarters, which is why we're so driven to fix the profitability of the business and sort of bring that into our own destiny to deliver. So one, there's more traditional ways for businesses to grow that we've never really had access to before, better opportunities with vendor financing and that sort of thing. So there is going to be a focus across second half to just look at our alternative funding mechanisms, if and when needed. Because obviously, we do want to keep the business growing at this sustainable rate, improving cash, but there's much lower cost of capital things that we can explore that we've never been able to do because we haven't been a profitable company. So that's the views around the cash position. We are going to build it up over the second half. We're going to use that cash for our own requirements moving forward. And we're going to now be able to have and continue conversations around lower cost of capital, banks, et cetera, et cetera, growing the business like a normal business would be able to increase elements of leveraging debt, et cetera, et cetera, because our business is still capital intensive, but we're confident we can look at those facilities now looking forward. Okay. Well, with that, thanks very much, everyone. Appreciate everyone's time joining, following the journey. We're going to get back to work and talk to you guys again soon and look forward to showing what we can deliver between now and then. Thanks.

Thanks, everyone.