Pentanet Ltd

ASX:5GG

Earnings Call Transcript 2024-Q1

[Stephen Cornish, executive]

Well, thanks, everyone, for being patient, and you are welcome to our Q1 FY '24 business update. So yes, this quarter, really, we kind of have been just following along during what we needed to do by way of getting all the infrastructure ready. So if you recall, within the last financial year, we kind of set out with our key strategic objectives we're going to bake for the first half. So we just want to -- we're really trying to simplify the messaging about what we're doing and the steps that we need to do to succeed. So here you can see them laid out. So in the first part of the quarter, we had a large project which is getting our Gen 3 infrastructure life for the cloud gaming. So getting all these Gen 3 servers live -- so they're all open ticking out. And so our cloud gaming is now able to game at 2K and 4K resolution with higher refresh rate.

And we did see a really good uptake in the market of the new plan. The point which we're reinforcing that the users which sit within our CloudGG platform, they're kind of waiting for the right title to come along or the right technology time. In the past with Gen 2, we could only game at 1080p resolution. Now you can do the full breadth. So it is just a very substantial replacement on PC gaming. I don't have time for that, I'll talk about more later. And then we're just following on track getting those 5G towers live. So we've had 8 towers come live now. And we've been able to launch the 5G product in the market last week. So in the build up to that launch as we had our towers coming online, we were in the process of going through the methodology of converting our hostages onto the on-net. So we're able to actually see a good uptake on those new wireless plans as well. And that's also met with our new website and new automation going live. So those things have all ticked off. We're very pleased with the cloud gaming results, and I'm very pleased now that the growth rate and the Pentanet return to growth because for us in telecommunications, we're getting more users on-net, it's all about capacity and coverage, which is why we wanted to get those 8 towers online. You can kind of see later in the deck where we've got coverage now which means that when we do our marketing efforts, which have begun, we shouldn't see a large, if any, increase in our CAC because we're able to kind of market -- like market effectively that we can get more people committed to the network. And then just as you can see here, the cloud gaming is moving into EBITDA-positive territory and we still intend for the telecommunications to follow in line with that by the end of the first half. But what I'll do now, I'll pass over to Mart, our CFO, to run through the financials for the business for the quarter. Mart? Yes, as I said, the financial business in the beginning of this time of the year, we're just really trying to underwrite the shift, we're trying to slow down our cash burn, we still want to have growth, but we needed to navigate the business to an area where we could produce more growth both in the gaming and telco, which is just coming out. So comparing to where we were in the same period last year, the revenue has obviously increased 10%. Sorry, Mart, can you do that? No, okay. Apologies for that interrupt. Yes, look, the numbers are all looking good. The revenue is growing. We're able to get some increase in our off-net -- our on-net margins as well is coming through nicely. But really, this is a -- the business is in a position where it just kind of like stabilize the shift. We are still able to have a bit of growth on the table. But really, the focus has been preparing all the infrastructure preparing for us to return back to growth. We did have -- the subscribers have started to grow again, but we just have to be mindful. So obviously, the growth is going to come from 5G users, but we do need to be, as I said, economical about the rate at which we deploy those users. The other thing that we kind of need to get on top of now is the churn. Having a subscriber base the way it is, we obviously don't want to see churn increasing, but we don't typically see churn from the on-net users as much which is positive. But now with the new capacity coming on, we should be able to kind of get ahead of that churn and get back to a level of growth, which we have said before in the past. But we do need to deploy that cash economically. And that's why it's very critical for us to also look at the neXus redeployment. So work is getting done on how we can redeploy neXus into some great real estate.

And we're kind of looking at a new better, more robust strategy for that by way of how we deploy it and the way of how redundancy is built into the network. And the reason why we're going to be able to do that is because we have this neXus stock. So at a point in time when we're just trying to be economical with our cash, it really makes sense to particularly use the stock that we have. It's a quicker we can get that neXus stock out there returning that items on the balance sheet into recurring revenue, which is always the plan. We just want to do it in a really sensible way. And we also have the 5G now that we can kind of balance the on-net run rate return to products. So we're expecting that neXus to begin deploying in second half. But probably at the end of our Q2, we'll let the market know what the plan is for second half with all the new key strategic objectives for us to hit. But as you can see, on that margin, which is a great run that's also seen improving up 90% from 87%. So just to start it again, really the business is just all about us building coverage. But we've built the 8 towers. We do want to shift into just filling up those towers now. So rather than just continually deploying new towers from new towers, again, everything about the business right now is just being really economical with the cash that we have. So we want to start in filling these stocks. So far, so good. And the areas that we've targeted for these 5G towers are all where we see we have the highest demand. So as we grow and build out that 5G strategy, we're going to be leaning on the Network as a Service. That's that facility or the vendor financing arrangement we have with Cambium. So that's going to go hand-in-hand with the neXus stock. And it's great that we're actually able to use that neXus facility for the dishes on the route because historically, that's as we grow and build our on-net user base, that's the most capital-intensive part is putting the dishes down on routes. So that Network-as-a-Service facility allows us to use that for the dishes which brings down our cost of capital to get it use along and then we can proceed to pay off that from the GP that have -- and again, it's very quick one today everyone, but maybe we have a bit of time in the Q&A.

But the other thing today with the cloud gaming, you can obviously all see very, very impressed and pleased with the uptake that we've had. I'll try to get a little visualization. I don't know there's a bit of confusion on how the cloud gaming business operates and whatnot. You've got this very large volume of number of users over 400,000. Those are the users that don't have CloudGG platform.

And then those users will cycle in and out of cloud gaming depending on what they're playing, any hot title is available, depending on technology, depending on the internet and whatnot. So I'll try to create -- just so that everyone can kind of visualize is the CloudGG user base grows, all those users will cycle in and out, even I guess you could say, its monthly active users. And then of the monthly active users, we have the paid users at the core and again, paid users and cloud gaming revenue both up 38% quarter-on-quarter. This is very pleasing. The 2 big things and the catalyst that made that happen were some new titles that came to the platform. So again, reinforcing that idea that there's more and more of the market of content come through. You can see also that acquisition -- Blizzard acquisition is being finalized now. So we see very, very large uptake in paid users, just at the back of potentially a single title or 2 titles are really demonstrating the power of titles on the platform. And now also the users are able to access that [indiscernible]. So it's a higher ARPU plan, $29 per month, and we're seeing really, really good uptake on that plan, which has also seen our ARPU across the whole core gaming segment increase and that business is now growing in an EBITDA-positive way. So we have a lot more capacity that we can fill. That business is sitting in EBITDA-positive territory is growing really well. And we really enforce the idea that this -- cloud gaming will one day just be the medium where you could play. And we're now well internally placed where we are with NVIDIA. And it's safe to say we're one of the absolute market leaders now that cloud gaming, given the numbers that we look at and yes, there's really good exciting things to head out to this business also. I know it's been a quick number, but our heads have been down to the ground for the third quarter, and we're just trying to -- doing the things that we said we're going to do, and you guys can see those things again ticked away. So really, what we need to do in Q2, now that we've launched the 5G network is we're just going to be focused on bringing more on-net users on. And we're going to be closing that cash flow positive gap. We're going to be growing the CloudGG user base. And with the -- and the paid subscribers, obviously, and on the cloud gaming front, we also now have to opt this relationship looking to go live in Q2. And so obviously we are very keen and excited and we're very -- we're looking very positive in how they see the cloud gaming business, and it looks like they're going to be a really good partner for us going forward as the next market strategy. Again, we can sell direct, but if I was trying to be economical at cash and whatnot, it makes sense to leverage a large provider that can go out to their network of new subscribers. And it's kind of cementing us as that digital wholesale distribution for that gaming. So really good positive gross on-net and gross new paid subscriber opportunities coming in Q2. All the work is being done and set. So really, that's all the -- it's the culture in the business that all the infrastructure and regulating is being done. Now obviously, we're listing and adding more users and GP and to close that cash flow. So with that, I'll probably spend a bit of time on any Q&A.

[Stephen Cornish, executive]

Okay. So I'm bringing a question. Yes, so it has Don has joined the board. So we're getting asked -- going to get a better understanding what he will bring? So yes, Don's got a really good track record in the digital space and obviously, coming from Rite, they were Microsoft's largest partner in the APAC region. So Don obviously came through and had a look at our business, and we wanted to add another director to the Board. So yes, his experience has already been very helpful on the intended board meeting and have got a lot of work prior to joining. We absolutely see the benefit and the value in the telecommunications business. But it's also, I think, he will be able to land a very large assistance in growing and the scaling of the digital side of the business, which is the cloud gaming currently and everything else that can be encapsulated in that hardware. I won't speak too much on it in this call or yes, but there will be some word around it shortly. But there's some other very serious applications that we can do with our cloud gaming infrastructure and how that can kind of grow and some pedal of experience, obviously, growing and scaling digital businesses. And a lot of experience doing with very large U.S. tech company, being Microsoft and our's being NVIDIA. So yes, that should be a great and very helpful. I haven't really got any other Q&A and follow -- it is a very, very quick one today. But really, we try to put all the information in today's earnings call. How does cloud gaming perform on multiplayer titles with response side? So cloud gaming actually -- like when you're playing a multiplayer title, so you might hear people have families and whatnot the game or people gaming themselves, they complain about this thing called lag. So when you're gaming, if it takes too long to get to the server and back, people lag and I'm sure, people have heard it -- got many households in their games are running well. The best part of that cloud gaming is you actually reduce your latency when you're playing multiplayer. So traditionally, if you're gaming from your computer at home and the server that you're playing on is in the data center somewhere, you'll have your latency going from your home to the data center. And then that data center will also have latency going to where the gaming server is. But because everything we do is all centralized, when a user is playing online in a multiplayer game, the latency that they would see represented on the top of the screen will actually be lower because it's effectively like they're playing in that data center. So that data center that the cloud gaming is in, where they're actually playing from, that might actually be right next to the gaming server, whether the [indiscernible] or whatnot.

You would actually be right next to it so the latency that I'd see inside a multiplayer game represents the latency between the data center to data center, doesn't need to have the home to the data center to the data center. So providing that the user has a really good experience of the input and output from their home to the data center from the input and output of the cloud gaming, which what we see today is really seamless and indistinguishable that is not only a computer, that user will actually see a lower latency and have a better aligned multiplayer experience. The other thing is that they will never have to update and download games and everything like that. It's all very, very seamless. And that's the benefit of cloud gaming online. That's going to become the norm. I'll take that answer that -- and again, the Q&A is [ clock logged tonight ]. So I'm getting, what are the marketing strategies for the 5G rollout? Is it mainly digital in the target area, are we doing letter boxes external, new campaigns? We've launched a new campaign. So that started last week. So to that community connections and good connections. So really, the strategy is -- there's a bit of outdoor media. We've done letter box drops in the past, but we don't find those to be as successful. And we do try to keep it mostly digital because we can only service the areas where we actually have the coverage. So far to date and the numbers have seen increase have been from a concentrated effort of bringing our off-net users to on, which is our strategy. So that's kind of -- that's what we've had to do so far prior to the commercial launch but now there is a marketing campaign. So that followed up. We had a brand-new website launch. We've got automation. And so there's a typical radio, bus back advertising that we can do out of home -- is trying to be as concentrated in areas that coverage is possible. And again, that's all being done in a way that we don't want to have our marketing budget flow out too much, although there is some lumpiness with marketing as you run a brand campaign or core action campaign. But we really wanted to do that in a way that we don't have a large increase in our customer [indiscernible]. So maybe in the next update, I'll include a slide for some of the campaigns, show a bit more color on how we [indiscernible]. Impact from lower GPU properly and does that rely to work on a 5G connection? Cloud gaming so far, we see it because that's a national product. The 5G connectivity is isolated to us, here in Perth. I just obviously see a very large opportunity, they have 5G network in cloud gaming. What they do with the G4 subscription in their mobile handset thing that's up to them. I would know -- you don't -- you really don't need a 5G connection to game on. But you do -- if you're gaming at 4K, it can use around 40 megabits per second. So I think the internet that most people [indiscernible] to now, now that everyone's kind of an update we got ultra 5G and [indiscernible] the like, we should be able to tap and access the national market for cloud gaming. And so far, all the reviews are really good for that. I think where you and more bands will come in and the requirement of such is when you're going to have multiple people in the same household or they're going to be wanting to stream and play at the same time. That's when you really need to start to introduce 5G and fiber products like neXus and that tower. But so far, we've been really able to effectively access the national gaming market from conventional what it is today. And another question now. The deal -- the structured deal arrangement with Optus, when were you looking to partner with them? Look, we're going to give Optus a bit of runway to do that. The way it's structured for Optus to retain that, they pretty much have to fill all of our capacity. So they're the partners that have chosen to go with, and we're going to give them that roadmap and leeway, which allows them to better focus on what they want to do with it and better resource it, which is what we need as a business. We need someone coming up to resource and marketing and sort of that and tapping into an existing customer base on the network. So that's what the focus is now. We very much intend for that partnership to continue and grow. But from a T01 telco, they kind of need to step up to the place and fill a capacity if they want to hold on to that. I would say that they stop being able to access it or anything like that. But we are also able to sell on partner to other providers. So it's not a telecommunications that are looking at cloud gaming. Obviously, LG and Samsung and the new Smart TV have made it to 5G bandwidth now. There's also -- if you saw in our results, a few months ago, we did a deal with Google.

So large, Google Chrome book included GeForce now for several months. We're still able to make deals and have partnerships with large providers and large value adds to cloud gaming. And in terms of telecommunications and the Optus come to the table and everyone wanted to give them that runway for the baked resources to the best of their ability. So there's a bit of a trade-off there. But in terms of Pentanet, they need to be filling up that capacity. Are there any key milestones, news items sort of to [indiscernible]? But the milestones that we kind of signal to the market as you keep an eye on, we are the ones from the first slide here. So this is basically our checklist to let the market know that everything is on track and we're doing what we need to do. Most of it really -- I mean, this is going to be spread over the first half, but this has obviously been accelerated, and we've done most of it in Q1. I'll say the next big announcement to make will be the launch of that of the SubHub. But again, if the words and everything from these initiatives will likely to see at the back end of Q2. And we'll have a full quarter of that growth in Q3 because, obviously, a lot of these things are happening midway through the quarter.

So keep an eye up, but I'm not going to say there won't be any other potential surprises and catalysts, the ones that really matter to make sure that we're on track with what we're doing are the ones that we outlined here. And as I touched on towards the end of the quarter, we will also then update this list and kind of -- so what needs to be happening in the second half for us as you can see, that was another clearance [indiscernible] picture to what we're doing. I think that might be it. I'll give it another 20 seconds if there's any more questions that would like to come through. But really, in summary, and I know it was a very quick presentation today. We've just been really busy laying the infrastructure and getting everything in the foundation to the business is ready so that we can return back to work. We still have a solid cash balance at bank and now where the business is sitting at that EBITDA breakeven. Cloud gaming EBITDA is positive. We just need to bring telecommunications up in line with us, which we have the foundation to be now and so far signs are indicating that we'll be able to do that. And then it's just around careful cash management.

So we're going to -- really the only thing that will use cash from there is our growth. And so the faster we're deploying 5G, the bigger that cash burn is going to be because it's obviously very CapEx-intensive. But if we manage that in a very economical way and also manage that with the neXus greenfield deployment, as kind of the neXus is going to be our lowest cost growth because all of that has already been invested in. So provided we can get all those units out under the new way that we design and deploy that and can bring field of space, it's very exciting. We'll be able to carefully manage that cash. And we don't want to grow the 5G too fast because that will create a bigger one for our back to cover in terms of cash flow positive. Given that it does have that 13-, 14-month capital payback period. So yes, with that, if there's no more questions, I'd like to thank everyone for joining. I trust and hope everyone is pleased with what we're doing and we're feeling very proud of the team, just kind of ticking along and getting what we need done and really looking forward to getting Pentanet back in the spotlight by returning back to that growth profile, which is very exciting years ago how we are to put it more [indiscernible]. Thank you, everyone. Have a great day. And again, if anyone would like a one-on-one, feel free to reach out, and we can give you a bit more detail on catchup. And Mart can also be on that call and [indiscernible] see you all soon.