The Megaport first half results investor presentation. Today, we have Michael Reid, the CEO, and Tish Dorman, the CFO, ready to take us through the investor presentation. All of the ASX releases are already up on the wires. Handing over to Michael and to Tish.
Thank you, Steve, and welcome to the FY24 half year results for Megaport. Now, it's worth noting that we were here three weeks ago, giving you some updates on Q2, and they were unaudited, so Q1 and Q2 unaudited results. This, obviously, three weeks later. These are the fully audited results for the business for the first half. I'm pleased to say that there's no change. There's nothing that's really surprising here, so we'll be walking through what is the full half number inside this session. Not gonna do, unfortunately, even though I love them, a demo. We're gonna keep this specifically to the numbers for this session, given that we were just here three weeks ago. So we're gonna walk through the company highlights, the first half FY24 results from Tish.
I'll give our business update and finish with outlook and guidance, which remains unchanged from the three weeks ago. Statement here is: delivered continued improvements in EBITDA, costs, and net cash flow, as well as record annual recurring revenue. Let's get straight into the financial highlights. AUD 95.1 million in revenue for the first half. That's up 35%, or AUD 24.4 million, from the first half last year. AUD 66.6 million in gross profit, is growing faster than revenue at 43% growth, AUD 20.1 million increase. EBITDA, 785% year-on-year growth. That's a tremendous turnaround in the business, and I've got some charts to show that shortly, AUD 30.1 million of EBITDA, up AUD 26.7 million. The net cash flow, you read that correctly. We are AUD 12.5 million, up AUD 40.8 million from this time last year.
If you look at the breakdown from a revenue performance perspective around the world, North America, Asia Pacific, EMEA, and Global, we break down the three regions. North America, as you know, is our largest and strongest, revenue at 57% of the entire global revenue, AUD 53.8 million, and growing at 36%. Asia Pacific, where we started the company, is 27% of the global revenue, AUD 25.8 million, up 27%, and EMEA, AUD 15.5 million, up 42%, represents 16% of our global revenue, making the total global at AUD 95.1 million, 35% year-on-year growth. This is, yet again, our highest EBITDA on record, and I think this chart demonstrates the huge turnaround inside the business that you've seen.
Absolute credit to the team in terms of the impact that they've made in the past year or so to get their costs under control and continue to grow that revenue, and I love looking at a chart like that. I also love looking at this chart, and this showcases the net cash flow. What a dramatic turnaround this has been, and as we showcase, the AUD 40.8 million turnaround in net cash flow gets us to AUD 12.5 million for the first half of the year. Our cash at bank is AUD 62.5 million, and our net cash position is AUD 45.8 million. Just take a look at that chart on the left. You can really see what a tremendous turnaround this has been.
Again, huge thank you to all the Megaport staff for the huge efforts they've been putting in over the past 10 years, but very most recently in the past year. Right, the financial results demonstrate Megaport's delivery of profitable, efficient growth, and strong cash generation. So what we're gonna do is hand over now for the first half FY 2024 results to Tish.
Thanks, Michael. So we've recently released the Q2 financial unaudited results to the EBITDA level, which remains unchanged post-audit. You're aware of revenue has grown 35% compared to the first half of FY23, have had some increase in direct network costs in alignment with improving our network, continuing to invest in that space. Partner commissions also increased. As you're aware, we have significant partnerships, particularly over in the U.S., where we're focusing a lot of our growth efforts. One thing to call out on this slide would really be around the equity settled employee costs. Now, this is not something that is typically issued as part of the quarterly results, however, it is as part of the half year and the full year financials. Now, we've broken this down. There is to be...
Make sure that that information is available to you. There is a bit more detail in the appendix attached to this presentation, which we won't go through. However, one thing we will clarify is we've got PRSU, which is performance RSUs. Those are for KMP. Now, Michael's joined us in March of FY 2023, and so we do have the cost of that sitting in the first half of this year. We've also got around AUD 2 million for general RSU program, which was kicked back off and reignited within the first half of the year. As we've iterated before, staff have joined us throughout the first half of the year, and so that is an initial indication of some costs that have come in. However, we do expect that to continue to grow.
There's also the AUD 1.1 million, as we referred within the the staff bonuses, which has moved from being paid with cash to RSUs, so that accounting treatment is now recognized in the equity-settled employee costs. Again, timing of staff joining, we will expect that to also move up for the second half of the year. For the detailed OpEx spend, we have also referenced this previously in the quarter. The first half of the year was flat, as the business has started to identify where it does need to be reinvesting in the go-to-market. And so marketing costs, travel costs, as well as employee costs, are expected to increase in the second half of the year. You will see that Megaport is currently on the Megaport World Tour, which will hit 40 cities, so that will come. I believe that's kicked off yesterday.
Now, this is one I am quite excited about: Megaport has received confirmation from the ASX that, due to four strong operating cash flow positive quarters, we are no longer required to submit an Appendix 4C. Not only is that a big item to have, but we actually also indicates that the growth of the company, but also the sustained sensible spend and continued investment in making the right investment in the right things, continues to showcase that that net cash flow is continuing to improve. Now, capital expenditure, we have released, as we discussed in the quarterly, around the projected or estimated spend for this financial year, excluding any strategic initiatives that may come up.
We have made use of the existing inventory, and also we've provided that breakdown between the CapEx spend for the first half of the year and our capitalized wages, which is really the development and engineering efforts for network development, product development, and deployment. The balance sheet is also indicative of that cash improvement and the general balance sheet focus for Megaport as a whole for that first half of the year. The operating leverage for the month of December, while that does show the margins here, again, expect for the second half of the year, as Megaport makes the decision to reinvest in the marketing activities of the company, the sales development, and that will change in the second half of FY2024. I will hand back to Michael for a quick business update.
Great stuff. Thank you, Tish. And I'm excited when your CFO gets excited about the world tour, 40 cities, and congratulations to the finance team for the 4C. That's a, that's a big burden that comes off the business, so very excited about that. All right, so first half FY24 revenue generating KPIs. We talked about in the Q2 session three weeks ago, the move towards revenue generating KPIs and why we went about that. Obviously, that's how we measure the business, focusing on the net quarter-on-quarter, and in this case, half-on-half movements to give the appropriate signal for the business. What you'll see in here is I've added one additional piece, which is called customer logos.
In the past, we called customers what is customer accounts, and as we sort of roll out Global WAN, as an example, we see that a single customer could come online with multiple accounts. And so an example of that is a customer that has a U.S. entity, an Australian entity, a U.K. entity, a Singapore entity, and so on. If there were seven entities for that one particular customer, that would actually show up through the metrics as a net increase of seven customers. And that's true from a customer account perspective, but in terms of how I measure the business and the signal that we need to see on a quarter-on-quarter basis, realistically, what we should be looking at is customer logos. And so what we'll be doing, going back, giving a historical lens going back, is including customer logos versus customer accounts.
You can see the net difference in the first half is 70 versus 77, so 7 differences in the comparison between those two metrics. That's the right metric moving forward. The last thing we need to be doing is signing up a whole range of Global WAN customers, and then as that adds up, it represents a big delta in the reality between what is a customer account versus customer logo. So that's the right right measurement moving forward for me personally, internally, and that's, I believe, the right measurement for you all to take signal from, particularly from a quarter-on-quarter perspective. Couple that with revenue generating, and we're in a great position to give you appropriate signal for every quarter. You can see the breakdown of the metrics there.
No change in comparison to what we shared in Q2, other than the addition of customer logos. And speaking of logos, these are the FY24 first half referenceable new logos, and I highlight referenceable because most customers don't allow you to share their logos publicly. And so these are the customers that are okay for us to share their logos and included in our contracts. And you've seen that broken down by North America, EMEA, and Asia Pac, and some wonderful logos for the golfers out there, we have Callaway, we called out CacheFly on the previous quarter. Texas Health, you can see, we cover both insurance, we cover golfing, which is probably the most important for Hanno, who's sitting across from me, thinks a lot about Callaway every morning.
We also cross into financial services and, if you look here, insurance. And across on the right, if I draw your attention to Asia Pacific, right across to TikTok, which we added to our internet exchanges most recently, and we're already seeing a tremendous amount of traffic. You wouldn't be surprised to hear that pumping through those internet exchanges. Veolia in EMEA was a great win, and you can see some more banking and finance, Investec, Securitas, Untold, and so forth. In Asia Pacific, we added Latitude and some other great examples, Bank of Sydney and Essential Energy. It really is a massive spectrum of customers that Megaport services and adds value to. Anyone that needs to connect to the cloud, between the clouds, and between data centers at high speed, that's our space. So growth in total services.
We're at 28,495 total services. We're up 12% year-on-year, and so that's—you can see that consistent improvement in addition to the business. It represents what is a really strong, sticky, and expansive business that we have here. The services per customer is increasing also. So that's the number of services that a particular customer takes out, has increased 5% year-on-year. And as you can see, our annual recurring revenue per service is up 15%. What does that mean? That means customers, for one particular service, are paying more than what they were a year ago.
That goes to show the example of moving from ports that are, say, 10 gig to 100 gig ports, or moving from services that now, when we launch Global WAN, and particularly when we talk about 100 gig VDCs or up to 100 gig VDCs, they only count as one service, but a significant improvement to the annual recurring revenue for that service. So you can see how that's playing out already in those numbers. Megaport Cloud Router and Megaport Virtual Edge. The cloud router is our ability to stitch two clouds together, and we can do that in 60 seconds. And the Virtual Edge platform is where we run inside our compute that's distributed to all the edge locations. We can actually spin up Cisco, Palo Alto, Fortinet, Versa, and so on.
Different vendors that can then spin up and then have that connectivity as a router or a firewall on those edge devices. We launched Megaport Cloud Router first, which is why you see the purple or pink, sorry, pink, line there, exploding up to 865 services. And MVE was released in sort of June 2021, and you can see how that's performing. What's really interesting, and we've shared this multiple times, but a customer who only takes out a port has an average service count of 9.7. When that sophistication improves and they take out MCR or a cloud router customer, what you see is about 16.3 services for that customer, and it makes sense. You're stitching together lots and lots of different connections, and it pulls through a lot of what we call VDCs, the actual connectivity component.
If you go to MVE, you see that lift again from 16 to 19. But what's really worth pointing out is that next piece on the left here, which is AUD 66,000, is the average annual recurring revenue for a port-only customer, and AUD 107,000 in annual recurring revenue for an MCR customer. And again, a big increase up to that MVE. So you can see the sophistication of the customer also ties back to the ARR that you receive from that particular business. FY 2024 revenue and EBITDA guidance remains unchanged, as robust cash flows are being reinvested into profitable, efficient growth. You've heard that story from when I joined the business. We continue to do that. We've proved that out from a fiscal perspective, and now we're reinvesting in the growth engine of the business.
We spent a lot of time three weeks ago, going through the detail on that. We won't reiterate on this particular call, just given the timing. Nothing's changed from where we were. We're still as energetic and excited about this business, you'd be surprised to hear, from three weeks ago. So what we'll do is finish on the outlook. Now, the numbers on this slide have not changed from three weeks ago. We'll roll through them to just reiterate. FY 2024 guidance is unchanged. FY 2024 revenue of AUD 190-195 million, EBITDA AUD 51-57 million. FY 2024 CapEx is, was, revised on the thirtieth of January in that previous call, down to AUD 20-22 million dollars.
As Tish pointed out, that's subject to any strategic investments, not that we can see any at this point in time. Second half, FY 2024 EBITDA and net cash flow to reflect the full impact of the increased headcount across the group, especially high salary of frontline quota-bearing sales team, plus increased expenditure on marketing, advertising, travel, entertainment, professional fees. And as we pointed out in the previous session, don't take the first half of EBITDA and multiply it by two. Most of that headcount landed at the end of Q2, and we're ramping up or pouring gas on the fire, as we would say, for all of the go-to-market motions and marketing events, et cetera. Megaport on Tour is a great example of that kicking off now.
FY24 CapEx guidance was lowered in January 2024 due to the existing inventory, use of existing inventory that was purchased prior to COVID or during COVID, I should say, a reduction of capitalized wages and a more efficient purchasing process. Call out to the team and the energy that's been put into that over the past year. And this also includes the completion of Project Centurion. We talked about that on the previous call. That's the 100-gig port rollout of infrastructure, which also gives you an ability to roll out 400-gig backbones across North America, which we're underway at the moment. That gives us an ability to roll out 100-gig VDCs, which we're incredibly excited about.
... The third quarter focus, as we continue to share, is to build go-to-market momentum with recovering KPIs expected to be evident in fourth quarter, FY24. All righty. So Steve, let's hand it back to you. I'll bring Tish into the call, open it up for questions, and go from there.
Okay. Thanks, Michael. Just a reminder, we'll take questions now from investors and analysts. I can see a number of people have raised their hand in the Zoom call. You can also send those through using the Q&A function if you would prefer. If I could ask at the outset, to please restrict yourself to one question. We're happy... We've obviously kept this reasonably tight, so we're happy to answer questions thereafter. And we will come back, and if you don't get all your questions answered, we will come back and give you a second turn. Roger Samuel at Jefferies, if you could kick things off, please, with your question.
Oh, hi, morning, all. My question is around your equity settled employee cost, and what sort of run rate can we expect in the second half or into FY25? I noticed that, yeah, I mean, there's AUD 2.2 million from you or Michael, but can we expect around AUD 3 million per half?
So I guess the one thing to note with the share-based payments is that the timing is everything around the share price and between when it could be issued and the share price movement. So it will depend. We have also only kind of kicked that program off for general. So if you—the PRSU is one thing, and that, that's probably one that you should, we should touch on, is, you know, Michael joined us back in March when the share price was significantly different, and the timing of when he joined to when that was approved at the AGM in November, that, that's quite a big difference.
So that kind of movement in the share price will determine a lot of it, and there are very specific and very strict accounting treatment that we have to manage within the accounting standards there, and so that's quite a big factor. So staff bonus, like, the bonus movement is one thing, and then there's the general RSU program, and then there's the PRSUs, which are just KMP. So it will depend largely on that share price, the accounting treatment, and the issuance of them.
Okay, thanks, Roger. If we could move to Tim Plumbe at UBS.
Hi, guys. I'll ask one, then jump back in the queue again. Tish, just a question for you, please. I think we touched on a little bit at the quarterly, but just in terms of those incremental heads that were brought into the business, if they were there for the whole of the second quarter, how much higher would your cost base have been, please?
So, I guess the thing to reiterate is we have kept EBITDA guidance in range—like, within that range that we initially determined because of, there's a range of factors. It's the staff costs, it's the travel and marketing, it's the investment in the go-to-market, which is more than just headcount. So, so that's part of why we've kept that EBITDA guidance within that range as a whole.
Oh, no, no. Yeah, no, I'm not asking about the guidance, but in, in the second quarter, if you had had those additional heads in there for the whole period, how much extra would your second quarter cost base have been? Like, if we want to think about that going into the going into the third quarter, that incremental cost going through.
I'm trying to think of, probably around AUD 1 million-AUD 2 million.
Got it. Okay, great. Thanks.
Thanks, Tim. Eric Choi at Barrenjoey, if you could go ahead, go ahead with your question, please.
Yeah, thanks, Steve. Congrats, guys, on graduating from the FTSE. Just had a really dumb one for Michael. Just wondering on your sales force momentum, I guess you guys are sort of a month and a bit away from the start of 4Q, so I appreciate it's only been three weeks since we last caught up, but is there anything that gives you more confidence? I'm thinking specifically, like, have any of the new salespeople been able to transition over any logos from their previous customer books so far?
I won't give guidance on that or insight, just because it's, I don't want to move anyone around something that we can't put statistics against. I would say that there's a mixture of factors. One is that when we compare. Typically, what you would say is, let's compare Salesforce as a really simple example to an appropriate measurement to the previous year. The Salesforce rigor inside Megaport a year ago didn't exist, and so there is no way for me to compare year-on-year to give you an appropriate measurement between them. The same issue was with marketing, and so I can't give you specific data other than what you have as gut feel. And I won't share gut feel on the call because I think that's not the right measure for you.
But I will say that, we're very happy with the team that's come on board. You will see that we've publicly shared those folks. They came from the industry that we're in. They're distributed across, particularly in the North American market, appropriate in the right areas. We know that we've also expanded our customer success engagement, which means we can touch the 1,600 customers that we've got in North America, is a really good example. And we know that when you go and talk to your customers, just really simply to expand on. I'll give you a really simple one. You're a customer with a port in a data center that has an ability to have a redundant port, as an example, which means you can actually connect in with a failover situation.
It's a really simple conversation to have with our customer, and you can't have that without a human who's willing to go and communicate with them. And so what just that in itself helps us start to move the needle. So all of the investments are trending towards what I would say the right outcomes, but we won't be able to share that with you until you see the back half of Q4, when we start to see metrics turn around.
Thanks for trying to be helpful with your hands tied. Thanks.
Thanks, Eric. Jon Atkin at RBC, if you would go ahead with your question, please.
Thanks. I'm quite interested in the world tour. And what exactly does that involve? Is it basically seminars and product demos? What's kind of the outreach involved in that? And then maybe kind of the deliverables or learnings that you hope to get from that, and what kind of follow-on would you anticipate resulting from some of those efforts?
Yeah, great question, and I think the easiest way to think about it is we're getting humans back in front of humans again. This is a post-COVID world. I think Megaport, and by the way, I think a lot of companies fell into this trap where they failed to turn back on the travel engine. It turns out that when you get in front of people physically, you form great relationships. You actually can push your relationship to actually leverage what you've currently got, but also go and do new things. And so if you think about us, we've got 800 different data centers globally that we can go and engage with. 40 cities is actually going and grabbing all of our partners, our customers, and anyone in the region to do a number of things.
1. For our partners and data center partners, as an example, and any of the other managed service providers, et cetera. We do basically what it would be like a lunch and learn, new demos, teaching sellers how to sell, and then helping them work towards building pipe gen together, and doing that in a physical forum. It's great to actually see people in three dimensions versus Zooms. And then what we would do is also have this a celebration where we bring everyone together in those regions and have multiple executives and the local teams that support crossing not only the channel teams, but also the frontline sellers who are working on a daily basis.
So, it's basically reminding the world that Megaport exists, pouring gas on that fire, so to speak, and firing up not only the go-to-market machine, but also all of our partner perspectives and moving forward into every region that we can think of. So 40 cities is not bad, I would say. But actually when you distribute that across the team, it's actually reasonable, it's doable.
Thank you.
I did get a lot of LinkedIn comments that I'll be at every single one of those cities. Sadly, I won't be. I think I'd pass out. So no, that's mainly the team driving those events. I'm turning up to as many as I can, but definitely not 40.
I'm glad you clarified that.
Yeah. Still have a business to run-
Mm-hmm
... which is great.
Okay, thanks, John. Suraj, if we could have your one question, please.
Thanks for clarifying the one question, but just Letitia, maybe one for you. Just into the gross margin in December, I think the slide says 70%. You reported 71% in the second quarter. So is there... I mean, I'm not sure if it's comparable or not, but it seems like the exit rate is a bit lower. Is there anything in there that we should be thinking about?
Nothing in particular, Suraj, around that gross margin. There is reinvestment. You can't roll out a 400G backbone without increasing your cost slightly.
So should we use that as a baseline for second half? Just, just to be clear, like 70% is the way to think-
I'd say, yeah, low, low 70s is, is about right, what I'd be using.
All right. Thank you. We'll jump back in the queue. Thank you.
Thanks, thanks, Suraj. Nick Harris from Morgans, go ahead with your question, please.
Thanks very much, guys. Looking forward to seeing the world tour. Just a CapEx question. Obviously, you've done a cracking job of tightening your CapEx range, which is not new to today. But just wondering if you might give us a little bit of a feel for how you're thinking about capitalized wages going forward. Appreciate, as in not this year, but in the future. Obviously, there's some unwinding the Cisco stuff, which I would have thought will kind of come back later in time. But is this run rate for capitalized wages sort of loosely at a little bit of growth going forward, or could it step up materially as you build new products and services? Thank you.
Nick, I would say it will depend on the types of roles we hire. So as you know, with the accounting treatment, and the internal processes, procedures, controls that we have around that, it will depend on the roles, where the product is, what deployment we want to do, and what upgrades we want to do. So I would probably keep it... it's a, it's a light year, but that, and we have gone through a number of redundancies. So I think that's probably key to just hold that for the time being.
Thanks, Tish.
Pleasure.
Okay. Thanks, Nick. We've got a question from somebody online. They've asked a general question around our main competitors. I might throw this to Michael.
Main competitors. So, we've talked about this before. If you look at Megaport, we're the largest network as a service platform on the planet that connects you to clouds and between the data centers. We have 800 data centers on net. And if you look at competitors, what are we trying to do? We are disrupting the telco and carrier space in effect. And so if you look at each telco around the world, they are terrestrially bound. So Telstra is strong in Australia, for example, AT&T in the U.S., BT and so forth. And so what you have is a strength locally. What Megaport has is a true global reach, landed already in every data center. And so the difference is we spin up in less than 60 seconds, an ability to connect.
So we've already pre-built the entire backbone, this massive spiderweb globally across all these different 800 data centers, and then connecting everything together so that you can spin it up instantly. A telco takes, however long that is, 10-11 weeks to go and deliver the same experience we deliver in 60 seconds. So you could say that with a traditional telco is a competitor to an extent. However, if the customer's looking for what we deliver, that's not really the case. We have some data center companies try to build their own platforms, which makes sense if you live only inside those data center brands. But the second you step outside of that data center brand, you're then in a world where they can't extend that fabric, and again, that's where Megaport makes sense.
In most cases, Megaport's largest sites live inside these data centers. There are a few companies that have tried to do something similar to Megaport. One that drives more of an Asia Pacific region with a sort of a heritage in China. That's not somewhere we play, and won't be going to the China market. And they've sort of gone more of an Asia Pacific route. In the U.S., we have one smaller competitor that's done something similar, which we see very, very rarely, and we've got data to sort of showcase that. I think the greatest opportunity for us is that the market is enormous, and that we've got so many customers, particularly in the U.S., that we're just untouched, and that we can go and bring this incredible opportunity to.
The competitor space is really not something we worry about. Our focus is really about getting the message to customers that Megaport exists. Every time that happens, we have a sort of mouth-opening moment where the customer goes: "I can't believe you can do this," and then we progress from there, which is why we have so many sticky and expansive customers. The game is to get that message out there more broadly.
Okay, thanks, Michael. We might go to Bob Chen at J.P. Morgan, if you could go ahead with your question, please.
Hey, guys. Just a question on the new sales team. Can you give a little bit of color on, you know, what their core KPIs are? Is it targeting MRR growth, or is it new logos or ports? Like, which one is most important to them?
Yeah. I've shared this on previous calls, compensation drives behavior, and getting the right compensation mix for your sales team is basically like a directive in terms of where to focus. We don't have KPIs, we have commission-based structure that's associated to revenue generation and a weighting towards net new logos. So we, inside the comp structures, you have a accelerator, so to speak, for new logos versus existing or expansion. And so it's all, monthly recurring revenue and ideally contracted. So they're the two pieces that we, we incentivize, contracted and new logos. So if you want to deliver the best performance as a frontline seller, it's revenue on a, contracted perspective for a new logo would give you the best possible outcome.
Great, thank you.
Thanks, Bob. Roger, at Jefferies, if you've got another question.
Yes. Yes, I do. Thanks. If I look at your margin by region, North America and EMEA have improved quite a lot, year on year, and, but it's still below Asia Pacific margin, which is 69%. Do you foresee that, North America and also EMEA could get too close to that 70% mark? Or do you think there are some structural differences between Asia Pac and the rest of the regions?
I think Asia Pac has been established for a fair bit longer, so that's a, that's a significant element as well. The kind of focus for Megaport over the next six plus months is reinvesting in the go-to-market engine to drive the increase in revenue as, and ARR, and that's, that's probably key to both those regions. Unless you have anything else?
Right. So, yeah.
Regions are,
Yeah, do you have a target of 70%? Yeah.
Right.
Just two things to add. The first one is that the regional margin numbers do not include corporate overheads, so those are only included in the group numbers. And the second thing is, the one difference in North America is that we pay commission to partners, which does not occur to the same extent in other regions. And so the gross margin, in particular in North America, is going to lag slightly. But the same trend that we're seeing in APAC, we're seeing, in fact, in the other regions, and we see that in by country, we see that by city, and we in fact see that by data center as well, which is the reason for our confidence in the operating leverage story.
It's also, it's worth pointing out that each region is very different. North America is predominantly U.S. and Canada, obviously. We have sites in Mexico as well. We do want to expand the region to South America. We also want to expand in Asia-Pacific, but if you think about it, Asia-Pacific is a huge number of countries, and Europe is also the same, and they're slightly different and nuanced. So I wouldn't just draw one comparison and say, or a brush, if Asia-Pac does this, you can brush this elsewhere. They're very different.
Right. Okay, and maybe just to follow up on the EMEA region, the EBITDA margin went down half and half. I think it was 54% in June 2023, and now you reported 44%. Can you explain what yeah, what's happening there? So this is the EBITDA margin run rate from June to December.
I guess we are reinvesting back in, and that's the... So the EBITDA margin will be reflective of that investment.
Okay, got it. Thanks.
Thanks, Roger. Kane Hannan at Goldmans, if you could, go ahead with your question, please.
Hey, guys. Just one quick one. Just that Megaport world tour, I mean, is there a specific cost you've budgeted for that, that we should be thinking about coming in in the second half? And then looking at the dates, I mean, it looks like it's spread pretty evenly, 3Q and 4Q. Is that the right way to think about it?
Yeah, I guess in terms of timing, yeah. Like everything we do, everything we're assessing and analyzing is around... You know, we're not sending the entire team over to one city to, to do that. It's, it's within regional teams that will be doing that Megaport on Tour. So Michael will not be traveling to 40 cities.
Yeah. I think-
Yeah
... we, we didn't call that out specifically on this call because it's a material impact in any way, shape. We literally called it out because I think I published that on LinkedIn this week, and I think that blew up. So it was just an example that Tish was referring to the fact that we're starting- we're reinvesting in that piece. There's nothing material to look at on that particular piece. That is, I would call, just business as usual. We need to be getting in front of our customers and partners on a consistent basis. What we've done is turn that into a big program where we can go and drive that, build up the hype, get the momentum inside the field. But in reality, it's just T&E, which I would say is just standard and is budgeted for, et cetera, et cetera. So, yeah.
Yeah. And is it right then, I mean, if I think about that December EBITDA margin in your second half revenue guidance, yeah, that December margin should have the full first half sales investment in it. So if I, you know, apply the second half revenue to that margin, you know, you've got this AUD 6 million step-up in costs coming through in the second half. Is that the right way to think about it?
There is definitely a step-up in costs expected. And that's staff costs, it's travel and entertainment, it's marketing, it's the whole, the whole lot, which is about that reinvestment in the go-to-market engine and making sure we test what works.
Perfect. Thanks very much.
Pleasure.
Thanks, Kane. Andrew Gillies from Macquarie, if you could go ahead with your question, please.
Thanks, guys. Just wondering on CapEx, just on slide. Sorry, I can't find the slide. Just if you could help me understand which items of CapEx spend are related to growth, and which items are related to maintenance?
For the PP&E element?
For both, if you could, please.
So I get... There'll be a combination, so we haven't split it out quite that way. It's largely around the equipment refresh will be a combination of maintaining, but also doing the upgrades, not just the significant upgrade with the networking capacity. CapEx wages, that mix of network development will be the actual network. The product development is product set, so we've done quite a few launches of new products. And then deploying, that is another element. You know, you can't just turn it on necessarily over, despite what Michael will do with his demos. There is an element of physical infrastructure with a lot of these to do the changes.
Okay, perfect. That's clear. And so, you know, if I look at it sort of exit FY 2023 compared to now, it seems like network development's, you know, back down a fair bit. I'm just trying to get a feel for what the long-term sort of maintenance CapEx level is.
So we've had. You know, there have been changes in headcount, which is a change as well. So that's the reason we've changed our guidance is because we did do an assessment in each and every element of these, and so what we'll be doing is planning what that looks like for FY 2025.
Perfect. Thank you.
Pleasure.
Thanks, Andrew. Returning to Eric at Barrenjoey.
Oh, thanks, Steve. Just one for Tish this time. Tish, just on potential operating leverage beyond 2024, and I appreciate maybe you haven't done 2025 budgets yet. But, I think you're guiding to an overhead cost base, call it AUD 44-45 million in the second half of 2024. Is it reasonable for us to assume that annualizes into 2025 and maybe grow that by CPI or CPI plus? And I guess that's the overhead cost base, but just at a gross margin level as well, I guess following on from Roger's comment, it's probably still reasonable for us to assume that gross margin of 70% can tick slightly upwards into 2025?
... it will depend on what changes we want to implement with the network changes and the network upgrades. So, there's a lot going on behind the scenes around what we're planning to reinvest in, and where we plan to upgrade, and where we plan to change, and what that looks like for Megaport as a whole. So it will—I would say, you know, we're still going—We've only just started to kick off the FY25 budgeting process. So, give us time, but yeah.
Gotcha. Thank you.
Pleasure.
Thanks, Eric. Siraj, if you could go ahead with your question, please.
Thanks. Michael, just two questions on product. First thing, the pay-as-you-go for MVE with Cisco, do you expect that to be... I mean, is that meaningful or just incremental in terms of adoption? And secondly, Equinix just announced their cloud router. Just thoughts on that, and whether is this a function of, you know, the industry growth in that, or do you reckon that to impact your Megaport Cloud Router as well?
I think first question is PayGo, and then let me answer that, and then I'll go Equinix cloud. So, PayGo is basically the ability for Cisco, for the first time, instead of when a customer wants to buy Megaport services from Cisco, in the past, as you know, we were the first to land on Cisco's price list with MVE. So basically, a customer can purchase Megaport from Cisco without having to contract with us. The challenge with that in the past was that Cisco really didn't have an ability to do monthly billing. And so if you think about Megaport, if you want to spin up a significantly larger month-to-month connection for a small period of time and then turn it back down, Cisco didn't have an ability to do that within their billing.
So PayGo gives you the ability to spin up and down, and then bill monthly. And so I think that, that is helpful for customers who need to do that, so I think that's a great step forward. I wouldn't say it's material, I'd say it's incremental. We definitely know that there were customers that didn't go with that path because of the challenges around, they didn't have that flexibility, so that adds the flexibility in there. So that's a good move. On Equinix, look, I think it makes sense, but they went down the cloud router. We've been going with cloud router for many years now. And I think what's important to understand is that Megaport, we've invented this space, but we've also been doing it a long time, and the automation that you build into routing platforms is incredibly complex.
To simplify, to deliver what we deliver in less than 60 seconds is a work of art and incredible science behind the scenes to deliver that. And so we continue to innovate features and functions inside the cloud routing platforms. And so that plays out in competitive landscapes, where you see customers that are pushing the boundaries of certain technical features, which we can deliver upon and many other companies cannot. So we will just, as pointed out in the previous call, the innovation that Megaport will continue to deliver will be across all product sets. But that's where we've got, in my opinion, tremendous opportunity to continue to bring out new features and functions inside the existing platforms that we have, but also add new product sets to the table.
We would, I would say, we would continue just to accelerate in that space.
Got it. Can I ask one more, if that, if you have time?
Sure.
Just in terms of just comments on network upgrades into 2025. That's interesting because, I mean, you do have quite a bit of utilization. Utilization is low across the whole business, right? So, Michael, just interesting that you're really up spending here or thinking about upgrades and, you know, network stuff here. Just how should we think about this? Is it because there was some product capability that you couldn't launch without that? Or... Yeah, just-
Yeah
... want to hear your thoughts on that. Yeah.
So there's a difference between utilization and the technical, product that we, we, you deliver, particularly when you're getting up to 100 gig connectivity, particularly when you're doing that in less than 60 seconds, and particularly when you're doing that across long distances. So when you've got an ability to offer that to customers, your, whilst our, utilization is likely to continue to remain very low, you still need to build the network in a way that protects the, all customers, from other customers, so to speak. And so, Megaport is very careful about how we build that, and so you can't get into a position where one customer could flood and cause problems for others, et cetera.
So the lift to 100-gig VXCs is quite monumental, and that's where to do that, we needed to roll out 400-gig backbones, but also 100-gig ports in all those locations. So, that is a substantial leap forward. I mean, we're talking, just to put it into context, 10 times the speed that we've ever been able to offer for a single connection, and we have 22,000 connections, if you, if you think about it. So like, yeah, it's important to build a robust network that heals itself, that delivers the customer experience, and we don't compromise that experience for our customers. So you're balancing that equation.
Thank you.
Thank you, Suraj. Nick Harris, we might call time after two more, and then I have one more around the Q&A.
Thanks, guys. This is a quick and hopefully easy one. Just obviously, congratulations on the quarterlies no longer having to lodge those 4Cs. Just managing our expectations going forward, should we expect that you may put out some sort of abridged, you know, DIY version rather than a requirement version of a Q3 and Q4, or is the next ASX result August? Thank you.
... plan at the moment is to continue with the quarterly update. The great news is we don't have to deliver the, I think. Well, I'll talk on to Spencer, but you can take it. But there's a significant amount of work that gets done from a finance perspective around delivering unaudited financial results. It's also not healthy, constantly delivering unaudited anything to the market, even though we're smack bang on it, just a huge amount of energy and effort that goes into it. So what we'll do is deliver, I think, the quarterly ana-
Yeah.
What do we call that? The investor presentation, I suppose. And then obviously, we won't deliver two sessions at the full year, like we are doing now, literally three weeks apart. I think you're probably getting sick of hearing from us, frankly. So, I think one at the end of the year would be appropriate. Is that fair?
Sounds pretty reasonable to me. Thank you. So just so I understand a Q3, and then the one in August, basically.
Mm.
Correct.
Perfect. Thank you. Appreciate it.
Thanks, Nick. Paul Mason, Evans and Partners.
Hey, Tim. Just a quick one from me. I just wondered if you could tell us, you know, Microsoft's had their Copilots out for quite a while now, and, you know, they're starting to see, like, quite a large number of enterprises adopting, like, you know, across their workforce and stuff. Have you guys seen any of your customers, like, where they've actually told you they're doing that? And if they have, you know, what's happened to their bandwidth usage?
Copilot, as in the assistance on-premise to, like, help you with coding and the relation back to, like, network utilization? Is that what, what you're drawing the two?
Yeah. So they've got, like, Office 365 Copilot now, not just the GitHub Copilot, but yeah, yeah, those sort of generative AI assistants like... Have you seen any evidence that that's gonna be a really-
Uh, yeah
... big bandwidth uplifter for you guys yet?
I don't think that is the driver for the bandwidth, albeit I think that's a great innovation. And by the way, yeah, you know, we or Cam's team and the engineering team are definitely leveraging GitHub, and was it GitLab? I always get confused. But the Copilot platform to help them from a coding perspective makes a massive difference, and I think that will be the increase in connectivity. However, what I would say is that we are seeing customers that are asking for very high connectivity and large speeds, which is why we've pushed down the 100 gig path from a VXC perspective. And a lot of that is in relation to some sort of movement of data, which then is to then train platforms, et cetera. It's...
The movement of the data. I think the biggest thing for us will be the movement of the data, and the real trick is it's typically not in the cloud that you currently live in. And so, you'll see some announcements from us towards as we sort of progress the platform that we have and sort of where we're partnering. From a marketplace perspective, we'll constantly be focused on all the GPU-as-a-service platforms and so forth, and that we are then preparing for customers who go: "I need to train my model. I need to move data from Oracle Cloud now, and I need to move it over to this GPU-as-a-service that sits in X," wherever it may be. That's not Twitter, that is a X being somewhere else. Yes. Does that make sense?
Yeah, so, so basically, at the moment, you think it's probably more like the training task than the inferencing task, where you've got, like, bigger leverage, by the sound of it?
Yeah. I think it's early days. I think. We still have so separate to AI, we still have a huge amount of customers that, for whatever reason, need to move serious amounts of data and back them up, either from a regulatory standpoint, literally just from a backup perspective. So I think data movement, like, on a daily basis, we've got customers that actually have multiple cloud instances. They back up between clouds, and they pull out of that, then back up to Iron Mountain, which is a, like a backup space, and then they swing that from the East Coast to the West Coast of the U.S. and have it across multiple zones and multiple regions.
So we'll I think there will always be that requirement, but AI, I think, is a little bit early, but we're starting to see already customers that need it. We rolled out a 100-gig VXC connection early in January, and that was on the East Coast of the U.S., and that was specifically related to AI. So you can see that we, we're seeing these demands come through, but it's not flooding through because I don't think every customer's worked out what they're doing specifically with AI yet.
Okay, great. Thank you.
Okay, thank you very much, everybody, for your attendance at today's call. I think we've answered the other question in relation to AI. We will put out details of our quarterly update, which is likely to be towards the end of April. And just a reminder that we're gonna be doing a roadshow after reporting season, so March 12-14, Sydney and Melbourne. And please be in touch if you'd like to participate in that. investor@megaport.com, you'll get through to me. Thanks, everybody, for attending, your attendance, and look forward to catching up later.
Cheers. Thank you all. Appreciate it.