Half Year

Q2FY24

The Good

• Operating Cash Flow positive quarter.

There potentially has been some manipulation of expenses to reach this for the quarter (prepaid bills from last quarter) but generally the business has been trending in the right direction (slowly)

• Telecom customer churn has stopped increasing for the quarter, however still remains much higher than others in the industry.

• SubHub integration has brought in an additional spike in users for GFN and these continue to add to the paying user base.

The Not So Good

• Revenue flat at $5.2m. No growth in telecommunications revenue over the last 18 months.

• Total telecommunications subscribers decreased for the quarter, driven by a decrease in off-net customers.This directly correlates with the stagnation of revenues. I have given Pentanet plenty of opportunities to improve in this area, but another decrease next quarter will be thesis well and truly broken.

• No additional new towers rolled out this quarter. Still at 8 of 24.

Watch Status

Slight Improvement

Valuation Status

Annualised Figures

What to Watch

• Churn expected to decrease with new retention initiatives. This could lead to an increase in advertising expenses which have generally been trending down.

• NeXus greenfield strategy has commenced. Not much detail on the slides around this.
• Off-net customer base growth expected to return with more competitive pricing launched in H2FY24.
• Trend of users paying for GFN service indicates there will likely continue to be an improvement in gaming subscription revenue for Q3.Overall gaming revenue may be down / flat depending on future payments from Optus

• No targets provided for the additional 5G tower roll-out. Total of 24 towers targeted during the capital raise with 8 completed. (Carried Over)

Annoucement

The Good

• Marginal improvement in quarterly revenue to $5.2m

• First 8 new 5G towers live
• GeforceNow RTX 3080 infrastructure now operational. The gaming segment can now transition from deployment to improving operations. This has led to a 38% increase in revenue QoQ. Without the exact numbers from Q4FY23, this could be estimated to be ~ the $400k mark. The increase looks largely driven by the $200k subhub invoice to Optus. The bubble chart from the presentation shows that the number of active users are growing slower than the number of total accounts. From this it can be seen that only a small number of the people who try the service actually remain active, and a smaller portion of those actually pay for the service.

• Operating expenses continue to remain steady. Due to the 5G marketing campaigns, advertising expenses can be expected to rise in the coming quarters.

• Ongoing improvement in EBITDA

The Not So Good

• Highlighting an “early” settlement of $570k bill as though it impairs the results. As it was brought forward last quarter they are still only paying the bill once in the cycle. My feeling is they have bought this forward to try and improve the cash flows for Q2 after trying the same thing last quarter.

• Customer churn continues to be an issue. Added 821 new customers over the quarter, but lost 749 resulting in only 72 new customers. The only positive is that On-net metrics are better which is the higher margin sector of the telecommunications business.

Product Review - Petanet - All Services

• Reduction in gaming ARPU from $13 to $12
• NeXus rollout looks to continue to experience issues, which has meant ongoing delays. Need more details on the greenfields strategy

What Status

What to Watch

• Improvements in On-Net customers in Q2 now that the new 5G plans are launched.

• Improvements in customer churn.
• No targets provided for the additional 5G tower roll-out. Total of 24 towers targeted during the capital raise with 8 completed.
• Sub Hub integration planned for Q2FY24. This may drive an increased growth rate in Geforce Now subscribers and increases to gaming revenues.(Carried Over)
• Q2 EBITDA positive?

Announcement

The Good

• Completed four 5G tower upgrades which are fully operational. The speed of rollout has increased slightly, however there are only 4 additional towers forecast to be completed over H1FY24. The capital raising presentation indicated an increase in capacity of 20,000 customers if 24 towers are upgraded by the end of FY24, which means 16 upgrades need to be completed in H2FY24. Based on the current rate of upgrades, this is an unlikely outcome.

• Operational cash burn continues to improve in Q4 with an outflow of $456k. This figure is slightly distorted by the inclusion of a $690k government grant and $570k bill.

• Operating expenses are largely under control. Additional user growth from this point should start to show some operating leverage.

The Not So Good

• Annual revenue sitting at $19.7m, which puts Q4 revenue at $5m. Quarterly revenue growth has now been flat for the last 3 quarters. It is also a bit cloudy on how to determine the split between gaming and telecommunications revenues. I estimate gaming revenue to sit around $200k for the quarter, which would put gaming revenue for FY23 just shy of $1m.

• Removal of all growth metrics (i.e # of subscribers etc) from the quarterly update makes it difficult to determine the short term performance trends. Given 10% year on year of on-net user growth, it could be assumed that total growth would be around that mark, likely a bit lower. 
• No mention of Nexus deployment. The statement of a rollout in a measured and controlled manner I feel indicates that the team are still experiencing issues which are impacting the deployment of this service.
• Customer churn is now the highest on record at 1.39% (For comparison Aussie Broadband currently sits around 1.2%). The increase in churn follows decrease in rating on productreview.com 

What to Watch

• EBITDA breakeven announced for the month of June. Operating cashflows for Q1FY24 should be close to positive.

• Sub Hub integration planned for H1FY24. This may drive an increased growth rate in Geforce Now subscribers and increases to gaming revenues.(Carried Over)

• Where telecom and Geforce subscribers are sitting when next announced.
• Four further towers to be deployed across H1FY24
• Gen 3 NVIDIA servers to be deployed in Q1FY24

The Good

• Geforce Now service continues to grow with 351,000 registered users. QoQ growth has slowed to ~13% which is still strong, however the growth rate has been declining. What would be good to know is how many active users and paid users the service has. I am currently a registered user but have only used the service twice. (Minutes played was dropped from reporting this quarter)

• Forming partnerships to broaden distribution. The Optus Sub Hub deal should help with making Geforce Now more accessible to a wider audience. The risk here is that if Optus sees value in the Geforce offering, Pentanet will have a competitor with deeper pockets when it comes time to negotiate on the next round of renewals. 

• Small improvement over previous quarters in operational cash burn through reductions in admin and staff costs

• Cash position improved after the capital raise, however this has been carried out at all time lows in share price.

The Not So Good

• Quarterly revenue flat QoQ at $5m. There has been a small increase in gaming revenues which are now around the $300k mark.

• Live neXus subscribers reached 407 up from 319 in Q2 which was only 88 additions, around 1 per day. This is much slower than anticipated after they were previously touting 11,000 expressions of interest. If it takes that long to join, interest will quickly disappear.
• Total registered telecoms users is even more bleak with subscribers up to 17,110 from 17,056. So at total increase of 54, including neXus.

What to Watch

• Sub Hub integration planned for H1FY24. This may drive an increased growth rate in Geforce Now subscribers
• Completed deployment of second 5G tower. Current rate of deployment is 1 tower per quarter. The capital raise deck indicated 24 towers to be upgraded over 24 months. If the 24 towers to be upgraded add an additional 20,000 capacity, assume each tower adds ~800 additional users.
• Existing stock of 2,000 neXus units to be deployed.
• Negative reviews continue and I don’t think this will improve while cost cutting measures are in place and current networks at capacity. It looks like @Rudyboy isn't the only one experiencing issues.

However there has been a slight improvement in churn rates

The Good

• The Nexus service is now stable and installed bases are being brought online, which has improved margins and recurring revenue. As there were delays bringing this on in Q2, revenue will likely continue to improve in Q3.
• The Geforce Now user base continues to expand strongly with total users up 23% for the quarter. 

The Not So Good

• Overall subscriber growth remained flat for the quarter after slowing in previous quarters. I had expected Pentanet to show much stronger growth consistently for quite some time still. This is an orange flag.

• Nexus rollout is much slower than I had anticipated, which also means it is a lot more costly. I can understand the delays to get the issues in hand before taking the product to market and Q3 should provide a clearer picture of the deployment rate.
• Paid Geforce Now memberships increased over the quarter as well but off a very small base, and likely all basic memberships. Based on the past 2 quarters increases in revenue of 13% & 15% respectively I estimate the half year revenue for Geforce to be around $370k. The introduction of the additional payment tiers have helped move the service towards monetisation, however a majority of users are still free. I expect this is a long term strategic move, with another change in plans in the future after they secure the exclusive rights for a new period. I would like to see the free plans reduced to a time limited trial given the basic plans are reasonably priced.

• Cash burn is still an issue. $3m spent during the quarter, with $6m in the bank plus $5.4m debt facility. The company states it has enough capital to meet its growth plans for FY23. Interesting wording as there’s only 5 months left in FY23. The results of further cost saving measures are also mentioned to be expected, this may help with the cash flow but does worry me for customer service outcomes which look to have been decreasing if product review.com can be taken as an indicator.

• What is also following this trend is the ongoing incremental increases in churn. Each quarterly there has been commentary around these figures, however there is a definite trend up. Orange flag number 2.

• As a comparison Aussie Broadband averages around 1.1% with industry leading customer service,

What to Watch

• Rate of activation and deployment of Nexus
• Actively drawing on the $1.5m Canopus investment fund in Q3. I am still a bit unclear on how 5GG intends to use the analytics platform.
• Ongoing increases in churn rate.
• If the deployment of new 5G & Nexus network hardware can increase subscriber rate

The Good

• Continued growth of GeForce Now users to 252,000 and an increase in paid memberships by 20%, The increase is off a small base and registrations are for the cheaper tiers given the comparative 13% in revenue, but this is still a positive sign.

• Nexus roll-out has started but progress was slow over the quarter, however this is expected to accelerate.

The Not So Good

• Stability issues reported for the initial nexus rollout which has delayed the number of new subscriptions which only increased 2% over the quarter. This is well below the rate that I have accounted for in my forecasts and original thesis. Increased churn due to a price increase starting in October would have also contributed to this, however this is a warning sign.

• Free Cash Flow -$4.1m for Q1 with $9.2m in cash and $5m debt facility which gives 3 Quarters of runway at the current investment spend. This quarter has included $1.6m for licence fees.

What to Watch

• Ongoing stability issues with Nexus which delay uptake or cause churn on the service
• Review new pricing points against the wider market and monitor ongoing churn numbers
• $3.2m of $8m paid for 15yr 26Ghz Licence. Need to understand the remaining payment schedule and impacts to cash levels.
• Reduction in operation cash burn to avoid needs for future capital raises.

So Pentanet has finally moved to start trying to nudge its users into paid subscriptions for GeforceNow. (See @laoshi's straw) After a year in service they have reached “nearly a quarter of a million gamers”. The number wasn't given this time unlike other announcements.

After pretty lack luster revenue figures for the service announced in the annual report, it will be telling to see if the new tiers can improve the numbers.

Gaming revenue for H2FY22 was $300k, if you take 6 months of full membership ($120) this gives around 2500 paying users. Total user count at the start of the half was 58,000. This then comes out at an estimate of ~ 4% paying users which is flawed as it assumes no additional users started paying for the service during the half, so the number is likely lower. So where to from here?

The price point of the new plans is actually quite reasonable. With the array of streaming services available to people these days, another $20 / month is a solid hit, whereas $4 is much more easy to justify and squarely targeted at someone like myself who doesn’t have time to game much anymore so doesn’t own a gaming rig but still would like to give some of the new titles a go.

What I see that may impact conversions, is the free tier is still available and not limited after a trial period or if they are successful at moving people onto the $4 plan, but then the wait times become significant again and it then forces people off the service rather than up the subscription tiers to skip the wait times.

Given the new pricing has started right at the end of the quarter, there should be a clean set of numbers coming up for Q2 to identify the success of the new subscription tiers.

The Good

• Continued increase in active GeforceNow users up 42% QoQ to 182,000. What is a good sign is the minutes streamed is growing at a faster rate (up 64% QoQ) which could be an indicator of ongoing usage after an account has been created. It is also noted that users are up over 200,000 at the end of July.

The Not So Good

• Reduced revenue growth rate. 5% increase in revenue to $4.6m taking total to $16.9m for FY22 vs $10.9m in FY21 & 5% increase in subscribers over the quarter to 16,674. Growth rate is slowing however fixed wireless makes up a slightly lower portion of users at 39%.



• Previously indicated a Q4 rollout for the changes to GeforceNow payment tiers. Described as upcoming in this update.

What to Watch

• Nexus go live was at the end of Q4. The onboarding of pre-registered users should drive an increase in subscriber growth over the coming quarters and with it growth in gross margins as fixed wireless makes up a smaller percentage of subscribers.
• Cash burn remained steady during Q4. Unless there is a significant increase in revenue over the next quarter I expect this to remain steady as advertising and staff costs grow with the business.
• Rollout of new GeforceNow membership tiers is likely to occur in Q1. Watch reporting metrics as a potential indicator on how successful the initial uptake is

A little bit of a search of current 5G & NBN plan comparisons to Pentatnets freshly announced Nexus offering. At the current promotional pricing it seems that it is a reasonable value proposition, after that period not as much unless you are a user who is after the highest speed internet plans. As this is likely targeted towards gamers, I think that Pentanet may end up bundling Geforce Now with the Nexus internet plans as a bit of a cross promotion.

Nexus

Telstra 5G - Nexus faster / Telstra cheaper but wide speed range

Optus 5G - Nexus Faster / Optus cheaper and includes Netflix

Aussie Broadband - NBN - Speeds similar / Nexus Cheaper

Fornite is now available on iOS and Android through Geforce NOW. Currently one of the most popular battle royal games, it will be worth watching to see if there is any noticeable uptick in users following this update, and if the launch of mid tier plans follows not far behind. (Previously indicated to be Q4 release)

LINK

The Good

• Ongoing revenue increase. Not quite at the levels from last year 
• 8% increase in subscribers over the quarter to 15,932. Fixed wireless steady around 40% of subscribers.
• Continued increase in active GeforceNow users. At 128,000 at the end of March. (Recent company presentation 05-05-22 had this up to 140,000)
• 10,000+ neXus registrations with non active customers, which if all converted would be around a 30% increase in subscribers. 
• $17m in cash leaves the company with a strong capital position going into the Nexus rollout.

The Not So Good

• Operational cash burn increased to - $1.86m. A bit of a jump from - $379k last quarter. Admin and advertising costs both doubled over the quarter. These costs have been attributed to scaling up in preparation for the Nexus rollout.

What to Watch

• Nexus network scheduled to go live in Q4
• Monitor supply chain and fixed wireless capacity constraints issues. Increased spending to carry higher levels of equipment stock over the quarter looking to mitigate these issues.
• Progress of CANOPUS and CloudGG platforms. So far I don’t have any value attributed to these parts of the business.
• GeforceNow mid tier plans scheduled to launch Q4. Monitor sector revenue in the Full Year results and if the company starts reporting paying customers in future quarterly updates.

Thought I would check out what the ques are currently looking like on GeForce Now after updates earlier this year announcing high growth on the platform.

There's definitely some more friction to using the free service now with over 150 people in line and a 20+ minute wait for time on the server. With the free service limited to a 1 hour session, and then having to re-join the line I think this may convert a few more memberships even before the new membership tiers are rolled out.

It will be interesting to see if there has been any growth in the numbers for Q3.

A bit late to this but still working through the 4C's

The Good:

• Announced 51,000 active users on the Geforce Now platform, with plans to expand the range of paid membership. At the moment the free membership allows essentially full access in 1 hour blocks. Basic membership available for a limited time implies continued free access may be ending or it may evolve into a free trial.
• Strong initial interest in the Nexus service with 4,907 expressions of interest in December (2,676 of those are potential new customers). It is positive to see reasonable numbers of interest in the pre-registrations as this is Pentanet's main business case for their fixed wireless offering.
• Approaching break even on operational cash flow (-$379k) and still have a solid cash position due to the recent capital raises. ($20.19m)

• $200k prize money from gaming team prize money. This is a minor item, however if they are winning prize money it means they are contributing to the expenses of this passion project.

The Bad:

• In the December quarter there was a decrease in revenue growth from 18% QoQ to 3% QoQ. It is not a good sign to see this rate dropping, Pentanet is currently priced quite a bit higher than other ISPs on the market at ~ 9 x Forward Sales so continual high growth is expected.
• Even though it is a good sign on the number of active users, there was no mention of Geforce Now revenue or number of paid memberships to be able to quantify its current commercial success. 
• Customer Acquisition Cost went up over the quarter. (Rough numbers as I haven’t separated marketing expenses for GeforceNow)

What To Watch:

• Upcoming changes to Geforce Now membership tiers and pricing and if this leads to a loss in active users once rolled out.
• Review of half-year results for revenue contribution from GeforceNow
• Ongoing customer growth rate
• Further progression of Nexus service. Indicated early 2022 launch.

Impacts To Price Forecast:

TBC. No price target currently in place.

Announcements Since Quarterly:

• Nexus registrations over 7,200 compared to 4,900 at the end of December. This  provides a theoretical accessible market of 168,000, which demonstrates some of the benefits of the Terragraph technology.
• Active GeforceNow users up to 92,000 compared to 51,000 at the end of December which is demonstrating accelerating growth and interest in the product.
• Side Note: I’m really unsure how I feel about the use of the ‘Meshy Bois’ terminology in company announcements. This is the kind of language I use with my mates, not when I am producing company documentation. There are also the ongoing light hearted jokes within the investor presentations. I’d be interested to see if others feel the same way.

I have only just bought into Pentanet and haven’t gone through the process of a proper research and write up so there is a little less context around the recent 4C announcement than normal for me so this will be a superficial look and circle back to this after I have finished my full dive into the company.

Revenue is up 18% QoQ and subscribers are up around 11% QoQ which is ok but given the current market cap a fairly hefty growth rate is priced in.

Customer churn is decreasing and reported at 0.8% but this is a number I will need to benchmark against others in the industry as it is a competitive market.

5GG is cashed up after a recent capital raise so the current negative cashflow is not a short-term problem and operating costs have remained fairly constant over the previous quarter. At the current rates of growth 5GG could be getting close to operationally cash flow positive by Q3.

The item to watch for its impact on the cashflow statement next quarter is the new GeforceNow gaming service which just launched this month. I imagine there is a fairly fixed cost for running the 15 servers regardless of the uptake and there are 15 more scheduled to be installed.

The other key sector of the business to monitor over the coming quarters is the progress of the Nexus Terragraph project, what level of demand for the service there is and how much ongoing capital is being invested for the deployment.

All in all it seems to be a pretty solid update with nothing screaming out that I have made a mistake yet other than perhaps my entry price.