Hello everyone. Thank you for joining the Megaport 2023 half-year investor briefing and Q&A. We will begin with a presentation by the Megaport management team, followed by 45 minutes of Q&A. 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 prefer to submit a question via text, please select the Q&A button to submit your typed questions. Now over to the Megaport CEO, Vincent English.
Thanks very much. Good morning, everybody. Welcome to our first half year FY 2023 results. We're gonna start with a usual market update, and then joining me on the call is Sean Cassidy, our CFO, and he will take us through the financial performance for the period. Starting with the overall revenue performance for the period. Before I continue, all of the numbers that we have in this presentation are in AUD, and we do have supplementary information, USD, that we did release in Q2 for everybody's additional benefit. Looking at the revenue performance for the first half of this year, starting on the left-hand side in North America, our largest region, total revenue was AUD 39.5 million.
That's an increase on the same period last year of 48% of AUD 12.9 million. Our APAC region delivered AUD 20.3 million in revenue, up 4.5 or 28% in the similar period. And Europe total revenue there is AUD 10.9 million, also grew by 24%, up AUD 2.1 million in the period. Total global revenue for the first half of the year was AUD 70.7 million, up 38% or AUD 19.5 million for the period. Looking at some of the highlights, monthly recurring revenue is up 16%. It grew from AUD 10.7 million at the end of June 2022 to the end of the 6 months ending 31 December 2022.
Likewise, annualized revenue is very similar at AUD 148 million run rate at the end of for the period at the end of December, up 15%. Customers closed at 2,739, up 4%. The number of our services now are over 29,000 at 29,088 for the six months period ending 31 December, up 6%. Overall our ports grew by 3% up to 9,809 in the 6 months, and also MCR is up at 768, up 5% for the period. Continuing to look at our customers profile grew by 4% at 2,739.
The average ports per customer, when normalized for some of our strategic ports that are not customer ports, grew from 3.6 services per customer to 3.69. The average service per port grew from 2.87 to 2.99. The average revenue per port grew from AUD 1,120 at the end of June to AUD 1,223 at the end of December, up 9%. Switching to the middle section of the slide, overall group exit gross margins at APAC is at 77%, Europe at 76% and North America at 64%. Overall for the total group is at 69%.
The group exit EBITDA numbers for APAC was 51%, Europe was 24%, and North America was 38%. Overall for the group is, including corporate overhead, is 6%. We're going to go through some of those slides in a little bit more color and detail shortly. Total cloud on-ramps were 282. We added 4 new ones in the period and also added 5 new regions at 147. Very quickly, just moving to the APAC region. The total number of ports and monthly, sorry, the monthly recurring revenue grew from 3.3 up to 3.4, up 3%. Gross margin is 77%, slightly down in the period.
Overall, number of services grew from 10,713 up to 11,069. Switching to the financial performance for the APAC region. As I said, gross margins at 77% continued to grow from similar periods each December period. The margins holding steady at over 50%. They're reporting 51% for the period. Switching to Europe, number of ports, the monthly recurring revenue grew from AUD 1.7 million-AUD 1.9 million, up 11.7%. The gross margin increased from 71% to 76%. Overall total number of services grew to 4,107, up from 3,860 in the six months.
The financial performance profile for our European business, gross margin compared to December last year grew from 68% to 76%. Our EBITDA position holding steady at 25% down to 24%. Just a slight decrease in the period. In terms of North America, our largest market, revenue was $7.1 million monthly recurring revenue at the end of December, compared to $5.7 million at the end of June, up 24.5%. Our gross margin for the same six-month period grew from 54% to 64%. Total number of services, 13,912, up from 12,810. Looking at the financial performance for North America, up from 52% same period December last year to up to 64% for the period ending December this year.
Our EBITDA margin has grown from 9% in the similar period up to 38% this period. With that, I'm going to hand it over to Sean Cassidy, who's going to take us through the financial performance in more detail, and then we'll take it from there after that.
Thanks, Johnny. As noted, revenue for the period of AUD 70.7 million is up 38% from the same period last year. It's a very similar growth rate to that we achieved through the full year of FY 2022. It's encouraging to see the net growth rate being maintained. Our monthly recurring revenue in December, which is our momentum going into the second half of this year of AUD 12.4 million, is 35% up on December 2021 and 16% up on June 2022. Our North America market delivered 56% of our group revenues, the USA alone is 96% of the North America.
It should be noted that we recognize revenue where services are turned up or activated and is irrelevant to the location of the sale or the headquarter of the company taking the services. Growth in NAM is ably assisted by our global sales team, helping to provide global solutions to global enterprises. He's going to present a slide a little later on our reference Megaport customer. That was initially a European sale, and it's now providing revenue across all three regions, a substantial amount of which is in NAM. Japan has helped APAC grow, our most mature market grow, with revenue growth of 28% versus the first half of FY 2022. This has slightly outperformed Europe, which is 24% up period on period.
For reference, AUD 70.7 million revenue over the last six months represents about two-thirds of the revenue that we achieved in the full financial year last year, and about 90% of the revenues that we achieved for the full financial year of FY 2021. That shows that there's still a very compelling growth story in Megaport. Moving on to the profit and loss and looking below revenue. Direct network cost is AUD 16.2 million or 9% up on the same period last year. We added 34 new data centers to our networks, of which 12 of those had significant points of presence installed. We also upgraded our North American backbone to 100 gigabits, and we continue to roll out 400 gigabit networks within certain metros.
Partner commissions of AUD 8 million are 45% up on the first half of last year. This is slightly more than the revenue growth, reflecting slightly higher percentage of new revenue that's coming through the indirect sales channel. Gross margin or profit after direct network costs and partner commissions margin of 66% for the half is six percentage points up on the same period last year. Our exit gross margin in December was 69%. OpEx of AUD 43.1 million is 13% up from the same period last year, largely because of additional marketing and travel, as well as some staff costs as we were scaling up and scaling out in H1 of last year. Versus H2 of last year, OpEx is up 7%.
EBITDA is positive for the full half year of AUD 3.4 million. This is a AUD 10.7 million turnaround from the same period last year. Looking at the revenue increase over the first half of FY 2022, we have added AUD 19.5 million in revenue. Converting that to an additional AUD 10.7 million of EBITDA shows our conversion rate is at close to AUD 0.55 for every new dollar of revenue that we have achieved. Non-operating costs of AUD 16.9 million are AUD 4 million ahead of the same period previous year, largely because of additional depreciation from the higher CapEx that we have had in recent years. There's also been some lower foreign exchange gains impacting that number, offset slightly by lower staff equity costs.
Employee costs of AUD 30.5 million are AUD 2.1 million or 7% up on the same period last year. It should be noted that the first half of FY 2022 was part of our scale up, scale out, we continued to hire throughout that period. Compared with the second half of FY 2022, employee costs have increased only AUD 0.9 million or 3%. As noted at the Q2 results, we gave an annual pay increase to our staff, effective from the 1st of October, which is about 5% of salaries overall. Travel costs of AUD 1.5 million were AUD 1 million higher than the same period last year, which was greatly impacted by COVID.
It should be noted that travel costs are AUD 0.4 million less than H2 of last year. Marketing costs of AUD 2.7 million represents slightly under 4% of revenue. First half 2022 again, was greatly impacted by COVID, with a lot less face-to-face marketing, and the conference circuit was largely was very quiet. Marketing in that period of AUD 1.1 million represented only about 2% of revenue. IT costs are largely headcount driven, and they're slightly up, AUD 0.2 million over the same period last year. These are flat from the second half of the year. Our cash flow from operations was positive AUD 1.4 million for the half year. This is a AUD 9 million turnaround from the same period last year.
This is reflective of the AUD 10.3 million turnaround we saw in EBITDA, when we talked about the profit and loss. It shows that the operating leverage coming through the profit and loss is now flowing through to cash. Cash invested in CapEx of AUD 19.0 million, is 11% down on the first half last year and slightly above what the second half of last year was, AUD 18.8 million. We have completed a number of significant projects, such as the Edge upgrade, which has allowed us to introduce core route reflection for the next generation of software-defined networking. We've installed, completed the installation in Mexico.
We're still in the middle of a 400 gigabit metro upgrade project. We there will be no new equipment purchases for that project for the rest of this financial year. We're starting to see some shortening in the purchasing horizon for equipment. That means we'll be able to start to deploy some of the stock that we have included in inventory over recent quarters. We've had no cash inflows from the issue of equity in the half year. Lower drawdowns from vendor financing because of reduced CapEx means the cash flows from financing activities were an outflow of 8 million Australian dollars as we continue to pay down long-term liabilities.
Our total cash burn for the half year was AUD 25 million, we retained AUD 57.5 million cash on hand at December. Throughout financial year 2021, we were on a journey to get to EBITDA profitability. In fact, in the month of June itself in 2021, we hit EBITDA breakeven on a run rate basis. Although that year and that month were greatly impacted by COVID, which curtailed travel and marketing expenses a great deal. In the first half of last year, we reinvested in ourselves. We hired some people, we upgraded capacity, we upgraded our back-end systems, we knew much of that investment was going to go on the profit and loss. In effect, we were adding a little bit more leverage to put an accelerator into the business.
That scale-up was completed largely this time last year, and we can see how quickly the business has sprung back to profitability. I believe the rate of that profitability justifies the investment we made. This next slide shows a snapshot of December's for the group similar to the slides Vinny showed earlier for the region. I don't think it accurately portrays our EBITDA journey as well as the previous slide, but it does show that the group as a whole is tracking along the same paths as the regions. Group has a much bigger hurdle to get over with regards to EBITDA positivity because of the central overhead. You can see how the regional EBITDA growth has now expanded sufficiently to cover these costs.
With continued good cost control, margin expansion in the regions will feed the overall group EBITDA margin quickly. Looking at our pathway to free cash flow. Free cash flow for me is operating cash flow less investing cash flows. We are positive cash flow from operations for the half, and we've seen that this turnaround is closely related to the turnaround of profitability. We've seen that that profitability is closely related to revenue growth. This is the inherent operating leverage in our model. As the revenue continues to grow, cash generated from operations will continue to grow. To help with this, at the second quarter results, we announced a couple of initiatives.
The first is a cost-out program to drive more efficiency within our network, looking at how we access cloud on-ramps to service our customer connections, looking at our network architecture and a few other areas. Across seven work streams, we have identified potential AUD 8 million in annualized savings. Work has commenced on these. We should start to see this increased efficiency coming through in the next few quarters. In addition, we have rebalanced some pricing, specifically port-to-cloud VXC, to bring it into line with VXC pricing from MCR and MVE to cloud. Some price-sensitive churn notwithstanding, we hope that this should add up to an additional AUD 7 million in additional annual revenues.
At the Q2, we notified that our expected CapEx this year will be lower than AUD 39 million from last year and lower again in FY 2024. We have been completing certain major CapEx upgrade projects, such as the Edge upgrade, we will be able to deploy some of the stock we have collected in inventory. This will mean that less of our growing operating cash will be reinvested in CapEx. Just very briefly, our balance sheet still remains very strong. We have AUD 128 million in shareholder funds, of which AUD 57.5 million is cash on hand. As noted in the Q2, there was a slight deterioration in our debtors in December, this was very much a timing issue. Collections, strong collections in January have helped redress that.
With that, I'm gonna pass you back to Vincent for a business update.
Thanks, Sean. Okay. I'm just gonna touch on, as I had earlier on in the Megaport cloud situation where we're at 282 cloud on-ramps. As I said, we've added four, so up 1% in the period, and we're in 147 regions, as we continue to, we've added five more regions in the same period, the six months. 77% of all of Megaport's connections, our enterprise connections, are terminating or connecting to one of the cloud providers or more. 40% of that base is actually using multi-cloud. In other words, more than two or three. Our multi-cloud customers grew by 32%, and 50% of our Megaport multi-cloud customers all have adopted an MCR. I'll touch on that in a minute.
You can see on the chart in the bottom right-hand corner that the AWS connections are 35% of all the cloud connections. Azure from Microsoft is closely behind at 28.2. The remaining other operators as you move along to the left-hand side of the chart. The remaining 23% of our base is non-cloud. In other words, port to port, customer to customer, location to location or internet exchange connections. Once again, just a refresher on some of the key logos, and I'll talk to this again shortly after this slide. Just to give you an idea or an indication of some of the companies that are using Megaport.
Also on the right-hand side, you can see from the different indexes, Fortune 100, Fortune 500, et cetera, the ASX 100, that a large portion of these customers at the top end of the enterprise world are global customers, and using more and more services and are adopting more cloud. I want to touch on, as Sean said, this is an example, an anonymous example of a single MVE customer profile that, going back over previous seven quarters, originally started to spend AUD 10,000 with originating in Europe, and now has continued to build out that platform both in APAC, Japan, and in North America across a good few of our countries of operation.
As you can see from them, not only are they just consuming an MVE, they're consuming VXCs and ports and growing our MRR as the customer continues to adopt and use those services. As we said before, MVE is typically a longer sales cycle, so it does take a little bit of time to get the customer established and up and running. When they are up and running, this is an example of a profile of an MVE customer and how it scales very quickly. As I touched on earlier, revenue growth. Our total services, we have just under 9,809 ports and 19,279 services.
You can see that as more and more customers consume, or over time, they are adding more services onto their port or onto our network and expanding their footprint. We will talk to that in the customer cohort analysis on the full year when we look at the year-and-year, layered in full year reporting. It will show that, as this chart illustrates, that customers are continuing to take up more services. Total MRR at the end of the period is AUD 12.4 million, up from AUD 10.7 million in the previous period. Just some stats on Megaport Cloud Router. AUD 7,300 per MCR customer, up from AUD 6,400 at the same period last year.
The number of services, 15.2, slightly up from 14.9 from the same period last year. The total services on MCR, total customers using MCR is 768 MCRs. To MVE, similar stats in terms of the average revenue per customer of 14.4, up from 12 same period last year. The total number of services per customer, 21.5, up from 17.9. Total MVEs live on the network at the end of the period, December, and it was 94. Just a quick update on the channel. Again, this information was released in our Q2 pack, but just as a refresher, starting with the top right-hand corner chart.
The number of new partners signed onto our PartnerVantage program continues to grow up 87% from June last year. The number of partners now transacting is up 131%, just around just over 50 of those, compared to June 2022. The monthly recurring revenue is continuing to increase, up 95%, and that is illustrated by the number of services being taken up with these customers. Our MRR per partner just slightly down on the same period, or same quarter, in this financial year. In terms of our second half execution, just to kind of round out what we're focused on.
The cost out program, again, having invested a substantial amount of CapEx in building out our network and our 400 gig capability to allow us to bring on 100 gig ports into the network, and then streamline some of our network operational costs, which will come through in our to assist in our profit before direct network costs or gross margin. This is work in progress, and it will continue to be as we make our network more efficient over time because we'll be able to scale it. As Sean said, we're making after pricing reviews, which we do periodically, we're bringing into line our VXC pricing for port-to-cloud connectivity. So it's now on a parity with our VXC pricing with MCR and MVE products.
Finally, we're gonna continue to review our business and making sure that we're building out the business in a much more efficient manner. We're gonna continue to review what we're doing so that we'll continue to improve and grow the business into the future. With that, I will hand it back to the moderator now for Q&A.
Hi, everyone. As a reminder to ask a verbal question, please select the Raise Hand button. If you prefer a type question, please submit via the Q&A feature. Both of these options can be found at the bottom of the Zoom interface. We have a time limit of 45 minutes for the Q&A, so please keep questions to the point. Now our first question goes to Tim Plumbe from UBS.
Hi, guys. Can you hear me?
We can now, Tim. Yep.
Fantastic. Thanks. Just two questions from me, if possible, please. Many lots of moving parts in the business and the economic backdrop at the moment. We've seen cloud providers seeing slowing growth trends. You guys have had some internal disruptions following the departure of your chief revenue officer. Just with the current momentum that you're seeing in your sales pipeline and where you're at with your sales team, how do you think about that trajectory of ports compared to, you know, the growth ports of 368 that you saw before? Is it a period of, you know, we need to kind of reset the sales team a little bit, get on board, so a little bit subdued and then accelerate in two quarters time? Or can you see improving momentum as it stands today?
Yeah. Our new CRO, Jeff Turek, he's only 70 odd days into the job. As part of what he's doing, he's doing a deep dive assessment and see how else we can bolster up our sales. Part of that is looking at the teams and see how we can make them more efficient, and potentially hiring a few roles that's needed to accelerate that. Again, like I said earlier on, we're always constantly reviewing, and I think it's a good time for someone to take a good look at underneath the hood in terms of how we're set up for that in our sales organization.
We want to make sure that we make those right decisions so that to allow us to do that. The in the general kind of macro side of things, yes, there has been a lot of news lately, particularly in the tech sector about layoffs and jobs in the U.S., particularly from the large cloud providers and other tech companies. Many of those roles are across corporate kind of functions and in different divisions that are not cloud.
I think what happened basically coming into the period into Christmas, we've seen kind of a hold off of decision-making from a lot of companies and waiting for their new financial year, particularly in the U.S., which starts on the is a calendar year and similar to Europe. Pipeline was there. A lot of it just didn't get converted because of hold offs from towards the back end of quarter two, which I think I explained at in the quarter two briefing.
Got it. The second one, just around the APAC business there. You've got flat ports in APAC driven by that port consolidation in large part. Service was up 3%, revenue per port up 3%. When do we see that benefit of the port consolidation leading through to increased revenue coming on board?
I mean, first of all, it's one of our more mature businesses where we originally initiate here in Australia. There's a now known to maturity in each market, but we with the continued on the port consolidation side of it was mainly impacted by in the first quarter, we had 1 gig ports in which we changed pricing on to bring it back into line. That was where we saw that little bit of a dip that took us kept it really flat. The rest of it is consolidation from 10 gig to 100 gig, which is mainly our internal network, and making sure that we're able to focus on the direct network costs or gross margin in the business.
Once we've gone through most of that, it should start to continue.
Got it. Thanks, guys.
Okay. Our next question goes to Nick Harris from Morgans.
There we go. Hi guys. Thanks for the calls. Just, the first one was that slide 24, the live customer example. I just wanted to unpack that a little bit. I was just trying to understand that, obviously, that's a big uplift as the customers consume more of your services. If I'm reading it right, the uplift is mainly from more Virtual Cross Connects, which went from 12 to 94. Is that uplift in those Virtual Cross Connects because of the Megaport Virtual Edge, or is it the customer buying kind of legacy products?
We're broken out there on that slide, Nick. The ports are in the bottom under gray. They're using the ports to connect to cloud, and are using MVEs in various different markets. They're standing a substantial amount of VXCs on each of them to stitch together their effective, their Megaport network for their continuity and continue to use cloud. As they add on a new location, it adds on more certain VXCs because we've got to attach it back to the rest of the business. It has a multiplier effect.
Got you. What I was trying to understand is that big step up in revenue because of Megaport Virtual Edge or because of the other services?
It's a combination, Nick. It's total services is everything. As you know, VXCs are well, all products are recurring in nature, but VXCs, there's usually two to three, if not more, depending, attached to a port or to an MCR or well, in an MVE case, there's more.
Thanks, Vincent. Just a question on the proof of concepts. You mentioned in Q2, obviously, proof of concepts have a finite life, and, you know, you run a bunch of tests, and then you end it. Are you getting any feedback from customers on how they went? I guess, you know, generally speaking, what are you hearing? Are they passing the test? Should we expect them to convert to live MVEs at some stage? I'm just curious to understand how that works.
Yeah. I think we've just had one proof of concept that didn't materialize over time into a live customer or a live environment. Some customers are existing customers when they take up the product. I think that was because we were not in a couple of markets they needed to be in, so it was an isolated proof of concept. By and large, it takes a couple of months. Then once they get through all that and prove it all out, they usually come back in as a live customer.
Great. Thank you.
Okay, our next question goes to Kane Hannan from Goldman Sachs.
Morning, guys. Firstly, just in terms of the customer net adds during the second quarter, obviously slowed down. We've spoken about that at length. You did have, you know, it looked like very good quality customer adds coming through, sort of 10 in the Fortune 500, ASX 200. Just trying to understand what drove that difference, you know, in terms of the customer segments. You know, is that how you're approaching the market or just where the, you know, are they having different macro environments at the large end of town versus, you know, smaller and mid customers in your base?
Yeah. Good question. Thanks. The customers, well, first of all, they do take a little bit of time when they get themselves up. When the big customers do come on, or large, say, Fortune 100 customers tend to come on, they actually already know what they need because they're either proof of concepts or they're using, they're comfortable with the logistics and what they have to procure and buy. They've also made, obviously very informed decisions internally about what cloud partners they want to use. In most cases, they use two to three for the various different areas. To answer your question on what we're focused on, particularly in this, on the approach there is we do see certain verticals that are more in tune.
It's like, if I refer you back to the slide. Sorry, I'm just pulling up here in front of me.
Definitely behind the media.
Financial, medical, manufacturing, pharmaceutical, are all kind of key areas. One of the things that we've been looking at in the sales organization is that if we have a large customer in that vertical, then we need to go and see what the competition is and doing and see if we can go and talk to them about this is an example of an approach of how to put together your cloud network, and how that might help. That's helped us then to focus on a sales vector there to make sure that we can, we can be more successful with larger customers.
Perfect. Then just coming back to MVE, I'm gonna take the point around proof of concepts impacting the numbers. Just the MRR, I think went AUD 370K to AUD 350K in the quarter. I didn't think the proof of concepts had any revenue associated with them. Just trying to understand what's going on there. Is that a bit of underlying churn or, you know, people spinning down the extent of the service?
Yeah. Well, that's when sort of proof of concepts came off, right? That's what would have brought it down, right?
Do the proof of concepts have revenue associated with them? I thought we were talking last time that they were, you know, there was no revenue associated with them.
No, not for the MVEs.
Okay.
We usually kind of say, "Here's like take it and try it." We have a promo code or something like that. Similar to what we are approach was when we started with ports back in, back in the day, right? That's kind of how we approach that.
Sorry. There's no revenue with the proof of concept, is that right?
Well, there's a point of time, right? We might say it's for a month or it's two months, and then after that, if they're still using it, then it builds. That's typically how it's sold.
There's been no underlying churn or anything I should think about that drove that MRR backwards apart from proof of concepts not converting, you know, in that quarter?
Mm-hmm.
Perfect. Thanks, guys.
Okay. Our next question goes to Bob Chen from JP Morgan.
Morning, guys. Can you guys hear me?
We can.
Yeah. Perfect. Just a couple of questions for me. Just in terms of the cost out initiatives, so AUD 8 million-AUD 10 million, like how should we think about that, like from a net or is it a gross sort of number and, longer term, how should we think about where the mature margins for this business, lands in the future?
Hi, Bob. I can say we have identified a number of work streams and some of these, a lot of these are going to be in the cost savings are going to be in the network costs. For example, the strategic port consolidation that we have announced that are impacting our KPIs, we're starting to see our costs associated with maintaining those ports come off as we can cancel cross connections in certain data centers. That's helping a little. There are other efficiencies that we can drive out. We're looking at some things as well.
Some of our older commercial relationships with strategic partners have changed over the years just because there's a, our architecture has changed and our, the requirement to utilize some of our partner assets has changed. We're looking at a few things there. Again, that'll impact in the gross margin as we agree new commercial relationships with those partners. There are a number of other factors. We continue to look at our data center footprint and look at underperforming assets, and we have to ensure that we are in the optimal locations for our customers, our existing customers, and for our data center operator partners as well.
That, we continue to review that, as well as looking at how we contract for our bandwidth around the network. There are many, many aspects to this and many, many individual actions that have to be completed, as we go through this. It's not like that we can flick a switch and get it all done overnight. You should start to see these efficiencies coming through the gross margins, as we in the next few periods. As to where we are, long-term gross margins for this business, we have always guided that it's 70%-72%, and as a higher proportion of our revenue is going to come through the channel, you're going to see partner commissions increase.
I'm comfortable that those partner commissions, with their increased revenue and our continued cost efficiency that we drive out of our network will allow us to get to those kinda long-term margins. 69% in December is pretty efficient as it is.
Okay. That makes sense. Then just on the OpEx side as well, like, how should we think about OpEx growth into this year and next year, given there seems to be a little bit more of a focus on the bottom line this year?
Well, there's a focus on making sure that we bring home the full benefit of all the additional revenues that we gain and allow that operating leverage to really bring in the cash. Yes, and one of the things I called out was one that was noticeable, that employee costs went up over the same period last year. They're largely flat or only small increase over the second half of this year. That's the single biggest OpEx that we have. It shows that, you know, the scale up, scale out that we had done in the first half of last year is complete and, you know, there's not going to be substantial increases in these costs. Inflationary pressures notwithstanding, of course.
Okay, cool. Now that makes sense. Maybe just taking a sort of step back. The last couple of quarters obviously, have been a little bit challenging on the growth front. Fundamentally, when you look at the total market opportunity, has that changed at all for sort of Megaport's core business as well as some of these newer products like MCR and MVE, which seems to be taking a little bit longer to, grow as well?
No, I don't think there's any change in plans there. I think there's just timing differences that have affected us in the last quarter or two. Obviously the consolidation on some of our KPIs, but that's gonna help, as Sean said, margins. You know, I think it's really the drive on staying focused on building our revenue and building our customer base and working with our customers to grow our revenue. As Sean said, like there's a substantial margin there that we've put in place with the initiatives and everything that we're working through and staying focused on that. That'll all help to substantially grow the business over time.
Great. Thanks, guys.
The next question goes to Siraj Ahmed from Citi.
Hi, Vincent. Hi, Sean.
Hi, Siraj.
Can you hear me okay? Okay. Yeah.
Yeah.
Just, I've three questions. The first one, Vincent, just going back to, I know the focus on efficiency, but just going back to the last quarter, I mean, 39 client adds even if December was weak, given you have a sales force of 90 people, that seems just very weak, right? Can you maybe help? Because that's one of the key questions I'm getting, is, what's happening here, right? Is it competition or is it just something else? Can you just talk through that client adds in the quarter?
Sorry, what? What adds in the core?
The client, the customer adds, right?
Yeah.
You know, even if December was weak in its macro, I mean, there's still two other months, right? You have a big sales team. Just can you just touch on that?
Yeah. I think that it's more about the services that we added from the existing customer base. That's what we were focusing on in the short term. Like I said, there hasn't been much activity in quarter two in terms of new customer adds. I think that's a lot of that has come down to the, like I said, the market, and there's a slowing down there from I suppose, decision-makers. Notwithstanding, our sales pipeline is strong. The market conditions just in terms of the lead up into the end of that quarter two period. They're the main reasons.
Just confirming, Vincent, on that, 'cause you previously mentioned, I think last week that Jan was off to a good start. Are you still seeing that or is that, you know, weighed down a bit or something? Yeah.
No. No change.
Okay. Got it. second thing, maybe one for Sean. Sean, on cash burn.
Mm-hmm.
I mean, clearly AUD 5 million reduction in CapEx this half. Not sure how the cost and revenue comes through. Just how are you thinking of cash burn in the second half? Just in terms of the balance sheet, right? I mean, some of this cost initiatives, I would have thought that port consolidation, et cetera, you would have already had in your business case that the cost would come out. That revenue, the price, pricing change, were you a bit concerned with the balance sheet for the price increase you put through? Just want to understand that as well.
Yeah. No. The price increase hasn't... like I said, it's just a rebalancing where we've been looking at how we charge for the services that we provide to our customers. It's only right that given the cost structure that we have to provide cloud services, that, you know, we ensure that we are recouping those costs. It's quite a few questions after that arise. It wasn't related to the balance sheet.
Yeah. Maybe I'll just interject here for a sec. Sorry, Sean. I think some of it is really got to do with, A, we wanted to get parity on our VXC pricing, right? We're trying to amend, and bring a lot more efficiencies into the way we do our billing, the way we support that from all the various different functions, whether it's network operations, finance, et cetera. Trying to standardize that is really important. That was one aspect. The second aspect is we already had similar pricing for MCRs and MVEs. It was, it's only a small subset. It's not small, but it's a subset of a subset, of pricing that got changed. Like I said, we've continuously done price reviews, in previous periods where we make slight changes or tweaks.
We've never really disclosed, like, what that financial impact would be other than that we just felt it was best and we could we had reasons for doing it. That's it.
Okay. Sean, just on the cash burn expectations for the second half, I think burn first half was AUD 25 million, I think. Should we be thinking like AUD 15 million or is there something else?
Like I said, like I mentioned earlier, we expect our CapEx profile to come down and we expect, you know, with the increased growth, the operating leverage coming through. We've initiated a few cost saving measures, and revenue or revenue enhancers that should help with that.
Okay. Last one. Just on the gross margins of 72%-73%, I think if you look at your cost out in the exit run rate that you had, you should be getting to 74% already, if you think 74, 75, right? Based on the cost out. What's bringing it back down? Is that?
There'll be partner concessions as well. An increasing amount of our revenue will be coming through the channel as hopefully momentum will pick up again there and that is, you know, will impact or counteract some of the savings that we're making in network.
Got it. Okay. Thank you.
The next question goes to Lachlan Brown from Credit Suisse.
Hi, Vincent. Hi, Sean.
Hello.
Thanks for your time. Just on the 368 port net adds in the second quarter, once you take out the strategic port consolidation, are you able to give us a sense of what the split was between the higher revenue generating 100 G ports and the 10 G ports and below? Maybe if you could provide a sense of your expectations into 2023 on that sales split?
Sorry. Just give us the first part of that one again.
The, the 100G ports, they're obviously higher revenue generating. Are you able to give us a sort of a sense of what the split was, the sales split? Or like what % of ports you're selling are the 100G ports?
Well, okay. The majority of the 100 G ports in our network are actually for our internal usage, so they're not necessarily revenue generating. We have sold a couple of them, but they were, you know, that was that investment we put in so that we have network optimization and in our direct network costs. Just wanna make sure we're not confused on that.
Yeah. Okay. No. That's very clear. thanks. I guess an OpEx question has already been asked, but I'll follow up. corporate costs of $15.2 million in the December half, which appears to be broadly similar to what you did in the second half of 2022. given the runway, can we expect a similar number to be de-delivered in the June half?
All I'm gonna say is that we are looking to bring in the operating leverage and cost control as part of that.
Yeah, easy. Okay, thanks. Maybe I'll just touch on one other question then. The Zenlayer and Megaport strategic partnership, has that brought in any new customer services in the quarter, or is that too early in the piece? If that has, do you mind just talking to those wins?
Yeah. That's too early. So far, yeah. It hasn't contributed anything so far because we're still working through go-to-market plans and our strategy around that. We had in-depth discussions with them at the Pacific Telecoms Conference. The teams will have meetings set up over the next two weeks in-person meetings at their head offices, so that's ongoing.
Easy. When should we expect some benefit from that to flow through? Is that six months out or later in the piece or?
Yeah. It's that, you know, 6-12 months, like any partnership before we see anything materially or anything coming out with that. First of all, we have to get it set up, and we have to have a good go-to-market plan. We have to have the technical network connections done. There's a good piece of work that has to happen in the background.
That makes sense.
B efore we can even kind of commit to any in terms of timelines.
Perfect. Thanks for your time.
Our next question goes to Roger Samuel from Jefferies Australia.
Hi, morning, guys. I've got a couple of questions. First one just, what we should expect in terms of the net adds for ports going forward, given the consolidation of ports, and now, you know, price per port is more expensive, so that may create a barrier for some customers. Also the trend towards, you know, going directly to public cloud directly, instead of having a presence in a data center. I mean, should we be expecting the ports net adds to be in a region of 300-400 per quarter or should it be lower given, you know, the consolidation and the move to public cloud?
Yeah. I, it's, that's a bit forward-looking, Roger. I don't wanna commit to a number on that right now. I think all I can say is that we've got a decent pipeline and, you know, that we're working through with Jeff and the team and I think it's just we gotta do it quicker and faster, that's all.
Okay. Fair enough. My second question is, around your CapEx. I appreciate that, the guidance for the CapEx is coming down for the next 2 years. What about the vendor financing? Are you still gonna continue to utilize vendor financing and, what sort of amounts can we expect?
It's interest free. We would be silly not to avail of it. Our, the vendor finance will be available on any of the equipment purchases that we make, over the second half of this year and next year as well. Clearly, if our overall CapEx is coming down, the amount of funds we'll be drawing down on in vendor financing will be similarly reduced.
Yeah. Okay. Just to clarify, the vendor financing is recognized in your cash flow from financing activities?
Correct.
Not an investing. Okay. Thank you.
Correct.
That's all from me. Thanks, guys.
Our next question goes to Wei Sim from Macquarie.
Hi, Vincent. Hi, Sean.
Good morning.
Hi. First question is just in terms of when you mentioned previously, one of the proof of concepts, the feedback was that we weren't in some of the markets that they wanted. I was wondering which markets those might be and whether, you know, Zenlayer might be in those markets.
Well, Southeast Asia and Asia markets, right. As you know, we've only got a footprint in APAC of Australia, New Zealand, Hong Kong, Singapore, and Japan. Yeah. Some of those countries are tricky and difficult to get into.
Okay.
Yeah, there may be. Again, just on the Zenlayer part of it, like I said earlier on, that's a, that's an early work in progress.
Yeah.
partnership that we're building, so.
Okay. Okay. My next question was just about Jeff. I mean, I've read kinda like the announcements and stuff, are you able just to give us a bit more, I guess, of his background, you know, especially just in terms of channel experience and, you know, what we think that he brings to the table?
Yeah. Well, I suppose the largest part of his experience, he grew up in Cisco, effectively over 18 to 19 years when the company was very small. He has been responsible for over $1 billion to $1.5 billion, depending which division he was in. He crossed four or five different senior leadership roles. He knows the security, knows the cloud industry. Obviously that's a space that they've worked in, and they built the business from, not too similar from us, where they quadrupled and trying to quadruple business over time, and that's what we've kind of tasked with. That's what we want to do as well.
He has experience in both direct and indirect, as a global leader as well as a sales leader in North America.
Okay. Right.
You can check on LinkedIn.
Yeah, no, I've had a brief look. Another one was just in terms of you mentioned before, potentially hiring a few new roles. I was wondering where that might be, or where we think we need a bit more, I guess.
I think I mentioned it. I think it's in sales since we have to hire a few extra sales people in there and to help him out.
Like, you can't really-
Yeah. That's all. That's where we're at. We're focusing on the revenue for that component. That's where we feel that we can, like I said, do things quicker and faster.
Okay. Okay. Then just when I think about the kind of like EBITDA margins for APAC and the EMEA region, and how they saw a bit of weakening, can you talk us through that, please? Thank you.
We have been leveraging quite a bit of corporate overhead in most of the regions. There's less of that that's available in Europe, where just geographical localization means we have to hire more people in country. There's a little bit of that in APAC as well, where we are finding that we need more localized people in Japan and the other Asian markets where they cannot leverage corporate overhead as much. I wouldn't read too much into it as kind of a permanent diminution of the EBITDA margin. It's just a case of a greater degree of localization to help both with the sales and operations within those markets.
Okay. Just in terms of that I guess the localization, is that piece done now or is that ongoing?
It's done.
Okay. Got it. Okay. Maybe one final question, just in terms of, you know, running inventory down, would this be a positive tailwind for our cash flows?
It means We have been purchasing on a 10 or a 12-month horizon. As we've been utilizing that, we have been replacing it on the same horizon. We are seeing a shortening of that horizon now, so we don't feel the need to maintain that level of stock anymore. Yes.
Perfect. Thank you so much.
Okay, our last verbal question goes to Paul Mason from E&P.
Morning. Morning, team. Just 2 quick ones for me. You guys used to have an innovation budget, I think. That was when Jay joined the board. I was wondering, have you guys scrapped that or is that actually still part of your CapEx where you maybe have some further discretion around or, you know, what's sort of happening with that budget that was there?
Well, we have a budget that would get set aside by the when we get approved, right? Every year. And depending on the projects that we have that come through. One of the big things that we had to complete on our CapEx cycle is like what we've talked about, is getting optimization into our network, getting automation across. Sorry, automation across most of our areas where we have manual workloads to simplify the processes in the back end. And then that in turn. We have a pipeline of projects or initiatives that we're looking at. Between our CTO and the innovation committee, we review periodically, but a lot of them are still early in play.
Paul, if you look at our 4Cs, you'll see there's a line where R&D is expensed rather than capitalized, and that's for when it's still very much in the research phase. When it becomes commercially viable and meets the criteria, which are very strict criteria for capitalization, it becomes a CapEx, a project then.
Okay. The second one for me, just quickly, in terms of some of your SD-WAN partners, like Cisco and Fortinet, like they've been putting up reasonable results. I think Fortinet had, in particular, a reasonable SD-WAN result recently. I was just wondering in terms of what you think you're missing in terms of getting attached to some of those, yeah, sort of trends from some of your partners there. Like, you know, are you still really early on in the teaching phase with those partners or is there sort of something else around, you know, connecting in with their own sales motions that you guys are still missing there?
Yeah, no, I think we've onboarded them now, we're attending some of their SKOs at the moment to get in front of their sales organization. As I said in the past, a lot of the solution selling that needs to happen for SD-WAN products, you also need CPE or you need hardware. The customer has to have hardware. Whether one of those vendors sells hardware or not, you still need it. That's been, I think, you know, as we all know from logistics supply chain issues over the last 2 years, that seems to be easing off now. That's creating a bigger or stronger pipeline for them, for customers to procure those products, and that's beneficial to us.
Okay, great. Just the last one from me. I mean, you've talked about the price rebalancing, have you guys given any thoughts to actually putting through like broader price rises given, you know, we're in sort of the second year of reasonable inflation now? Sort of, you know, maybe you guys actually would have some cover to do something like a 10% price rise at some point in time. Like, what are your sort of general thoughts there?
Well, like I said, Paul, we'll continue to review pricing. We've got a lot of moving parts at the moment, so I think the most important part for us is to just initiate this VXC pricing while we're reviewing the others. Like we just did the pricing changes that we needed to do for MVEs and MCR. That was only back in earlier this year. You don't wanna make too many drastic changes too quickly while we're trying to grow the business at the same time.
Okay. Thank you.
Okay, that concludes our Q&A session.
Okay. Okay. Thanks very much, everybody. I know I've got a stack of meetings lined up over the coming days for other in-person meetings, but thanks very much for attending the half year results presentation.
Thank you.