Pentanet Limited (5GG) Earnings Call Transcript & Summary

Okay. Well it looks like everyone is coming in. Yes. Look, thanks, everyone, for making the time. Again, good morning or afternoon, depending where you're dialing in from. With the results, obviously, it's the first half FY '25. We already have given a lot of color on the first half from the Q2 results. But all the same, we appreciate everyone dialing in, whether you're here again or coming in for the first time, looking forward to running through how the first half went and recapping a bit about what we did. So just agenda for the day. And again, it should be a quick one. We just have a bit of an introduction. I'll run through a bit of the strategic update, and what are the key things that we worked on across first half to sort of deliver these results. And then I'll pass on to Mart, our CFO who will give a bit more depth on the color for the financial results. So look, the key financial highlights from first half, we were able to deliver the first EBITDA-positive half in the company's history. That was a $0.4 million EBITDA improvement in PcP. Consolidated revenue increase of 6% prior comparative period. Gross profit was increased by 6% and gaming revenue, obviously up 31% prior comparative period, not to sort of just read out the things. But the key operational updates, what we said we're going to do this financial year was double the 5G footprint, which is on track. We improved some telco operating efficiencies. We've continued to add 5G subscribers along the way. We increased the NVIDIA Cloud optimization and further that strategy sort of going into it in a bit more detail. So a few quarters ago, we identified and told that to the market that we identified some key product areas in our business that are obviously generating the best profitability. One of the main ones really is our on-net services. We do extract quite good margin from our on-net products. So when it comes to building on-net, we've got two viable products in market that we can deploy. And we've obviously got our neXus, which is like a gigabit service, both up and download and then we've got our 5G offering. So both of those products are viable with where telco are all shifting, which is into that ultrafast space. So it's a question of which of those two technologies can we deploy as rapid as possible. So we identified that as 5G. Obviously, if we bring a 5G tower online, we generate coverage much more quickly than we can with neXus. And given that the speeds 5G can deliver, it's very reliable to where the market is shifting. So we made that identification. And so then we geared the business really solely around that. So we looked at some inventory on the balance sheet, which we were able to redirect into 5G hardware, which gave us enough infrastructure for 5G deployment to do that doubling of the capacity this financial year without really having a substantial cash impact on the business. So we went forward and ahead to double that 5G footprint, which is well on track. So that's really what we looked at doing across Q1. And then we also did a bit of restructuring in the business, looked at a few different cost controls that we could implement to better align the business to this laser-focused strategy. So that was all done through Q1. And then in Q2, we put a bit of focus into increasing the monetization of our NVIDIA business. So we worked with NVIDIA to improve our GPU optimization. And that platform runs at substantial scale now. We looked at some plan changes, some pricing changes. We introduced playtime onto our plans, which I'll get into more detail around. And then we also looked at increasing our optimization across the network. So we're able to get some margin uplift on some different supplier contracts for our upstream services like nbn and fiber deals and that sort of thing, sort of backbone that operates both of those businesses. And so all of that combined was able to produce the financial results across first half, which again was our first EBITDA-positive half. And we do expect that to continue to grow across second half now as well. As I touched on, we identified 5G as our main focus or our immediate focus right now. So when we're talking about on-net services, our customers have a dish on their roof that connects up to a tower. So if we're comparing the two different technologies, when we upgrade a tower to 5G, we just -- the minute that, that tower upgrade is complete and we turn that tower on, we get several kilometers of coverage coming out from that tower. So the thinking is we're obviously onboarding customers as we go. But when we're filling up a tower case by case, you've got to do quite targeted marketing, which can increase your customer acquisition cost. So really, where we need to be is we need to complete this doubling of capacity and coverage. So effectively, we'll be covering the north of the river. And that will enable us to go out and launch a new 5G product in market effectively in a much bigger way. And that's where we expect that we'll be able to see that on-net run rate start to improve. So at the moment, from the telco perspective, we're pretty much sort of in the build phase, focusing very heavily on building this coverage and capacity so that then we can go and introduce the marketing of that product. And we wanted to align that to when the business was profitable so that we can look at more cost-effective ways to facilitate the growth of the network. So at the moment, when we build 5G and add customers, we are able to leverage our vendor financing, we refer to that as the NaaS, but we have structured that in a way that we can refinance that NaaS and we can potentially seek a lower cost of capital by our estimates, 20% to 30% lower cost of capital per user on a different facility to go and facilitate that growth. So we needed to make sure that, that was aligned with the business being profitable and having access to this facility so that we can effectively come to market with a very competitive offering in terms of speed and pricing, which will be the really big thing to get our run rate -- our on-net run rate specifically back up. Because at the end of the day, Pentanet, we're a challenger telco, and we do need to have a disruptive offering in market. And these combined, we will be able to facilitate that. So we're expecting the 5G doubling should be complete towards the end of financial year. And then we'll be able to introduce that new product in market and sort of get back to stronger growth towards the end of this financial year and onwards. As I said, we are still adding those users incrementally, but the numbers do -- we're aware that our subscriber numbers do need to grow. So that's really the plan of attack to get back there. It's just getting more coverage and capacity. And then it's something we've done before. When we first deployed our traditional network, we had the 50 towers. We had the coverage. We had a disruptive price point in market, and we were doing quite good material on-net run rates. So certainly something that we know how to do, and we're looking forward to getting back to doing it, but we do need the foundation laid to facilitate that, which is that coverage and capacity. So I know we would like to see a lot more growth coming into the business up until and beyond that point. But really, we are expecting these numbers to sort of materially change once we have gotten through the coverage and capacity expansion and actually relaunching the 5G product in market. Just a little side note, we do -- when it comes to pricing of our 5G offering, for every $10 we want to play with effectively on that ARPU, it just increases the CapEx payback period by about 2 months for that subscriber. So that's why we want to just get a better facility in place that we can leverage so that we can then leverage the ARPU and increase that run rate to what we've been able to do in the past. In terms of our NVIDIA business, so sort of just recapping for anyone new on the call, we've obviously got our telecommunications. So we do nbn and fixed wireless services. And then we have our NVIDIA Cloud business. So we offer NVIDIA GeForce NOW. We're the exclusive provider of that in Australia. We have customers in New Zealand. And what that technology is we effectively have -- I mean we do have -- we own and operate the largest commercial deployment of NVIDIA GPUs, but what they're doing is running people's games from the cloud. But at the moment, if I wanted to play -- not anymore, but in the past, if I wanted to play a game, I need to have a console or I need to have a gaming PC. This takes all of that away from the end user and they just pay us a subscription, and then we're doing all that powering and rendering in the cloud and streaming that game directly to them. So we launched this service in Australia in 2021. We've gone through different iterations of the technology. When we first launched, you could only stream at 1080p resolution and 60 frames per second. Now we've been able to upgrade our hardware, and we can -- we offer plans that can stream at 4K resolution and 120 frames per second. So basically, it's as peak as you can go in terms of gaming performance for what you'd ever need to sort of purchase as a service. So we've built that business from a brand-new product in market to now, as I said, we own and operate the largest deployment of those GPUs in Australia, and we've got that business segment profitable. The benefit of this and where this can go, there's obviously a lot of use cases and different things we can do with GPUs, which we signaled we're sort of starting to get involved in. The competitive advantage that we have in that space is that all of our operating costs in that business unit and infrastructure is all paid for by our gaming revenue, which we hold exclusivity over. And so we'll be able to, in time, be quite competitive in the GPU, in the cloud space as well. And we have all of that deployed. So we're well versed in how to get this stuff online and operate it. That's why it fits so well in the halo of telecommunications running this business as well. So really from here, we need to increase market awareness of the GeForce NOW platform, which adopts the new users. As we scale and expand, we get further optimization into the infrastructure. I could talk on hours about how that functions. But with that, we get margin uplift, we can get ARPU uplift. And then as additional services get introduced onto the platform, that obviously creates new revenue streams into the platform, which further fuel that margin uplift on sometimes the idle GPU capacity. So that good business there. It needs to grow further, but we've got that in a pretty good place as a start. So yes, our cloud gaming or cloud revenue has grown 31% from the prior comparative period. And we are starting to see that optimization coming in and where you can see with the ARPU, it has increased 7% PcP. So that's in line with our -- when we first launched and up until Q2, we heavily relied on our freemium adoption strategy. So we've got over 670,000 users on the platform, and they all get introduced into the platform for free. And then over time, we want to look at ways and improve on getting those users converted into paid users. And so with that, we can play with the plans and the time that people can play, what settings resolution and that sort of thing and over time, get more people onto the service and using that as their primary source for gaming, which in turn increases that value offering for the user and in turn and change that ARPU in a positive way for the business. So look, that's pretty much our operational. And as we go, feel free to put some Q&A in because I will get back to it at the end. But with that, I'll hand over to Mart now, who will run through the financials.

Thank you, Stephen. Good day, everyone, and thank you for joining today's H1 FY '25 results briefing. So we're very pleased to report that H1 FY '25 marks a key milestone for Pentanet as we continue executing on our strategic objectives. We delivered positive EBITDA. Recurring revenue growth has continued across both telco and gaming, and we're making great progress on our 5G expansion. In terms of our financial performance, just a summary, like Stephen said before, positive EBITDA for H1 FY '25 of $0.2 million. That is a $0.4 million improvement on the prior corresponding period, which is H1 FY '24. Then we saw group revenue increased 6% on PcP to $11.1 million, and that's reflecting consistent growth across both telco and gaming. So our consolidated gross profit increased 6% to $5.2 million with gross margin staying stable at 47%. And then GeForce NOW revenue increased 31% on PcP, reflecting growth in premium membership, price adjustments, and then the ongoing monetization initiatives. Telecommunications revenue increased 4% on PcP with a growing 5G subscriber base and higher ARPU trends. And then our churn improved to 1.3%, reflecting obviously that higher customer retention on our on- and off-net services. So now let's dive into the details, and we can start with revenue. So in terms of the telco revenue, we grew 4% on PcP, reaching $9.9 million. This was driven by steady subscriber growth and a shift towards higher speed plans, which gives us that higher ARPU. Nonrecurring telco revenue, which includes hardware sales and setup fees also grew by 15% on PcP. In terms of our gaming segment, that was really a standout for this period. That's up 31% to $1.1 million. Our premium memberships are up 82%, showing a strong shift towards higher value and ARPU plans. And then the pricing adjustments and user acquisition strategies has been very effective, as you can see in the results with CloudGG memberships also growing to 670,000 users. That's up 33% on the prior comparative period. So this growth momentum sets us up well for the second half, particularly as we scale our 5G network and gaming monetization strategy. So in terms of gross profit, our overall gross profit is up 6% to $5.2 million, and our margin remained steady at that 47%. So the gross profit grew in line with revenue, increasing 6%. Our telecommunication gross margin remained stable at 47%, and that was supported by the recurring revenue growth from the subscriber growth. And then we also saw continued nbn margin optimization. And then we've started noticing this trend last financial year. But as more users are moving on to that higher mix of higher-speed plan. Then in terms of GeForce NOW, our gross profit improved significantly, and that was in terms of the higher ARPU, which was up from $15 to $16 on PcP, and then that more premium tier subscriber that we're seeing coming in. And then for this half year, we also had quite a bit of cost efficiencies from GPU optimization. In fact, the gaming segment's gross margin jumped 14 percentage points to 44%, and this reflects better unit economics as we are scaling CloudGG. In terms of EBITDA. So this is our first time that Pentanet has delivered positive EBITDA for half year, marking an absolute turning point in our financial trajectory. Our EBITDA improved by $0.4 million year-on-year moving from a $0.2 million loss in H1 FY '24 to a $0.2 million profit in H1 FY '25. This was driven by a combination of revenue growth and cost efficiencies. So we also had quite a bit of supplier renegotiations, platform optimizations and more efficient marketing spend, all contributing to a lower operating cost base. If we adjust for a one-off restructuring cost of $250,000 in Q1, our underlying EBITDA improvement would have been even stronger. So this result shows that our focus on financial discipline and operational efficiency is definitely paying off. So in terms of our outlook and priorities for H2 FY '25, we will be remaining focused on keeping this momentum going. So I'll be -- and that's it from me. I'll be handing back to Stephen. Thank you.

Thanks, Mart. So look, thanks, everyone, for hanging around. There is a question. Before I get to it, the key wrap-up and takeaways delivered the first EBITDA-positive half, we're on track and on schedule in terms of operationally doubling that 5G capacity, which is a very important foundation for the next stage of our growth. We increased NVIDIA optimization. So we've demonstrated that there are inflection points in that business where we can leverage the scale to increase margin and increase revenue from the platform, which we expect to happen again and again in cycles as that business continues to scale. And look, we do expect financial growth to continue across second half.

Which leads me into the first question, and just one question. But I'm getting asked, am I able to provide some figures for FY '25 in terms of financially, I assume we mentioned in the last update that the company will make financial improvements. So we are -- I can't really talk exactly about figures. But as we have demonstrated across first half, there were certain catalysts that happened month-on-month that improved the financial performance of the business. Some of them were in Q1 and a lot of them actually happened across Q2. So not only do we have the natural growth, the underlying business coming into the second half from both divisions, but a lot of these incremental month-on-month financial improvements that happened across first half will be getting extracted within the business across the full second half. So that gives a bit of color on that. Some deals where we had margin uplift and revenue uplift that came through in November or December only or only December or only across the second quarter, we'll be having all of the benefit of all the work, no matter which month it came into across first half, across the full second half as well as the natural revenue growth across both segments that will be with new users coming in and what new revenue stream. I'm also getting asked, how is the Optus SubHub deal going? Look, we don't really talk and can't speak too much on it because it is sort of Optus' business. Just arbitrarily, we do see much more material impact in our cloud gaming business selling direct. But with that said, we still offer services. Optus are a customer selling at wholesale. And what they do with the product and how they want to offer it. At the moment, it's through SubHub, but how they might want to bundle it or that sort of thing, that's entirely up to them. But it isn't necessarily a linchpin on what we do with that business to drive success. And we are also -- as the wholesale operator of that, we are able to introduce other retailers or whatnot who want to access that platform. But arbitrarily, the insight is that the best results and performance from that business is just coming directly to us through the CloudGG. I'm getting asked, am I seeing any M&A activities or interest in that area? Are we in a position to be a takeover target? Look, I think that there's always things happening in the industry and in the sector, obviously. I think that we've got a lot that we can -- we've always -- we've gotten to where we are today completely organically. And I think that where we are priced at the moment, I think it's still -- I mean, it's an incredible valuable offering in terms of what you'd be becoming a shareholder of Pentanet today. I think there's a lot more that we can deliver, and it's very close to being able to do so to get Pentanet and its -- the business and the value like in a much, much stronger position -- look at anything like that even if we were to. We need to have the right size market cap to even play in that thing. And I think it would be semi opportunistic if someone were to want to do that internet holders today. We're right at the cusp and catalyst of all the things that we needed to do to turn this business effectively around and build more value from where we sit today. And we're so close just a few quarters away really bringing that strong growth back into the business. And effectively, we're a nano micro-cap, however you want to define it, that's been able to get through the last tumultuous few years in the market into profitability. So I think there's a lot more uplift and upside for us to just sort of keep delivering on our plan at this point in time. So look, no problem getting -- thank you. Look, with that, that's all the questions. But again, I appreciate everyone taking the time to dial in and whether it's your first time or coming in again. We do appreciate the support being here and learning. And we look forward to sort of just continuing to deliver quarter-on-quarter in line or even above expectations. So with that, I'll end the webinar. If there's anyone out there that wants to have one-on-ones with myself and Mart, feel free to reach out, and we can continue these discussions if anyone needs a bit more color. But with that, we'll get back to work. Thanks, everyone.

Thank you, everybody.