Pentanet Limited (5GG) Earnings Call Transcript & Summary

Good morning to everyone who's just joining. As always, I'll just give it a minute, probably another 30 seconds, let everyone come in, and then we'll get started on our Q3 FY '25 update. But thanks for being here. Talk to you in 30 seconds. Okay. That was a quick one. Looks like everyone's coming to the room now. So yes, again, thanks, everyone, for joining this morning. I promise we'll make a quick one for everyone today, but appreciate the time, nonetheless. So again, welcome to our Q3 FY '25 update. As we go through today, look, I'll do a bit of an intro, just a bit of an overview and recap of what we've done operationally. As you can see from the results, it's quite financially driven in terms of increasing the profitability. Most of the operational stuff that we're doing is sort of business as usual, what we've been talking to for the last few quarters. So I'll go through that strategic update. And then I'll hand over to Mart, our CFO, for the financial results. And along the way, feel free to pop some Q&A in, and I can get to that at the end. So again, look, we are pleased -- we are trying to demonstrate that we're getting some profitability and some momentum in the business. This year has been really heavily focused on doing some operational shifting, positioning the business to get back to a growth stage, but doing that from a much better financial platform or foundation from where we sit from an operating cash flow and cash flow positive perspective. So we are quite pleased with these results that we've been able to now double deliver on that EBITDA positive nature of the business to sort of demonstrate that, that's the new financial position of where the business is sitting. So really, the key financial highlights from Q3 is that our EBITDA was able to still increase from the good result we saw in Q2. So our EBITDA was able to increase 17% quarter-on-quarter. So it went from that circa $6 million (sic) [ $0.6 million ] EBITDA Q2 to $7 million -- $700,000 EBITDA Q3. So we are seeing that operating profitability increasing in the business. And if you're looking at the prior comparative periods, it's in that comfortable double-digit growth year-on-year. But really, it's all about operationally setting ourselves up for success in the future. So the main things that we wanted to focus on this year is get to that profitable foundation, and we want to be generating our own cash that enables us to do the things we want to do. And we've been coinciding with that, we've been expanding our network footprint. So the last few quarters, I've been talking about, we identified 5G as our best growth potential. So in order for us to grow 5G in that product, we need to grow coverage and capacity. So that's what we've been busy doing. So we said we'd be doubling the 5G footprint this financial year, and that's well on track to do so. And now we sort of keep moving into preparation of that new product scale launch. Along the way, we also wanted to incrementally optimize our NVIDIA GPU capacity, which you saw us do last quarter and along the way, also just increasing revenue and margin. So pretty much what we were able to do in Q3, a lot of these changes happened across Q2 margin uplifts. So Q3 really gets exposure to all of the changes across the full quarter, which is why you saw that financial improvement. But under the hood, what we're doing now is really preparing for that 5G product launch. So just summarizing how we got to where we are, and I know a lot of this is repeated information for a few people on the call, but to anyone new, we started the financial year, we really wanted to implement those operating cost efficiencies, which we're able to do, sort of really focus the business on our profit-making activities. Again, identifying 5G as the space to grow. So we're able to convert some of our balance sheet or the existing balance sheet of stock into 5G hardware. That all got done, enabled us to accelerate the 5G expansion. Across Q2, obviously work with NVIDIA, changed the cloud gaming prices, optimization of the platform. That platform sort of scales over time as it reaches inflection points. So we achieved that and then just implementing a lot of new automations and efficiencies in the business from the new cost base, which saw us last quarter reach our first EBITDA positive state, and we've been able to deliver on that again with some growth this quarter. Now along the way, I know we want to be adding a lot more users. It's no secret there. In order to do that, we do need to build this catchment net. So the on-net and off-net numbers that we're building in our subscribers in the telco section, we do want to bring those up, but we are sort of in our build phase, in our build mode, and we're still incrementally filling things up as we go. But the focus really is going to be on now shifting into a much bigger marketing and strategy to fill up the towers that we're building. So those towers are nearing completion, which will give us that critical mass so that we can start blanket marketing for a 5G product. And again, because we've invested the capital to date into the network, and we have quite good margins on that product. The 5G solution that we're going to bring to market will be able to be quite competitive in the telco or consumer Internet space, given that we do have substantial margin to sort of play with and the speeds that are getting delivered over 5G in that ultrafast space, sort of where the market is all shifting to. So I know yes, user growth, still incremental along the way. It's not really the spotlight here, but it's about to become the next real focus is bringing growth back into the business in a very more meaningful way. Regarding our NVIDIA cloud strategy, just again, a quick call today, recapping everything. From 2021, we launched the service to anyone new on the call, GeForce NOW cloud gaming. We basically turned gaming into a subscription. So users no longer need a computer or a console to play. We've got all of that infrastructure at scale. So we've built up this over the last few years. We launched -- you could stream at 1080p, you put new iterations in, you stream at 1440p, talking resolutions. And now we can offer 4K high frame rate plans with our infrastructure today. So it's the latest sort of NVIDIA GPUs from last year that are operating. And today, we own and operate the largest deployment of NVIDIA GPUs in the country, and we operate this technology profitably. So really, the cycle of this business, there's around 700,000 users who have signed up now, and it's a very small percentage of users paying. So we're continually and always working on that funnel, getting users from free or the trial. We have an ultimate trial now for people actually able to try the top-tier version of the 4K stream. So we're adopting new users. We're converting them as we get more paid users into the platform, we can continually optimize how that runs by way of the margin that you would have seen us do from Q1 to Q2. There was quite a substantial margin uplift in the gaming platform. And that's sort of the cycle for that business. So there's a lot of pipeline of users that we have to still convert. But really, the takeaway from our NVIDIA side, and I'll let Mart speak more to the financials is that, that revenue uplift that we saw in Q2 was able to hold through all of Q3. So that new revenue baseline has sort of now stabilized and given us a new base to start growing from. So both our telco and gaming divisions are really at the same sort of inflection point of they've embedded down. They're both running profitably and now they're ready to implement the next stage of growth into the platform. And we're going to be able to do that as a cash flow generative business. It obviously gives us a lot more firepower to go out and do the things we need to do that we sort of haven't really had over the last 2 years or so. So we're -- the company is quite excited to have that extra breathing room to be able to grow in a sustainable way from here on forward. So with that, I will just move now to Mart. I'll let her speak to the financials, and then I'll come back at the end. I did say it will be a quick one today. Thanks. Mart?

Good morning, everyone, and thank you for joining us. I'm pleased to report that Pentanet has delivered a second consecutive EBITDA-positive quarter in Q3 FY '25. This is a significant achievement that reflects the business strategic discipline and the continued operational focus. Let's now walk through the key financial and operational drivers behind these results. In terms of revenue, our consolidated revenue for the quarter was $5.7 million, and it was stable quarter-on-quarter and up 10% on the prior comparative period. This performance reflects consistent contribution from both our telco and our cloud gaming segment. Within telco, recurring revenue increased 2% quarter-on-quarter to $5.1 million, supported by subscriber growth and an expanding 5G-enabled network. Then in terms of the Cloud Gaming segment, we reported a 1% revenue growth quarter-on-quarter and 29% growth on the prior comparative period. This was driven by the premium membership adoption, and then we've obviously seen that full quarter impact of the pricing optimization measures introduced in Q2. Next slide. Then in terms of the gross profit, our gross profit increased to $2.9 million. This is a 4% increase quarter-on-quarter and a 21% increase on the prior comparative period. These results demonstrate improved cost efficiency across the business and growing contribution of higher-margin products. So in terms of the telco, our gross margin improved to 49%. That's a 1 percentage point improvement from the prior comparative quarter. And this was supported by ongoing NBN margin optimization, our subscriber base expanding and then there's a continued shift to higher ARPU plans. Then in terms of cloud gaming gross margin, that remained at 66% and reflected an improved ARPU and operating leverage following the platform optimization and then the price adjustments. So in terms of EBITDA, our EBITDA increased 17% quarter-on-quarter to $0.7 million. This represents our second consecutive EBITDA-positive quarter. And this improvement was driven by gross margin expansion across both the business segments, then the continued cost optimization, including supplier renegotiations and improved platform efficiencies and then our stable recurring revenue growth from both core segments. This result reinforces our ability to scale organically while maintaining a disciplined cost base. So in terms of the cash flow, next slide, please. In terms of the cash flow, we ended the quarter with a cash balance of $2.3 million and $6.6 million in available financing facilities. Net operating cash flow was positive at $0.8 million, supported by stronger EBITDA performance and effective working capital management and investment cash outflow totaled $0.5 million. This primarily relates to tower lease payments, then the labor costs associated with the network upgrades and then traditional fixed wireless CPE purchases. Our 5G equipment stock swap agreement continues to support our capital-light deployment model, and this preserves cash while advancing network expansion. So in summary, our revenue remains stable. Our margins continue to expand, and we're EBITDA positive, and our cash position is good. Pentanet is well positioned to build on this momentum as we enter the final quarter of FY '25. Thank you. I'll now hand it back to Stephen.

Thanks very much, Mart. So yes, look, wrapping up today and okay, I see some questions coming in. But yes, look, summary of today, delivered on the second quarter of EBITDA positive and just demonstrating that the business is comfortably in that operating profitability state. That state is continuing to grow. We do expect the financial growth to continue from here, which is great as a base for the business. Our aim of doubling the 5G coverage is well on track. So we're prepping that 5G product launch now. So in terms of timing, we're probably talking towards the end of this quarter, but our real reintroduction of the growth into the business is we're setting the stage for next financial year and a lot of the work to make sure we get there has now been successfully achieved. And we'll continue to increase our NVIDIA GPU optimization, optimize the users, optimize ways that we convert. So yes, really, the stage is set now for Pentanet to sort of get back to growth and we can comfortably do that now from where we've been able to, with the hard work of the team, position the business this financial year.

So I'll just get to a question here. Can I talk to the increase in churn? Yes. Look, in telco, you do see -- if we look historically, there's incremental increases in churn at different seasons. We've just come through one of those where that happens. It's certainly going to be a focus for the business this quarter, I mean it's always a focus of the business, but we're going to be taking a very keen look at that now. There's no point putting new users into the top of the funnel and going through the CAC to do so if you're sort of losing customers at the bottom. Our churn is pretty industry standard. It's a little bit better than most, but it's certainly a focus. So I spoke to a lot of the automations and that sort of thing that we've been working on. Some of those modules that we've been building have been to focus on what do we do about just reducing that churn because for us to get back to growth, it's going to be a dual-pronged approach. You've got to reduce that churn and increase the top of the funnel. So you definitely need to do both of those things in part. So we would expect that our churn can increase -- churn can decrease, sorry, with the efforts that are about to be deployed in line with these new onboarding initiatives for new customers as well. But look, with that, we really thank everyone for their support. We're quite happy with where the business is at now, and we feel it's a good time to really get involved with the business in terms of if you're considering become a stakeholder because the entry today is -- the business has changed its risk profile. We are a profitable company now. Our market cap is quite small. But from here, we can introduce a lot of growth on to the work that's been done to date. So for all the existing stakeholders, thank you very much, obviously, for being a holder. And we do look forward and hope to see some new people and names start to come on to the registry. And as always, following these calls, happy to have some one-on-one time. If anyone wants to reach out, happy to sort of run through in this detail as well about what we're doing and the plans moving forward and how we're going to get there. But there's obviously a lot to do. So we'll look to end the call here. There's no more questions, but look forward to seeing what we can do and report next time we talk unless sooner on Q4 and the full year. But thanks, everyone, for your time this morning. Again, reach out if anyone has any additional questions. You can also drop some questions into the Investor hub, and I'll get to those momentarily, incrementally day by day. All right. Thanks, everyone.