Hello everyone, and thank you for joining the Megaport first quarter 2023 investor briefing and Q&A. We will begin with a presentation by the Megaport management team, followed by a 30-minute Q&A session. During the Q&A, please click the Raise Hand button to be placed in the virtual queue. This feature can be found at the bottom of the Zoom interface. If you would prefer to submit a text question, please select the Q&A button to type your questions in. Now over to the Megaport CEO, Vincent English.
Thank you very much. Good morning, good afternoon, welcome to our first quarter FY 2023 global update. I'm gonna take you through some of the highlights. Some of the key highlights for our first quarter, our continued EBITDA growth. We've had a very strong quarter one in terms of revenue performance at AUD 33.7 million, up 10% for total revenue for the quarter. Our monthly recurring revenue is AUD 11.6 million at the end of September, up 9%. Gross margins overall for the full quarter are just over 64%. All of this has contributed to our second consecutive quarter of EBITDA growth, delivering a AUD 1 million EBITDA result for quarter one.
In terms of the channel strengthening, as everybody has known, we've invested quite a lot of time and effort into building our channel program over the last 12-16 months. We've seen an increase of quarter on quarter since the end of June to end of September, a 31% increase of signing on of partners. Of those partners that have signed on, we've seen a 77% increase in those transacting in quarter on quarter. I'll touch on that a little bit later in another slide later too.
Megaport ONE, in terms they are now in their commercial cycle after completing two cycles of technical endeavor and complete successfully, have now two scores on the board with two major customers, and have a strong pipeline moving forward. We see Megaport ONE being an integral part of our overall platform moving forward. Recently, you might have seen in the news and some PR and social media that we've announced a strengthening of our relationship with Zenlayer, which are very focused in a lot of markets that we're not in. that allows us to partner with them on a much more network level where our customers can reach countries that we don't have a presence in.
Likewise, their customers in those countries can reach our extensive network, which has cloud presence across a lot of the major countries that we operate in. It's a very symbiotic relationship. We're really happy about that. That's where we're starting our first focus on that, and it's going to be in the whole Asia and Southeast Asia region. We move forward from there as time moves on. Yeah, that's very exciting news for us in terms of helping us not have to do a whole lot of heavy lifting. Next slide please. Now in terms of our performance on ports overall we had a reasonably soft quarter in terms of port performance.
Notwithstanding most of the other metrics that we have, including revenue and other service, total services were well up. Our total ports this quarter were only 286. We had some consolidation happening in our business. Starting with the softening in the quarter, a lot of that had been kind of factored into seasonality, a lot of vacation time, a lot of decision-makers being away between Europe and the US. The second part of that has been probably there's been a little bit of a vacuum with the lack of a CRO in our organization, to rally the troops, which I will address towards the end, but we're down to picking a candidate very shortly. It advanced in that regard. That's the general feedback.
In terms of port consolidation, as you know, we rolled out an extensive 100 gig network across our platform. We've seen a lot of port consolidation where customers are turning down three and four 10 gig ports to take up a 100 gig port. We're not, it's not revenue impacting for us as far as we're concerned, it's just more of a metric count on ports. In terms of that strategic port consolidation with the likes of AWS, Microsoft, and Google has had an impact of 123 ports reduction. It doesn't have an impact in terms of our revenue. More so, it does have an impact on our cost saving 'cause we now turn off some other costs that we were using to support 10 gig ports in our network costs.
It's overall financially it doesn't have an overall impact but it does have an impact on our KPI. The second consolidation to happen is we rebalanced our 1 gig pricing in the APAC region to bring it in line with the rest of the pricing that we have globally. Again, this is a lot of the 1 gig pricing brought up to what the 10 gig pricing has been. Again, similarly, there's been a lot of consolidation there, where customers are turning off multiple 1 gig ports and taking up a 10 gig port to allow them to utilize more services instead of taking up more 1 gig ports. That's the breakdown as to what's happened in that.
We expect some of that to still continue into quarter two in terms of that consolidation, but once that's complete, then we expect a lot of customers to actually use more services over the larger capacity ports that they have, to support their business. In terms of the customers, added just under 60 customers in the port just to bring it up to 2,700 customers. In terms of our quarter two outlook, we've got a strong pipeline for quarter two. A lot of stuff that didn't happen in quarter one has now trickled over into quarter two, so we're expecting that to be a much stronger performance in quarter two overall. Next slide, please. In terms of the underlying MRR growth, and I should preface this, that all these numbers are in AUD.
The reason we've done that is just to keep it consistent what people get used to our functional currency. Sean will address the different, both of those currencies later on in the financial section of the presentation. For consistency purposes, these are in AUD. We've had growth of AUD 637 thousand in underlying MRR growth in quarter one. Our total MRR for exiting quarter one was AUD 11.6 million. A split of that between direct and indirect has been 65% direct and 35% indirect. Overall MRR for the quarter was up 9%. Next slide. In terms of the breakdown on the split, we're continuing to see that the largest component of our revenue growth is coming from the North America region.
13% increase, up to AUD 6.5 million of the AUD 11.6 million MRR, contributing an increase of AUD 800,000. Our Asia Pacific region was reasonably flat, and again, that's an impact of the repricing that we've just seen, and we won't see the impact of the positive impact coming through from that until quarter two, which we're already starting to see from a billing point of view. In Europe, continuing to grow up to 10% again quarter-on-quarter, up to AUD 1.8 million. Overall, like I said, 9% uplift in total revenue to AUD 11.6 million. Next slide.
Switching to Megaport PartnerVantage and our indirect and our channel program, starting with the chart on your top left-hand side as you're looking at your screens. New partners signed, we had 78 partners signed at the end of June. That's now up to 102, up 31%, partners signed as we continue to expect to add more partners going quarter on quarter. To the chart just below it, we've seen of those partners, just under 40, there's an increase of 77% of partners who are transacting. That means bringing deals and closing deals.
That's the sticky end of it, of where we want to see a lot of our downstream partners bring in business and closing business. As a result of that, over on the top far right-hand corner, you see there that we the MRR from June, which is just over 53 or 54 thousand, has now jumped up to over 80 or 54% increase as a result of those transactions starting to come through. The MRR per partner is just around just over AUD 5,000, an increase of 18%, and we expect that to increase just due to timing differences. Partners come on at different stages during the quarter going forward. Overall, a very healthy position.
It's taken us a while to get here, but I think we're on the right track in terms of what we're expecting it to be. The momentum is there, and we still have a very strong pipeline with a lot more partners to come through and a lot more partners that have signed to funnel through. As you can see from the chart, over 100, there's another 60 of them there going through various different stages before they can start transacting. We've been focused on trying to be very efficient about how do we speed that up and making sure that they're in a position to close deals as quickly as possible. Next slide.
Just in terms of the, you would have seen this slide in our full year results, but on the far right-hand side, just wanted to kind of update to give you a size of companies that are using Megaport overall. We've added the bottom two charts on the right-hand side, where we have 32% or a third of ASX 100 companies are using Megaport services. Of the ASX 200, 24% are using it. Notwithstanding, we still have very decent percentages of the Fortune 100, still 20% and growing, as we continue to add.
I think this symbolizes the fact that a lot more larger companies are using Megaport to solve a lot more deeper reach, a lot more cloud regions, a lot more global reach, but also more complex things and the ability to use SD-WAN and MCRs, not just ports and VXCs, and MVEs on top of that. We believe we're in the right space. This is just that phase where now we're just starting to accelerate through and bring on larger customers. Sometimes take a little bit longer than usual, but when they do come, they bring a lot of revenue. Next slide, please. Okay, I'm gonna hand you over to Sean Cassidy, our CFO, who's going to take you through the financial performance for quarter one.
Thanks, Vinny. Good morning and good afternoon, everybody. Like Vinny mentioned, while the U.S. dollar has become our primary currency and our dominant currency, for the sake of familiarity while we work through the transition to solely reporting in U.S. dollar, most of the figures I'll be talking about today are going to be the Australian dollar. You may have seen that we have filed our 4C completely in U.S. dollar. At the full year, we noted that we don't necessarily need every metric to go our way every single quarter for it to be judged as a successful quarter. Q1's a prime example for that. I believe we've just had a very solid quarter, and that's borne out in these financial results.
The custom consolidation of the 1 gigabit ports that we saw in APAC has had an impact on MRR. That increased capacity that they have taken up, the MRR will come back to us in future quarters as they provision more services. Notwithstanding that small impact on MRR, our revenue for the quarter at AUD 33.7 million is up 10% on Q4, and it's up 37% on the same quarter last year. That quarter last year, if you might remember, was an absolute record of revenue growth at the time. The revenue growth in this quarter should be considered in that light.
I appreciate that revenue growth has been helped by an FX tailwind, and we're talking about, if we talk in US dollars, that obviously that conversation flips on its head a little bit. Revenue in US dollars for the quarter of $23 million was up 5% versus Q4 impacted by FX headwinds. Direct network costs of AUD 8.2 million rose slightly versus previous quarter, and that's because you have the full quarter impact of the network expansion that we completed in quarter four. Partner commissions of AUD 3.8 million have risen, they're 41% higher than they were against the previous quarter last year, which is an increase in excess of the revenue increase, but that's what we would expect as more of our new business is starting to come through in direct channels.
I will point out that when our revenue has increased year-on-year by 37%, our gross profit or profit after direct network costs and partner commissions has increased 51%. This is a good, strong indication that operating leverage within our business continues to come through. Our biggest OpEx expense is employee expenses. Employee costs of AUD 14.9 million have grown 9% year-on-year. It should be noted that across this period, our average headcount has grown 12% year-on-year. We're not seeing a great deal of wage inflation impacting in this regard. I will point out that our annual pay increases have only taken effect from 1 October this year.
An increase of 10% in our employee costs for quarter one versus Q4 is largely down to the fact that we have lower internal capital or capitalization of internal costs in the quarter just past. I'd also like to point out that employee costs as percentage of revenue for the quarter of 44% mark a significant improvement over FY 2022 average, just 53% as we continue to drive more productivity out of our set expenses. Professional fees are largely flat quarter-on-quarter. Marketing and travel expenses are increasing as we continue to normalize in a post-pandemic world, and we continue to support that momentum build within the channel. Again, the big highlight for the quarter was that this is the second consecutive quarter where we have delivered an EBITDA profit.
Moving on to our cash flow. In addition to building on our profitability quarter on quarter, we have delivered a second quarter in a row, where we have been cash flow positive from operating activities. I have noted in the past that there is some seasonality in our operating cash outflows, and quarter one includes our annual bonus payments to our staff, and that was a significant payment of AUD 2.8 million. It also includes the cost of the reduction in workforce that we had in the quarter as well. I'd also like to point out that when we look at this in American dollar or US dollar terms, the cash flow generated from operating activities is significantly better. That is a better indication of the effective natural hedging that we have operating within our business.
Our CapEx in the quarter of AUD 16 million is a little higher than it was in Q4 and slightly higher than it was in the same quarter last year. We continue to buy CapEx on a one-year horizon. It should be noted that we have enough equipment and inventory at this stage to complete our growth plans for the current fiscal year. That is not to say that we are going to stop having CapEx in future quarters. We will still have the installation costs of that equipment that we continue to have in stock. We will continue to have IP development costs capitalized as well as right-to-use assets. I previously guided that the annual CapEx should be about AUD 30 million and it's looking like we will spend slightly more than that for the full year.
You will note a cash inflow of AUD 4.1 million, noted as cash flow from borrowings. This is nothing to do with the revolving credit facility that we have negotiated, which I spoke about previously. This is simply interest-free vendor credit from the increase in CapEx notable. Our net cash flow for the quarter at AUD 13.9 million is effectively flat year-on-year, discounting the impact, the cash impact of the InnovoEdge acquisition in Q1 FY 2022. We are left with approximately AUD 17 million in the bank at the end of the quarter. As we've seen the continuing drive to profitability and the cash flow generating from operations in successive quarters, we're starting to see the operating leverage come through.
I remain confident that we have the cash reserves and the wherewithal to continue this journey to free cash flow without the need to raise additional capital. With that, I will hand you back to the moderator, and we can take your questions.
Thank you, Sean. As a reminder, to ask a verbal question, please select the Raise Hand button. If you'd prefer a typed question, please submit via the Q&A feature. Both of these options can be found at the bottom of your Zoom interface. We have a time limit of 25 minutes for Q&A, so please keep your questions to the point. We'll start with a question from Siraj Ahmed from Citi. Please ask your question, Siraj.
Thanks. Hi, Vinnie and Sean. Just, I'll ask one question. Is the port consolidation what you're seeing in 2Q, right? Would it be fair to say that the big impact of port consolidation was in the first quarter, or is—I mean, I guess the question is, could port have been negative in the second quarter? Just the natural rhythm of business. Vinnie, you mentioned the CRO and seasonality. Are you seeing things improve from a seasonality or is the CRO thing keeping things constrained?
Look, it depends on the part of the region. I think it's just some of the feedback that we've got from our teams, you know, just trying to rally the troops and then people have taken extended leave and not only have people taken a little bit of leave, it's more the other way around where it's our customers or partners that we're talking to have, like, taken extended leave, decision-makers trying to get things across. What's happened is a lot of that stuff has trickled into quarter two, and it's bolstered up the pipeline. A lot of work still needs to get done. I just going back to the first part of the question, you know, there is going to be a little bit more of that port consolidation happening in quarter two.
We expect that to be complete over a, you know, pretty much. I think most of the 1 gig component has been pretty much done. There might be still a few more in there, but the 100 gig will still be. There'll be slight impact there. But again, it's not revenue impacting, so it's just more of a port consolidation. I think what's encouraging for me though is the overall growth sales coming through on the ports and the pipeline that we've got in quarter two across all our services, and our customer pipeline in actually new logos or new customers coming through. I mean, like I said, you know, we've been working very hard. It's not easy to find the right person for a role for Megaport and that.
We've been diligent and taking our time, making sure we're getting the right person, and we're very close to that at the moment. I think all of this will just, it's more of a slight timing issue as well as seasonality that's kind of has probably a softer quarter, I suppose the best way of putting it in terms of natural sales growth versus, you know, the one-off activity around port consolidation.
Yeah, absolutely. Just to follow up with slightly, I did mention that, you know, ports are an important KPI to us, absolutely. It's difficult as we start to sell more, bigger ports. If you talk about kind of provision customer or provision capacity on our network, that has continued to grow. But also, even if that was not the case, when you talk about our customer numbers still went up in the quarter. Our revenue per customer went up to an increase in customer numbers as well.
Yeah.
You know, ports are not the only measure for growth.
Mm-hmm.
Yeah, agreed with Vinnie and Sean. Port customer adds are also not great, right? Port 57 up from pcp, but I think the second lowest for years, I think. Again, that's talking to the seasonality, I guess, right?
It is. They're hand in hand, right? They're both equally linked. Like I said, having said the key thing here for us is what does quarter two look like and where do we stand on where we see it going. You know, I think this is more just a big impact on seasonality and a lot of the pipeline that we thought would get delivered in September has trickled through into October. There's a flurry of activity going on at the moment around that, including the acquisition of new customer logos, not just ports. The interesting thing is that our VXCs and our MCRs are continuing to grow extensively as we start every quarter, and the same thing for MVEs.
We're seeing a big uptick now on MVEs and a very strong pipeline around that. Do some of these things take a little bit longer to come through than month-to-month or quarter-to-quarter? Sometimes they slip, and they take four months instead of three. I think that's just an impact of seasonality.
Thanks. Can I say a quick clarification, Sean? Did you say CapEx will be slightly higher? Is that saying-
Yeah.
AUD 10 million or AUD 10 million?
It might be closer to our AUD 38 million that we had last year.
AUD 38 million. Okay, got it. Thanks.
Thanks, Siraj. Next, we'll move to Wei Sim from Macquarie.
Thanks, Vinnie. Thanks, Sean. Two questions from me. One is just on the cash flows. I noticed that in our 4C this time, the leased asset payments was not in the first quarter one. So I'm just wanting to double-check that these numbers are comparable to 4Q or if there's any adjustments on that.
It's not an adjustment. There was an inconsistency on how the right-of-use assets were being treated in the 4C versus the accounting rules and after discussions with ASX, it was agreed that the 4C should better reflect the accounting for those right-of-use assets. We've reflected that in the current quarter. We haven't restated.
Okay. Got it. The other one is just, you know, Zenlayer sounds very exciting. I'd be, you know, keen to hear more about, you know, how the economics of the partnership work. You know, what does that expand our enabled DCs to?
Well, it depends on each country, but it gives us access to like the Philippines, Vietnam, you know, South Korea, Thailand, you know, countries that we're not in. How it would physically work is we're already mutually connected in three different countries that we're in, which is Japan, Hong Kong, and Singapore. Customers will hand off customers that are, say, outbound. In other words, if you're coming from the Philippines and you wanna get to Sydney, they'll get handed off to Megaport to connect to Sydney, and we'll take them from either one of those three countries to Sydney, and they'll consume services in Sydney. As a business, and it'll be on Zenlayer's paper.
Then if it's an inbound customer, so somebody that's a Megaport customer and they're in anywhere in our Megaport network, and they want to do business in the Philippines or in South Korea, we will hand that customer off, but we will handle the paper and dealing with the customer on our end. That's how it's kinda commercially set up, and it's all based on both our mutual pricing that we give to customers, and then there's a kind of a discount, a wholesale pricing mechanism between ourselves and Zenlayer.
It's more so that we kind of do a bit of an internal transfer in terms of the cost rather than having a revenue share model or anything like that.
Correct. We'll give them the cost for what it costs to take a customer to Sydney or New York or wherever it is from one of those three countries, and they'll invoice that to their customer, and then we get the discount on the wholesale. It works both ways. Yeah. It's just the easiest economic model.
Okay, perfect. Thank you very much. That's all for me.
Regulatory as well, so I mean.
Mm-hmm.
Zenlayer aren't necessarily re-regulated for business in any market where we currently operate, nor vice versa, so it makes life easier as long as the regulated entity invoices the customer in the right.
Yeah.
In the right country.
If you look at the map, if you look to their website, and you look at the map where they've got their coverage, and if you look at the glaring holes that they have, it's pretty much all in North America and most of Europe, which we've got a large footprint in, and there's countries that they have that we have no access to. It kind of fills in a void for us without us having to go extensively build straight away.
Okay. That makes sense. Thank you.
Thanks. Our next question comes from Paul Mason from Evans and Partners.
Hey, guys. I have one, probably for Vinnie and one for Sean. Maybe Vinnie first. Just curious on Digital Realty. They've announced like a whole bunch of stuff to do with this rebrand, I think, Service Fabric, but it sort of reads like they're rolling out Service Exchange, which you guys power across Europe now formally across all the Interxion assets and then South Africa with Teraco.
Mm-hmm.
I was wondering if you can just make sure I've got that right, if I've read that accurately. Secondly, sort of what the timelines are, like, whether that has started benefiting your business yet or whether that's sort of kicking in later in the year.
It's later in the year. It's more like the second half of the year. Nothing here moves slowly. Yeah, no, look, we're in all of the Interxion sites. We're actually, we kind of did a sticky cluster kind of thing so that customers can connect from Interxion to anywhere in the network through. So not just not using Service Exchange, we're actually manually doing it. So we were able to enable that to connect all the. Believe it or not all the Interxion sites were connected in the first place before the sale, so we filled in that gap. The second thing then was just connect Interxion to the rest of Digital Realty, which we were already connected to.
Service Exchange just means the white label underneath it allows its self-provisioning driven by Digital Realty themselves. That's the natural next step, and that helps because then they're selling their own product, just using our platform.
Right. And just for Sean, I was just wondering if you could help with the US dollars versus Aussie dollar cash flows 'cause the US dollar operating cash flow and CapEx numbers actually look a lot stronger than the Aussie dollar ones in terms of how close you are to sort of a cash flow breakeven target.
Yeah.
There's a big difference in, like, the working capital line as well in particular. Could you just pick that apart for us?
Yeah.
I can see what the difference is?
Yeah. It's just got to do with the timing of payments and non-AUD. Like I say, we're quite operationally hedged, but when you account for non-AUD payments versus when you actually make the payments, you see a lot of FX movements within the working capital when that's the case. When in actual fact we're paying a lot of American customers with American dollars. So when you do the consolidation, it happens. Now the corollary of that is a lot of our cash balances are held in AUD. When you change, you have this FX impact, which is huge on the USD cash flow, which is relatively minimal on the AUD one. So it's effectively you're gonna feel the pain one way or other.
It's either on the balance sheet or kind of balance sheet part of the cash flow or on the P&L part of the cash flow. It's a little bit confusing, but the US dollar cash flow, the reasons why we have been forced to look at or I've said in the past, US dollar is our dominant currency both in terms of revenue and our cost. The US dollar cash flow is closer to reality than the AUD one, and that's what's been driving this change.
Okay, great. Thank you.
Thanks, Paul. Next up we have Nick Harris. Nick's from Morgans.
Thanks, guys, and also appreciate the great disclosure. It's really helpful. Thank you for helping us work through it. Just a couple of questions from me. Just the ANZ, the 100 gig price rise. Could you give us sort of a percentage and a timing? Like, does it really kick in on the first of October? Do you want me to shoot the other two questions or one at a time?
No, no. It started on the first of July. It's already in place. Everything was effective first of July.
Got it. Okay. It comes through in the second quarter because people had to basically switch off the 10 gig onto the 100 gig, so it takes some time to adjust. Is that?
Yeah, there's an element to that. That's why I was saying there's an element of transition and the billing impact, you know, doesn't. You won't really see a lot of it. A flurry of that happened mid-quarter.
You know, just getting adjusted to it and as well. It's
Oh.
Yeah, go ahead, sorry.
Sorry, Nick. A lot of the strategic port changes from 10 gig to 100 gig are going to be on our back end to allow customers access, you know, bigger capacities so we don't need to take 2 or 3 10-gig on-ramps on their behalf. It's not that much revenue impact, and it's gonna save us cost, and it gives us greater flexibility on the back end. The ends at 1 gig to 10 gig pricing. As you know, this is where we started out, and we have a very substantial industry from 1 gig. Where our customer has 2 or 3 1-gig ports in one region, you're going to see them consolidating that into a 10-gig port.
It's a short-term, kind of hit to us in that regard because they're turning down, you know, a couple of $350 ports and turning off one $500 port. It allows, you know, the actual capacity that the customer now has provisioned is very much more, and it makes it easier for them and their kind of networking needs are more cost-effective and cost-efficient for them. As they push more and greater workloads to the cloud, they'll attach different services, and then the MRR is going to come back very quickly.
The VXCs are bigger too, so you get to charge more for them.
Excellent. Second question was just the MVEs. Congratulations. If my math is right, you had a record adds quarter. Could you just maybe make some comments on what's happening there? Is that starting to resonate, or do people kick off new projects at the start of the year? Just wanted to dive into that a little bit.
No, I think, Nick, that's a follow-through. Like I said, I think, you know, a natural MVE sales cycle is much longer than we talked before than a portal or a VXC or a traditional service. So just because of logistics and just coordinating things and trying to get it set up, and you need hardware, and you have to get a license, and then you turn on an MVE. So there's a couple of stages that the customer has to put pieces in place before they even start utilizing an MVE. So a lot of these activities are, you know, have been coming through since early in the year, and you know, they're starting to come through now. The good news, as far as we're concerned, is we do have a very strong pipeline.
You know, we expect that now to start to increase month-on-month as we move forward. Marginally at first, because again, like some of these are all at very, they're all at various different stages of where they are in the conversation. Yeah, look, I think it's just, you know, a lot of this stuff, these discussions with larger companies were six months old, right? They're just starting to come along, and they, as they get there, they drop then, you know. Our trick is to make sure we've got enough of them in the pipeline, so there's a consistency with the. That just takes a bit of time to build up.
That's great. Thank you. Just my last question was just obviously the employee expenses line. There are a few changes made in Q1. I don't know if you're comfortable giving us a bit of a feel for just in the second quarter. Should we expect those expenses to drop sort of a reasonable amount, or how should we think about that?
Um.
Central one. Thanks.
Yeah, I know, Nick. I would say our Q1 employee expenses are probably close to run rate, what you're going to see going through Q2. We had our annual pay increases that will take effect from the first of October, so they weren't in Q1. Against that, you will see the full quarter impact of any reductions that we have. We were done with that. We've got our arms around it. I think we are completely in control, and we continue to grow the business. You know, there will be additional headcount as we continue. It's just we won't be taking large individual step-ups in headcount numbers.
Thank you. That's really helpful.
Thanks, Nick. Just a reminder, we've got 10 minutes left on Q&A, so please keep your questions to a point. Next up, we've got Bob Chen from JP Morgan.
Hey, good morning, guys. Just a couple of questions from me. Just on the free cash flow trajectory, given you've got CapEx a little bit higher than expected this year, I mean, are you still maintaining that target of getting to that run rate break-even point by the end of FY 2023?
I don't think I've ever given out a target online. In most of my projections, it is a quarter three after that, with additional kind of when we talk about, as I've mentioned, CapEx should be slightly higher. It's a you know, AUD 2 million a quarter higher than previously guided, and most of that's happened in Q1.
Yeah. Okay. No worries. Just in terms of the partner channel starting to ramp up, I mean, can you talk a little bit about, you know, what types of partners are starting to actually fire across the PartnerVantage? I mean, is there any distinction between the different partners that are transacting now versus the ones that aren't yet transacting?
Well, look, it's the education cycle. It's that funnel that we presented at the full year results, right? You have the first chart that I had up, talked about on the top left-hand corner, talked about signed partners, right? That's when we've got legal documents in place, and that's where we can get them on the portal and get them educated. We have to go through those various different stage gates with them. The chart down below, we've now at the end of September, we just have, I think it was 102 partners signed, and we just had around 40 of those transacting. Each of them have a step up in terms of their level of activity, in the quarter.
That 60 gap that you've got there, they're now going through those stage gates, right? We expect there's gonna be a chunk of them that are gonna fall through into quarter, in quarter two, that'll be transacting, and then we'll be adding more as well as new partners that we're signing. Remember, I did say we were targeting the top 3 in every country, you know, that where a partner program was in, and it's, you know, in Europe, there's a lot more partners that are not just global partners. They're actually unique to the markets that they're in. Still, there's still a huge amount of heavy, you know, we're still working through it. I think we're just getting into a rhythm now that we found the best way of doing it and getting a little bit more efficient.
The trick is to make sure we do that right. The partners that are transacting actually have a pipeline and have deals, and we're actually able to close them, and that's what's contributing to the monthly recurring revenue. It's just getting into that rhythm, getting that going. I think that's been the biggest thing or our original challenge. Now I think we've just found a way of making that happen. It also takes time, right? 'Cause you have to talk to them, bring them through it and say, "Why is this important? Why do I need to have it?" You have to do the sales pitch first to get them on board before they even sign a contract.
When they sign the contract, you have to do the education, and they're gonna want to have Megaport as a product so they can sell it. These are all the kind of, not just psychological reasons, but all the kind of physical things you have to go through before you get them up and running and selling. I hope that answers the question.
Yeah. No, perfect. Just finally, just on that partner channel, I mean, in terms of seasonality of your partners versus your core business, do you expect any differences in terms of that channel?
I don't think it's as extreme, no. Because I think the partners will be incentivized to continue to sell recurring products and build on existing customer base, right? 'Cause they're kind of ready. I think they'll be astute enough to make sure they get deals done before people take vacation and, you know, things like that and seasonality. They're pretty hungry. Once you get them hooked, they're pretty good. I think that's part of the reason why, you know, another plus, I suppose, in that side of the house to take away that kind of downside seasonality kind of impact that we may experience later in quarter one, or towards the back end of quarter two. Yeah.
Certainly.
Yeah.
The growth is quite strong at the minute. Well, that growth might be hiding any kind of seasonality that you'll see within it. I suspect there will be some, but I don't think we'll notice it for a while.
Yeah.
Yeah. Perfect. Thanks, guys.
Next up, we've got a question from Roger Samuel from Jefferies.
Hi, guys. I've got two questions. First one, just looking at the EBITDA margin in Q4, you're 45%, and this quarter it's down to 3%. I appreciate that there could be some one-off there, as you mentioned about the bonus payments, but also you're talking about head count increases and some pay rises as well coming through the next few quarters. I'm just wondering if you are still confident that you can grow your EBITDA margin for this financial year. Yeah, and how do we get there?
Absolutely, Roger. We were helped out a little bit towards the end of last year with some kind of standard year-end auditing adjustments where we realized we hadn't hit quite some of the targets, so we ended up providing more and we were able to release an allocation or two, and that might have gave us an extra 1% on the EBITDA bump or something. We are going through a phase where we have given the channel time to grow, so we're not expecting kind of the real revenue kicker from that channel to start coming through until the back end of this year. That'll give us the operating leverage to really start lifting that EBITDA number.
I am fantastically, I don't want to say relieved's not quite the word, but while we're going through this kind of delicate period in our life where we are only marginally EBITDA positive, and thankfully, there's been no kind of shocks to the system as we're going through this. We have stayed EBITDA positive, and we grow from here.
Okay. My next question is just on the MRR for Asia Pacific, which is flat this quarter. I think you mentioned about the consolidation before, but that's. It's not revenue impacting, so I'm just wondering why?
No, the customer consolidation is revenue impacting. Where a customer has a number of individual one gig ports with VXCs attached to them consolidated down to a single ten gig port, and put all those VXCs on the same ten gig port. There is a little bit of MRR that we've lost there, and it's about AUD 150,000 that we've lost there. Like I say, we now have the capacity. When a customer has a one gig port, your ability to attach secondary and tertiary services to that one gig port is extremely limited. That's the ability to upsell services on a ten gig port is so much easier and quicker and immediate, in fact.
We expect that now the customer who's used to spending X amount of money on their network. We have just given a little bit of it back to them, and they can further optimize their network by pushing more work to the cloud, and we'll get it back then.
Okay. Great. Thank you very much.
Next up, we've got a question from Tim Plumbe from UBS.
Yeah. Hi, guys. Can you hear me?
Yep.
Hey, Tim.
Hey, how you doing? Just two questions from me, if possible. Maybe a bit of a follow-on from Siraj's original question, just in terms of those ports added. Obviously a seasonally softer period. Should we still be thinking of 533 that you did in the fourth quarter as kind of the normalized seasonal run rate, and then from which we would have some consolidation impact?
I think that sounds fair.
I think that's fair, yeah.
Got it. Cool. And the second one, just in terms of that slide where we're looking at MRR by channel, indirect has gone from 36%-35%. Obviously, you're getting positive trends coming through from Megaport PartnerVantage, but they're very early stage. That's only, like, 2% of the total indirect MRR, if I've done my calculations correctly. Can you talk a little bit about what you're seeing within the rest of that business and why was that going backwards? Is that got to do with some of the changes coming through in terms of the data center operators or doing their indirect sales strategy?
I wouldn't go so far as to say it's DCOs or it's changed. Going backwards is a little harsh to tell you the truth. It hasn't grown the way I would have quite liked it in the quarter, but part of that is down to some individual personal success within the direct sales organization, where there's one or two significant companies have turned off a huge amount of services. That MVE customer that we showed at the full year that has 11 MVEs took 3 additional MVEs in the quarter, which was a significant uptick in the MRR, and that's all direct. Things like this play into it a little bit, and you know, moving it 0.5% that kind of rounds up to 1% here and there. It's
It hasn't gone backwards. It's held its own.
Got it. No, I appreciate it. That's right. What do we need to see? I mean, the longer term target is 70/30, right?
Mm-hmm.
What are some of the main drivers that we need to see to start getting that acceleration more towards the 70?
Right. That's going to be the number of new logos. What we presented there is the number of new logos or that have partners with us working their way through the accreditation process and Megaport PartnerVantage and when they get to transacting. Then you will look at the MRR being generated per partner. That's what's really going to start driving it now. We have given internally in our own projections, we've given time and space for this to start building its momentum. We see it happening, albeit still the mathematics is small numbers. You can see from the PNL where our marketing is coming up and our travel is coming up, and this is how we're putting a few marketing dollars behind it to really start supporting that growth.
I have said we're giving it space. I don't really expect it to gain real traction until the second half of this year.
Understood. Okay, thanks, guys. Appreciate that.
Thanks, Tim. Our next question comes from Lachlan Brown from Credit Suisse. Lachlan, please go ahead and unmute yourself.
Sorry about that. Can you hear me now?
Yeah.
Yeah.
Perfect. Thanks for your time. I'll fire my questions off pretty quickly. Just on the October price increases, are you able to talk to any potential yield benefit you're expecting from these? Would you say these increases are more of a customer retention strategy if customers are enticed to take up longer term contracts?
Neither.
Yeah. Well, look, well, first of all, this started on the first of July, not on the first of October.
No, this is different. This is the term pricing that we've moved to.
Oh, okay.
Our default products have moved to 12 months. If our default on the portal is 12 months, you shouldn't be selling your default product at a discount. This is what we've moved to.
Yeah.
I would imagine this will trigger a migration from month to month for a lot of people to contract in. In the same way mobile operators honor preexisting tariffs after there are tariff changes, we will be doing that as well. I will not expect any revenue change. This may, over time, impact our churn rates or port churn rate a little. I haven't factored in anything for any uptick. This is kind of a philosophical pricing restructure rather than anything to drive revenue.
Perfect. That's very clear. Thanks. Just on the AUD 2.5 million of lease payments in the quarter, is there any seasonality in that number, or should we expect to sort of step up from these levels going forward?
No, that should be fairly consistent. One of the things that we have done, that we have as part of the kind of cost out exercise when we've looked at our network cost, we have built a very coherent database and contract database that allows us to monitor our every element in our network. We can start to bundle these together. When we're able to bundle them together, we can look for pricing and put it over a period of time accounting rules would demand that we capitalize on. There have been a slight uptick while it has been going through that process, but it should be relatively stable from here on in.
Thanks, guys. Cheers.
When I say uptick, I meant uptick in the capitalization. What we pay against the leases should be very similar.
Yes. Yes, of course.
All right. Our next question comes from Ben Martin from Goldman Sachs.
Morning, guys. Thanks very much for the question today. I've just got two quick ones, if that's all right.
Sure.
Sean, maybe just digging into that CapEx commentary, maybe just worth understanding what kind of drove the difference in full year CapEx expectations. Are we looking at kind of CapEx pricing increases or is there any kind of accelerated investment? The second one's just on the Megaport ONE contracts you guys spoke to today. Interested if you're monetizing those at the moment and what kind of annual run rate we should kind of expect for that product segment?
I'll take CapEx and then let you take the Megaport ONE.
Yeah.
The CapEx, when I talked about, when I went over the full year and was revising my CapEx, my short term or medium term CapEx estimates, Cisco had come out and they were talking about pressures in the silicon supply chain to be easing, and they were expecting to start to be able to recognize a lot of the kind of order book that they have on their balance sheets. That kind of filtered into my thinking that I would be able to run down a lot of the inventory I had on my balance sheet. I do not see any evidence the silicon supply chain issues have gone down, and I continue to buy on an extended horizon.
Great.
On the Megaport ONE then, two deals, one in Canada and the other one based in Singapore with, I'm not sure if I'm allowed to say, but a large telco operator that's based in Europe. The other one is effectively, what would you call it? Cryptocurrency kind of mining and all that stuff. They're using it for orchestration and cloud connectivity, et cetera. That's for our own internal purposes. They're both double-digit numbers MRR, so 10 and higher for both of them. They start billing this quarter.
Yeah. There's three elements to this, Ben, in that those customers are very different. One is using it for a lot of cloud compute and there's a kind of a subscription element to Megaport One for that end of things. They're well pay per access to the platform for the other company, which is the European-owned global telco. This is contracted out of their Singapore business unit. You will see them driving a lot more of our kind of standard products that are being addressed through this. You won't see the revenue necessarily coming through the Megaport One line. You'll see VXCs and ports and stuff being turned up.
Yeah. There's a paragraph that we had on the global update, I think at the end of the business update, where I talked about the Megaport ONE and the differences between the two customers. One is using orchestration, like I said, for a lot of heavy condensed work that they're doing themselves, and the other one is using it for our normal services, which is networks as a service, connectivity, multi-cloud, multi-region. As Sean said, those type of services, they're just using a white label version of which is of Megaport ONE for themselves, that it looks and feels like it's their product and they're selling it, and it's gonna come through to on our network as ports and services.
Excellent. Very clear. Thank you, Ben. That brings our Q&A session to an end. Vinny, I'll hand back to you to close off the call.
Okay. Thank you very much. Listen, I know probably people have a lot more questions. Let me settle for the next 24 hours. Yeah, thanks very much for attending the call. We'll try and keep the meetings as they may, however we get on and try and get quarter two done. Appreciate all your support. Hence the reason for this call to try and get ahead of some of the questions for you early after reporting the numbers. If there's any chance you want to reach out, then please do. I know Sean is down in Sydney for the next couple of days there, so he's probably more available than I am local time.
If you need to hit me up on an email or whatever at the same time, happy to jump on a call with whoever. That's it. Thank you very much for attending and talk to you soon.
Thanks all.
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