Pentanet Limited (5GG) Earnings Call Transcript & Summary

Good morning, everyone. Well, afternoon for those over East. Yes, thanks for joining as always. Just being on 9, so I'll -- Western Time obviously, so I'll just give it a minute for everyone to join the room. Okay. Looks like everyone's joined. So welcome, everyone, to our first half FY '26 5GG results. I appreciate everyone joining. It looks like everyone is in now, so we can get started. As we've been trying to do, we'll be respectful of everyone's time and try to keep these short and condensed. If anyone has any questions along the way, feel free to chuck them in the Q&A, and I'll get to those at the end. Just a quick caveat, there's a storm running through where I am at the moment, so if I do drop off, that's the reason. My lights have just started to flicker. Hopefully, that doesn't happen. So look, today, we'll go through some of the highlights, strategic updates, the telco update and the gaming update. For anyone new to the call or new to our business, Pentanet is sort of made up of 2 different divisions, so we've got 2 different business units. We're in telecommunications and then also cloud gaming. So when it comes to telecommunications, we own and operate Perth's largest fixed wireless network, so that means that we have our own -- what we refer to as our on-net network. So we've got a vast series of towers. We've got our own telco equipment on those towers, and we connect users directly to that. We've got a few different methods of technology that we use on those towers. Predominantly, what we're shifting into now is the 5G. We are an owner and operator of 5G spectrum, among the Telstras, Optuses, the Vodafones and us with that spectrum, so that gives us a good technology leverage to increase our speeds and add more users to the network. And then we also sell and offer nbn on our telco network. So at the moment, we only really offer nbn in Perth. We're really sort of going after that higher market share in Perth. If we can't get a user on net, on our wireless network, where we have larger margins, we will put them off net. And then the other part of our business is made up of -- with NVIDIA with cloud gaming. So we've been doing that for several years now, effectively, what GeForce NOW is, which is a cloud gaming. At the moment, if people want to play games -- historically, you'd need a gaming PC or a GPU or a console. We have all of that capacity. We have one of the largest deployments of NVIDIA GPUs in the country, and we run all of that processing power at scale in the cloud. So it turns gaming into a subscription model. So rather than people needing to have a computer anymore or a console, they can just pay us a subscription, make an account, and they'll have access to a high-end gaming PC in the cloud. So 2 semi different businesses, business units, but they sort of do have their similarities that they're heavily reliant on telco. Now then we'll shift to the financial update with Mart, and Mart, our CFO, is also on the call, and then just sort of talk to our next steps. I really don't need to say that one. So yes, look, highlights for the first half. For people who have been following the journey or just new, we did have a really big drive to get the business EBITDA positive. Going back end of financial year last year, we sort of transitioned into being EBITDA positive, and we've been able to uphold that now for many quarters. So we had an EBITDA of $1 million, which is up 530% prior comparative period, largely made up of the telco or the communications EBITDA of $0.9 million and also the gaming EBITDA of $0.8 million. So we are in a state now where we're trying for the longest time to get profitable, sort of just getting the business operating on its own steam, and that's what we're just continuing to do now. But slowly and incrementally, we are growing. You can see the revenue grew 8%, up to $11.9 million, gross profit up 12% to $5.8 million and incrementally, just improving all the little dials and metrics and measures like the GP margin within the business, which you can see that was up to 49% as well. And that's a mix of all our services across telco, which I didn't touch on, but we also do corporate and enterprise services on telco selling fiber. But the mix across all revenue is at 49%. So we're really just in a state now of just accumulating a bit of cash and looking to where we next deploy our resource, which business units are the best allocation of that capital. You can see our telco subscribers. They did increase, but we are putting metrics in place to sort of get those numbers up much higher than these incremental numbers that we've been seeing. Again, just what I'm saying here, we're really just focused right now on sustaining that positive EBITDA, which isn't difficult for us to do. The 2 businesses, they are -- they both require capital to grow, but we're very strategically placed for how and when we do that. We're seeing a big shift in telecommunications. It's challenging at the moment because of the nbn speed boost, I will admit. Everyone's probably across or aware that nbn substantially lifted their speeds and everyone can get much faster speeds now with nbn. It's sort of -- nbn is sort of coming out of its puberty and into maturity in terms of what it is as a product. And although we do sell nbn and we can see our nbn subscriber growth is coming in, it is sort of a limited margin that you can make as an nbn reseller. So look, at the moment, we're obviously filling up the 5G network that we have. 5G doesn't constitute our footprint, but we certainly add users to 5G where we can. It's much easier at the moment just to be adding the nbn subs. Just talking Telco now. But we certainly have a plan. And part of that plan was just reestablishing the Pentanet brand in market, which I'll talk to here. Pentanet's largely been out of market for a little while in terms of our brand. And while we've just been hunkering down, looking at all the costs and creating better product -- I don't know if you can hear but that thunder is getting strong now -- but we're just sort of cultivating what our new products and everything will look like on the 5G network, on our on-net footprint. And while we do that, we're just rebuilding that Pentanet brand. So when you do marketing, you can do like -- there's brand-building exercises, and then there's call-to-action exercises. So you've got to have like an underlying trusted brand in market, which we certainly do, and that's just sort of your general marketing that you might see that's brand related. And then once you get that established in a foothold or re-foothold in the market, as we're doing now, you can do different call-to-action strategies. And that's when you see your different sales or different -- just sales and different products and that sort of thing, actually getting people to move across the network once you've established that foundational trust. When it also comes to gaming, we're incrementally growing that. You can see across the different months, it's quite seasonal when the users come on. So we had a good period in November, December. But with our cloud gaming network or gaming business, we're also -- that's really reaching a point now of great strategic interest because I'm not sure if everyone's been following, but with the rise of AI, that industry has just been hoovering up all of the componentry. So you'll see the price of GPU, RAM, storage. It's all double, triple, quadruple what it was even 6 months ago, which really, really helps the business case for GeForce NOW. We're firm believers, since we got involved with GeForce NOW, that 1 day, everyone who games will be doing it through the cloud, and it's just how the industry is going to shift. And we're seeing those markers on the horizon of that point starting to come even so much as NVIDIA have announced that they won't be releasing a new GTX GPU to the consumer market for the next few years. We can see all these -- the writing on the wall that we've always sort of known was there. It's sort of coming more to light for the rest of the market to see and be aware of that, 1 day, it would just be too cost prohibitive for a consumer to have a gaming piece at home. And that would be the point of leverage where everyone gets sort of leveraged onto our platform, which we're sort of prepped and preparing for. So while we do that, we're just reconstituting our brand in market. We're accumulating cash. We're enjoying just being profitable and while we really take a measured approach and take our time now about how we're going to best deploy that capital when the different times come. And I should note as well, with our on-net or with our 5G network, one of the other things that's like on the horizon for that is to counter what the nbn speed boosts have done because now they've gone over and above, hypothetically, what we can do on 5G today. 5G and wireless hardware, it just continually gets better with like software improvements. So we could see a potential case where maybe in a year's time, the network that we've built will be able to have products on it that then are able to compete with even the fastest nbn plans. So we're just sort of strategically getting ourselves aligned and ready for where to best deploy our capital when those times come. You can see here with the telco, 513 net new subscribers. First, it's not huge numbers. It's not anything to super write home about, but there is growth in there. And again, like the -- most of that growth is coming from the nbn. We're still growing 5G, but it is from those challenges that I keep talking to, the nbn speed boost, which are certainly leveraging, but it has sort of shifted and changed the market. But there's definitely a plan in place for how we can create really good product in market to counter that. You can see our churn has improved 1.2%. Again, that's a key, key focus area. When you're just doing brand building and not call to actions and not growing a subscriber base too aggressively, you can certainly look at the churn as an area of focus to improve the performance of the business. And you can see our churn for telco. It's one of the best performing, which is also a reflection of our product, of our service and the existing brand. When you're looking at industry averages over the 4% mark, we're quite proud of that, and again, ARPU just continues to increase and grow. So on that marketing campaign I was talking to, we launched our Nothing But Net campaign. You can see here a few examples of what I'm talking to. It's just building that brand back in market, putting the Pentanet name back out there for people to see. And we'll be doing some consumer metrics work over the next month or so to sort of see what the impact of the campaign is. And for all intents and purposes, what we're seeing in terms of the quality of subscribers coming in, the amount of leads and that sort of thing, it's already effective even as a brand-building exercise. But we'll be able to leverage this platform that we're building for different call to actions for the months following. You can see now also with our gaming update, like I was saying, it's a slow burn over time. You'd look at -- we've been involved in cloud gaming for a few years, but when we first got involved, it's a brand-new technology, brand-new market. So we sort of brought it in its early form to market, where we can stream at 1080p resolution, 60 frames per second. See, that's low tier in terms of ARPU. We're generating a lot of users for free, just sort of that freemium adoption model. And over time, we've been able to expand and evolve what our offering is in terms of the resolution. We do 2K and now 4K, now 4K high refresh rate. And with those premium options, you can charge a more premium price. So over the last few periods, we've been able to grow our ARPU from -- remember a time when it was around the $12 mark, and we've been able to really cement what a new ARPU looks like for that product on the premium way that we deliver it now, where you can see it's comfortably sitting at that $22 mark. And you can also see the power of that revenue and scale when it comes to the GP margin of this platform. You can see that that's substantially higher than it has been in times gone past. And really, when it comes to cloud gaming, we're firm believers in terms of our paid users, and we do have -- we've still got a lot more capacity. We can add users, too. So there's no big capital expenditure coming. But in terms of the paid users that we have, it would be less than 1% of what this market's going to be. So from our view, we've sort of -- we've hitched our wagon to NVIDIA and that -- boarded the ship rather, and that ship's left the jetty. We have exclusivity for this technology, and this technology is absolutely going to dominate gaming, some place on the horizon. And if you're looking at all the news and what's happening with components and how much it cost to actually build and own a computer now, that time, we can see, is fast approaching, which, again, all the more reason why what our -- our current strategy is just to start accumulating cash and wait for the right time to do the right capital deployments and spending our resources in the right areas and using the time that we have now to just be accumulating that cash. With that now, I'll just pass on to Mart if you're all good -- thanks, Mart -- go through the financials.

Thank you, Stephen, and good morning, everyone. I'll now walk through Pentanet's financial performance for the first half of FY '26, and this was a period marked by a step change in earnings, cost discipline and stronger operating cash flow. So these results demonstrate that both operating segments, telco and gaming are contributing positively to EBITDA, while we've also reinvested in brand during the half. So consolidated revenue for the half was $11.9 million, and that is up 8% on PcP. Telco revenue increased by 7% on PCP to $10.6 million, and this was supported by off-net growth, continued 5G adoption, and then we also saw a migration to higher-value plans. So in short, the key drivers for the telco revenue growth was that 5% increase in subscribers. It was mostly off-net growth-led performance. And then we also see -- saw those key metrics improve. So the blended ARPU increased to $96, and then our recurring ARPU increased by 3% to $92. Then in terms of the gaming revenue, we saw a 19% increase on PcP to $1.3 million. And this is really reflective of that improved subscription mix following the plan restructure and then strong ARPU expansion. So the ARPU increased to $22, and that's up 43% on PcP. Overall growth has been disciplined, focused more on the quality of revenue rather than short-term promotional activity. And then we can move on to margins next. So the gross profit increased by 12% on PcP to $5.8 million, and then we saw the gross margin expanding 2 percentage points to 49%. And this reflects the improved mix and operating leverage across both the segments. In terms of overheads, so we can see our overheads is down 3% on PcP. So overheads remained controlled despite the brand reinvestment. And the cost base is now structurally leaner following the optimization work undertaken in prior periods, and that has translated to an improved operating leverage as revenue grows. So we remain focused on sustaining positive EBITDA while supporting measured marketing investment to drive longer-term subscriber acquisition. Next slide, please. So the telco EBITDA increased by 69% on PcP to $0.9 million. Gaming EBITDA is up 96% on PcP to $0.8 million. And then at a consolidated level, we're looking at $1 million EBITDA for the half, and that is up an impressive 534% on PcP. This half, we have seen stronger segment contribution and disciplined overhead management, including approximately $100,000 of brand campaign investment during the period. More importantly, our EBITDA performance was achieved while maintaining investment in growth. Next slide, please. So in terms of our operating cash flow for the half, operating cash flow is $1.3 million, and that is up also impressive 430% on PcP And this reflects the EBITDA growth that we've seen and disciplined working capital management. So the company closed the half with $2.4 million in cash, and then we've got $7.2 million in unused capital financing facilities. So this provides flexibility to support growth initiatives while maintaining capital discipline. The major capital commitments related to the spectrum are now complete, so further strengthening our capital position as we enter the second half. So in closing and to summarize, we've seen a meaningful improvement in operating performance. We have expanded margins. We delivered positive EBITDA. We strengthened our operating cash flow. We maintained cost discipline, and we preserved capital flexibility. So now really the priority for the second half remains disciplined growth. We want to sustain our EBITDA performance, and we want to reinvest, as Stephen said before, selectively to support longer-term subscriber acquisition. With that, I'll hand back to Stephen before we move to Q&A. Thank you, Stephen.

Thanks, Mart. So look, yes -- and thanks for the financial summary, Mart. In closing, and I'll let everyone into my mind, like where my thinking is at, just laying it out. At the moment, we're just -- we're doing -- we've got the 2 areas that we can grow into, right? We've got telco and we've got cloud gaming. They're both going to come at their different times. Telco has been a challenge because of the nbn speed boosts, but our wireless network is still poised to compete with that, but it will be in some time. Maybe in 6 months to a year, our wireless network will be able to compete with those speed boosted plans, and we will be able to aggressively compete on price. In the interim, what we have to use or to do is our -- we can build our brand, which we're doing. And we can come up with good new products that -- what our products will look like on that telco network. And we can also sell nbn services, again, by having good product, good service. So there's a few huge untapped areas still for us in telco, which we're just strategically thinking like, okay, when and where do we do them. We -- and we only offer nbn locally. There's a huge untapped resource for us to potentially combine our nbn services with our national gaming. And then there's the increase of speed of what's to come with some updates, not capital updates, software updates to 5G, getting that to a point where it's really starting to stretch legs, which will then be able to compete with nbn. We've got to also remember, with nbn and the pricing, all of the price increases for nbn are locked in many years to come. So you're going to see the cost of nbn is going to be ratcheting up CPI year-on-year. So it is going to become easier to compete with, especially when you've got a product that competes with it exactly on speed and you've got 90% circa margin to play with. So biding our time, waiting for that to come, creating really good, interesting products strategically about what we're going to do when that time comes and on the journey to get there from a telco perspective, we're getting and reestablishing our brand in market. And then when it comes to cloud gaming, all the writings on the wall that that's about to have its time. We can see our ARPU is growing over time, users getting more accustomed and used to paying these amounts. Cloud gaming is also going to be a generational shift as more and more users, they get involved in gaming when they're 12, 13, 14, and then they, after the next 5 years or so, get to the purchasing age. They're just going to have always gamed on the cloud. So when it comes time that they get their jobs and they can be a paid subscriber, they're just going to natively adopt cloud gaming. And the other side to that is users who are more used and accustomed to building their own PCs are now finding that those computers and those consoles and anything with a graphics card or memory or storage is now 3x the price to build as it was 6 months ago, so very interesting inflection point coming with the cloud gaming business. And yes, it's -- I get asked all the time, and I will say it. It's very much my intention that -- because we operate one of the largest deployments of NVIDIA GPUs in the country. And right now, we've got that business profitable with a -- something that we have exclusivity on, which is cloud gaming, and that's showing its own -- flourishing now and to come. But yes, absolutely, these GPUs are going to have different use cases. And gaming is all done on peak time. We do know that cloud gaming, in terms of its ARPU and GP margin, it is the strongest gross profit generator for GPUs, but it's all used on peak time. So yes, we're also strategically thinking and planning about what else we can do with our GPU capacity and where Pentanet can sit in the AI space with all of the compute that we have, which is certainly, certainly capable of generative AI. We don't do it now. Although some -- we do it sometimes on the back end. We don't really talk to it too much, but there's definitely a division to be built there to leverage the amount of infrastructure that we have. And we can be very competitive in that space because we are already running all of our hardware profitably from gaming. And with that, we'll obviously be quite competitive on what we're offering in terms of enterprise market products. So that's my thinking. It's, over the next 12 months, what we're going to be doing and positioning ourselves to take advantage of. And I think Pentanet today represents incredible value to getting involved in. And that's sort of largely and loosely my thinking over the next 12 months, and there will be certainly some incremental news along the way on what we're doing and when and when the different markets are coming or when we make different moves. So that's the plan. I appreciate everyone for joining us this morning and hearing. As always, around these times, happy for anyone to reach out. We can have like a one-on-one, go into any or all of the detail in a bit more detail. But with that -- and I don't think there's any questions because it's bugged. So with that, I'll let everyone get back to it and we'll -- hang on.

I've got a question. Any aim to get government contracts in Perth? Look, we do -- so our telco -- one of the key focus areas now is rebuilding our -- or reestablishing our enterprise and commercial department. Again, we're accumulating -- we're trying to accumulate cash to make big moves around the corner. So the things that we can do now is obviously our brand building, but commercial and enterprise and government type work is -- doesn't really -- it's not a huge capital outlay. So yes, we're certainly interested in those areas. It would be more so for, I suppose, telecommunications, and to come, there might be some government-type work around the GPU end of things. So yes, there's certainly an aim to do that, and the government contracts would just sort of form and fall under our enterprise team, which is currently getting rebuilt to grow. So thank you for the question. I hope that answers it. And yes, I'll let everyone get back to their day, and we'll keep tugging along. And I look forward to bringing some more news to everyone soon. Thank you.