You have joined the meeting as an attendee and will be muted throughout the meeting.
My pleasure to introduce the team from Megaport. Starting from the left-hand side of the screen, Chairman Bevan Slattery. Beside him, Sean Cassidy, CFO. Closest to me, Vincent English, CEO of Megaport. Really delighted to have you all here today. Also from the Megaport team, we've got Helen Coghill from IR and Adam, also from the team. I think the plan is for Vincent to kick off. We'll do maybe a 15-minute presentation, and then we'll open it up to Q&A. For everyone on the line, please raise your hand if you want to ask a question, and someone will unmute you, or alternatively, just type it in as a text message. With that, straight over to you, Vinny. Thanks.
Thanks very much, Nick. Appreciate it. Good morning, everybody. This is our Q2 outlook presentation. Sorry. Just a moment. 2 mics. Just a couple of things to point out, in presentation. Everything that we will be talking about, in the presentation is in Australian dollars. We do have everything in US dollars in the appendix for reference for everybody. The second thing is, after this call today, we are reporting our full half year results on the 9th of February, in-person meetings and presentation for that period. We will be going into a fundamentally a blackout period pretty much after this call today. Just sort of to manage everybody's expectations. A lot of the material that will be in our half year, we will be discussing and going through today. With that I'll just go straight into our highlights.
We have very strong EBITDA growth in the quarter. AUD 2.4 million in EBITDA in quarter two. Total of AUD 3.4 million for the half year, up from the AUD 1 million that we had in the previous quarter. The total revenue for the half year was just under AUD 71 million. Up significantly on where we were and continuing to grow in the quarter. We have continued focus on our operational efficiency as we continue to maximize what we've already built in our operating model in our business. We're starting to see that come through now in our financials in terms of both the revenue, the margins increasing, and optimizing what we have.
We're gonna touch a little bit on the sales channel and how that's continuing to progress and grow as we continue to build activity there. That again, is more of our future revenue generation in the periods ahead. Also staying very focused on the area of cloud and IT trends in general because it's intrinsic to the key part of our business, with nearly 70% of our customers are connecting to one or more cloud partners today. That's a key revenue driver, it's a key focus point for us. We've had some announcements with AWS Outposts, where we were one of the first providers to get accredited for that, which allows us to work even closer with a lot of our data center operators.
Also when in the space of quantum computing, and as we're working through that, 'cause that's in the developing space as more and more data is being consumed and more and more partners and not just data centers, but providers out there need to actually be in a position to provide those type of services. We wanna continue to make sure we're at the forefront of that. Again, like the interconnection and continuing to add more enablers into things. New, new partners like Atlas Edge, which are a data center operator, again, but much smaller and more boutique in Europe, but tend to be more at the edge rather than at a centralized location.
Again, making sure that we're providing the same interconnection platform to any data center operator. We've had some other deals with DataBank in the quarter, as we continue to develop, particularly with Megaport ONE, and I'll touch on that a little bit later. In terms of key performance indicators, so we're continuing to see some consolidation on our network in terms of our ports.
A lot of that has got to do with the upgrade in the capital expenditure we've invested in the business over the past 3 to 4 quarters in terms of upgrading our backbone and our network, not just for a 400 Gig capability, but also the ability to sell and use 100 Gig ports, which means that we get a reduction in our cost structure, we get reduction in 10 Gig ports that are consumed on the network as we maximize and move up to 100 Gig. You can see from the chart there, we have a total of 368 ports gross for the quarter, of which 165 of those were sort of consolidated as part of that exercise.
Overall, customers went up just over 1% to 2,740 for the quarter. In terms of our monthly recurring revenue, up AUD 661,000 in the quarter. Now at a run rate of AUD 12.4 million, up 6% or up, you know, overall in terms of our total revenue, up AUD 800,000 for the quarter-over-quarter movement. You can see from the chart that, you know, it's an uplift of AUD 800,000 from AUD 11.6 to the AUD 12.4 quarter-over-quarter. It's continuing to grow up 6%.
In terms of the split of the revenue, we're continuing to see up 9% of that total revenue uplift has been contributed from the North America region, up at 7.1% closing monthly recurring revenue. Asia Pacific's up at 3%, and then Europe is also up at 7% and continuing to grow. We're starting to see more traction happening in Europe, as we said last quarter, continuing to move forward there, with the business.
Overall, like I said, AUD 12.4 million up 6% or AUD 800,000 for the quarter. In terms of our EBITDA journey, I kind of wanted to sort of call this out, and we talked about this at the last quarter and also at the full year results, and we talked about, you know, where our trajectory was going with the business in terms of how we're performing, our economic model and our data. You can see just going back to FY 2021 as we were, you know, down at just under AUD 5 million for the quarter and negative on EBITDA and how we've now sort of come out the other side of that towards the back end of last financial year and into the first two quarters of this year.
And that's, and I'll hand it over to Sean shortly when we go through the numbers. Basically, we had AUD 1 million of EBITDA in the first quarter of this financial year, and we did AUD 2.4 million in EBITDA this quarter. Our total for the half year is AUD 3.4 million. It's starting to come through in the business based on our economic model. As long as we stay focused on our revenues, managing our costs, the EBITDA model starts to flow through fairly efficiently, right? That's the overall underlying trend that we're gonna talk about today. In terms of Megaport PartnerVantage, in the program, again, we're just showing you the continued partner signs up 43% in the quarter, as we're adding more and more partners.
Again, just to remind everybody, anybody who comes onto Megaport PartnerVantage are more like a third-party reseller. They will have many customers or clients underneath that will help us to grow and continue to sustain our revenue growth by selling on behalf of Megaport. Of those 43%, that growth that we picked up, which is just under 150 partners already, we've got 31% of them, or nearly half, just under half of them, just under 60 of them are actually already billing and transacting. In other words, registering deals and bringing customers. Of that, 26% of the monthly recurring, which is over $100,000 a month, is coming from this pool of partners that we've built up over time.
In terms of some of the leading companies that we continue to add to our network, of the 2,740 customers that we have, we're seeing more and more customers, albeit a little bit slower customers coming on, the customers are larger, right? They're bigger and they're more global. You can see from the brands and the logos, and you can see from the right-hand side there in terms of what the capability of the customers that we have in terms of Fortune 100 or 500 in the company. Anywhere ranging from 20% to 24% or 25% of large multinational companies are using Megaport for cloud access and for as part of their global network and their footprint.
With that, I'm just gonna hand you over to Sean to take you through the next couple of slides.
Thanks, Vinnie. I'll talk through the financials a little bit. As Vinnie noticed earlier, revenue of AUD 37 million for the quarter is up 10% on Q1 and up 39% on the same period previous year. Our MRR in December of AUD 12.4 million now means that we have annualized revenues of slightly under AUD 150 million. For those of you reading our results in U.S. dollars, our MRR in U.S. dollars at $8.3 million means that the annualized revenues have crossed an important threshold in US dollar terms, where our annualized revenues are now across $100 million.
Another interesting thing to point out about the revenue in the quarter, AUD 37 million in the current quarter, exceeds the total revenue that we did in FY 2019. It just shows you the kind of continued growth journey that we've been on, and continue to enjoy. Direct network costs of AUD 8 million are down slightly or about 2% on quarter one and 11% up year-over-year. We continue to drive a cost optimization program across our network footprint to ensure we give the most cost-effective network in the right locations to service our customer needs. Partner commissions of AUD 4.2 million are up, AUD 0.4 million on quarter one or 10%, and that's in line with revenue growth.
Profit after direct network costs and partner commissions, in effect our gross profit of AUD 24.8 million, is AUD 3.1 million or 14% up on Q1 and AUD 8.3 million or 15% up year-on-year. This shows the operating leverage continuing to come through in the business. Our gross margin percentage, 67%, is 2 percentage points up from Q1. Employee costs of AUD 15.6 million are slightly up, about 5% on Q1 as the annual pay increase that was effective on October 1 came into effect. Employee cost as percentage of revenue at 42%, year-to-date is 13 percentage points better than the same period last year. As you see, we're getting much more efficient at scaling our revenue and servicing our customers.
Marketing and travel combined at AUD 2.4 million is 33% up in quarter one. As we're seeing a normalization of marketing and conference activity across the world as the world reverts to kind of pre-pandemic or pre-COVID levels of activity. EBITDA of AUD 2.4 million has grown AUD 1.4 million on quarter one, 140%. This is the third quarter in a row of positive EBITDA. Our EBITDA margin of 6% is up 21 percentage points on the same period last year. Cash from operations, positive AUD 0.2 million, is down on quarter one by AUD 1.2 million, largely because of receipts from customers and a major supplier was a contributing factor to that.
This is essentially a timing issue, and we have receipts and therefore receipts in January have been consequently very strong. CapEx of a net $4.6 million includes a reversal of an amount of $3.6 million, which is now being treated as an operating expense. CapEx includes continued upgrade of our core and our capacity as we complete a number of major projects. The continued expansion of the 400 gigabit metros, intellectual property of $4.5 million, and includes further development of Megaport ONE and security enhancements, both internal and for our customers. Vinnie's going to talk a little while in a little bit more detail about CapEx and the full year view shortly.
Cash flow from financing relates to the repayment of the 0% vendor financing and the payment of operating leases that have been capitalized under AASB 16 regulations. Included in this is a one-off outflow of AUD 3.6 million relating to the reversal I mentioned in CapEx as well. Our movement of cash balances in the period of AUD 11.9 million and AUD 25 million year to date means the cash balances at the end of the period of AUD 57.5 million remain on hand to service the group as we go forward. I'll pass back to Vinnie now.
Thanks, Sean. Just on that point on CapEx, just to bring everybody around, this is probably the first time we are looking a little bit more forward out in terms of projections on our cash and, sorry, on our CapEx for our cash spend. In FY22, the period ending in June, we spent just 39 million, just under AUD 40 million in CapEx. In this year, we're forecasting somewhere between AUD 32 million-AUD 33 million, okay, depending on FX in movement in the second half of the year. For next year, we're looking at between AUD 28 million and AUD 30 million, the profile of our cash spend. There's a couple of reasons for that, and I'll touch on that in a second.
Part of it is related to. You can see from the profile in the charts that the first half of the financial year typically is when we spend our heavy lifting on our CapEx 'cause we want to actually put it in place and have it built and in the network for whatever we're spending it on, so that we can actually optimize that in the second half of the year. That's typically the profile of how the cash is spent.
In terms of, in terms of the breakdown of the half year on half year, we've listed out here a few of the projects that we've spent. A lot of this money that we had spent towards the second half of last year or 2000 or FY 2022 and then it follow through into the first quarter of this financial year in terms of our cash, has been mainly about some network replacement, but mainly massive upgrades on our 400 Gig backbone and also on our 100 Gig port capability, so that we can actually sell and service our network for those. That has now been finished. We've done all the heavy lifting on that, and that's why the profile of our cash CapEx is starting to reduce.
It also has a big impact in our future outlook in terms of our cost control, in terms of we're now utilizing 100 Gig ports on the back of a network that we can now move forward over the next couple of years without having to reinvest in that for a long while. That's why you can see from the chart here in terms of our business as usual, which is continuing to upgrade our network and you know, capability or add more locations or add more capacity where needed. The big projects that we had that was part of our uplift, which you can see highlighted in the charts there, is starting to reduce significantly over time.
I suppose this brings me down to the last slide in the presentation, and it's when we talk about our operating efficiency. Again, we invested in the network significantly to allow us to move forward and continue to develop Network as a Service, as a platform, utilizing Megaport ONE, and our capability to actually be relevant in the cloud space for the next 3 to 5 years, right? Stay relevant. Part of that is as part of we've invested in the CapEx into the network, it also now means that we can start looking in and utilizing our network efficiency and seeing where we can save money.
P art of that is we've identified there's a major amount of work streams that we want to work through in terms of we've identified as annualized between AUD 8 million and AUD 10 million as a result of that investment in the CapEx and the investment that we've put into the business, where we can now actually make more efficient decisions about how we're managing our costs in the business. A lot of that is related to the consolidation of cloud on-ramps, our network operations, and like I said, the utilization of 100 Gig and 400 Gig ports in the network, which as we said, we've invested heavily in. The majority of these we've already identified.
We're actually working through a work program right now as a result of all that, and we expect a lot of these to start to be coming to fruition over the course of this financial year, and then obviously put us in a good place going into the new start of the new year with a reset in where we're at. Also announcing that we are doing a slight rebalancing on our pricing on our VXCs for to bring it in line with our MCR and MVE metro pricing on VXCs, and there'll be more detail about that a little bit later. I just, it's a little price sensitive at the moment.
Effectively, we're talking about rebalancing from a AUD 100 VXC in the metro to AUD 200, the same as our pricing for MVE and MCR, as in a lot of our legacy customers and legacy business has been so.
Expecting that to be effective around May, coming into June, this financial year. There's no other changes in our pricing or product. We've gone through an extensive review of what we are doing, why we're doing it. We believe all of our pricing is in line, and it's competitive. This is just one of those changes that we felt that was bringing it more in line with the cost structure that we have and also more in line with the value that we're delivering for the business or for customers. Then we're also looking at a further strategic review.
We've been 2013, 2014, when we started the business, and we're now doing a, the big deep dive in terms of making sure we're setting ourselves up for the next 4 or 5 years into the, you know, the next 5, you know, where we wanna go and where we want to be as a business. Focused improvement on working with our new CRO, Jeff, who's only with us now, I want to say 50 days. He's, you know he's obviously taking a good hard look at just not just the existing sales organization and how we're going to continue to grow that. How do we maximize the channel and how do we make sure that that's more optimized under his management in the sales group.
That's kind of it for the presentation. Over to questions.
Perfect. We'll open up to questions. We'll take liberties and go first in the room, and then, as I mentioned earlier, if you're on the line and you'd like to ask a question, please raise your hand or type it in. I'll see if anyone in the room wants to go first. If not, I've got plenty. Okay.
Just a question for Bevan, probably. I understand you've changed the incentives for the executive team to focus more on profitability. Could you mind just explaining those changes?
All the changes?
Oh, no, just, you know, how they shift. I believe they've shifted to an EBITDA focus and weighting towards that. Is that correct?
I mean, the whole business has, not just the incentive package, but I think the whole focus of the company and the market has too, right? We didn't do it because that's what the market is, but it's always just a maturation of the business heading towards that. Certainly our focus is on profitability. I think, you know, certainly with the things that you're seeing, profit and cash, they're obviously the two things we're really focused on. We're still focused on growth as well, very important. You know, we've actually built just seriously an incredibly amazing business here and an amazing platform.
What I spent probably, as the guys would know, I spent, you know, the best part of November, you know, in incredible detail on the business and, you know, re-understanding and even re-architecting some of that, so with the team. Knowing how important this is and obviously the cash that we have, you know, we sat down and worked out, you know, probably on a, on annualized basis, we've said here AUD 7 million-AUD 10 million worth of cash savings there. We've looked at, and a lot of that's because we did that re-architecture of. It's probably a bit missed. I mean, we spent a fair bit of money doing this 400 Gig, 100 Gig upgrade. Let me just explain why it's really, really important.
It was such an important investment, but also that investment, that CapEx, that heavy lifting is pretty much completed now. One of the challenges we had in the group, and we've been seeing this climb over the last, you know, 2 years, as enterprises consume more of the cloud, we have these legacy 10 Gig ports that we operate with the cloud providers, your AWS, your Microsoft Azure and Google. We wanted to be ready with 100 Gig when they start kind of opening up the 100 Gig capability. That's really important for a couple of reasons. One is people are ordering, you know, they want instantaneous access to cloud. Two is the cloud providers are not allowing oversubscription or very limited oversubscription.
We basically said, "Look, we've got to make sure that our customers can connect to us at a 100 Gig. At any time they want to service into the cloud, we're able to deliver that without wondering, have we got capacity?" The other point to that is we have to order a lot of cross-connect. you know, to interconnect to cloud at this 10 Gig legacy level. Doing that is what we've basically found is we're now ready. When the cloud operators say, we now have a 100 Gig available, we can do that. To give you an idea, I mean, our annual cross-connect fees clipped $10 million a year, you know, at the end of last year, which is extraordinary.
What that shows you is the growth that we've actually had in Cloud connectivity. Also shows the big opportunity and efficiency when we go to 100 Gig. My focus was certainly with the team and for the last 18 months, we've been deploying all this infrastructure out there to, one, reduce our interconnection cost, but also our scalability into Cloud. Two, it's also we replaced, you know, over 200 edges, edge locations around the world. We've done it to make it consistent everywhere, and that 100 Gig is available at all the places we need it available from a customer standpoint. 400 Gig in the core to be able to carry this data through that.
The other reason as well, again, is to reduce some of our costs in terms of delivering these services. That's been an incredibly big part of what we're doing. This cost out program that we're doing right now, you kind of see that. But when we did that analysis and that deep dive and look at the legacy network, we just realized that we're charging too little money for these Cloud cross-connects, or Cloud virtual cross-connects, particular to the legacy networks, where we've got all these 10 Gig circuits. What we've had to do is to make sure that's on parity and alignment with how we do it on the other side.
I really probably can't, I can't stress enough, I mean, the leverage that we actually get in this capital investment that we've made, it's pretty much on that whole program in terms of 400, 100 Gig. You know, it's all done for now for this phase. We'll business as usual do some upgrades, you know, over the next two years as needed. The CapEx cash burn on that program, for example, is pretty much completed. The second part is that where you see these strategic ports that we're talking about, we're transitioning off the legacy network, or the legacy cloud availability zones on the 10 Gig basis, which saves us massive amounts of cross-connect, but gives a lot of scalability and ports in those locations.
I think, and I think that's probably that's gonna continue beyond this, but we've got this current phase brought out. You know, my focus and the focus of the team is to, sorry. Just on that kind of point, by changing that pricing, you know, there's AUD 7 million-AUD 10 million of we expect to annualize incremental revenue. That's pretty much all profit, but it's not like we're gauged in terms of the profit. It's now more than covering the cost of the investment that we've made. We're continually reducing the cost of that, and we've slightly increased the price of that one product to make sure that's aligned.
What that I think shows is just our, as I said, our really dedicated focus on cash, and on profitability.
Profile, is it all about like every three years you have to replace the old kit? Or is it all about growth and keeping, expanding the network? Like, as a proportion of your CapEx budget, like what's what?
There's two parts to that. Yes. Like in any network, you always have to have a certain amount of maintenance after. Our typical profile is somewhere between four and five years, right? Now we, just to clarify what Bevan was saying as well. What we did is we removed over 200 edge locations and upgraded them from what their capacity was up to 40 Gig only. We swapped out that equipment and upgraded it after that four or five-year period. We'll continue to do that. But all that equipment now is set and repurposed for 100 Gig at the edge. That's one thing.
The second thing is there will be various programs like what we just went through, which was upgrading the whole network to 400 Gig, which is kinda like a one-off exercise that you need to do. Bearing in mind that we're in a lot of locations, so there's a lot of places we have to upgrade. I think where we feel what we've done now is set ourselves up for the next couple of years, where we can really now maximize and leverage what we've built and the way we've set it up and how the business is going to consume it and how our partners are gonna work with us and where we're at. You know, when we go back to 2014 and 2015, everybody was still talking about 1 Gig, you know.
We're one of the first to come out with 10. No one will ever use 10. Now we're talking about 100 because that's the way the conversation's already moved, the way we're all consuming data as a business and in general. We just wanted to make sure that we were ahead of that. And that's what we did last year.
Just on those, most of those sites, the devices we replaced are called Juniper ACX devices, which again, to Vinnie's point, has 40 Gig kinda trunk or aggregation, which we've done to 100 Gig and some up to 400 Gig. The other reason it's really important is that, there's a product consistency we want across the board, both in terms of being able to instantly order services and not have to worry about capacity, number one. It's always been a consistent thing we've had. Number two, there's a couple of new features that we want to enable, and we wanna enable it across the entire network. For us to do that, those devices we replaced, they're on average four to seven years old. they.
We got certainly a fair bit of life out of those devices in replacing. The part that we're working on is very much working on giving our customers, enterprise customers, some Intent-Based Networking or Intent-Based Routing. That new feature will be coming out. Not that it's gonna absolutely excite a lot of people, the gates and enterprise has really wanted that product, we're gonna be able to deliver that.
Just, just stepping back a second. Just the two major changes I'm seeing from today's announcement are that repricing adds $7 million to $10 million revenue. You take $7 million to $10 million costs out of the business. Put those two things together, and next year, as I see it, that takes you two-thirds of the way to being free cash flow positive, as in massively step changes the business. Is there anything wrong with my math there?
That seems consistent.
Excellent.
It's just, again, I can't stress enough, the focus amongst the team is to make sure that, again, we built an amazing platform. We just had to tweak some pricing on it to make sure that our revenue is aligned with our costs, and our investment that we've made. And that's obviously where we've done this massive amount of work in infrastructure investment, network aggregation, and simplification, and third, in terms of tweaking the product pricing. You can see, as you said there's a $14 million-$20 million swing that will occur. That should occur over the next 3-6-9 months.
On the VXC pricing, as Vinnie said, you know, we probably expect to see a little bit of churn out of that, but because it's effectively a doubling of the price, we expect it to be net positive, which has taken that into consideration. As I said, when we look at that, I'd say 67% of that increase will probably happen on a monthly recurring revenue base will happen in this quarter, and then 30%-40% will have to happen the second quarter, the fourth quarter, the next quarter, because we have to give 90 days notice to some strategic partners. Some of that stuff comes in pretty quick. We've identified the cost outs.
A number have already been completed. I'd say about 20% of it. There's another 25%, 30% that's we're just doing validation that's there, and then the rest are expected to be done over the next 6 months or so.
One last question and then I promise I'll open it to network.
Yes, sir.
Obviously new chief revenue officer joined late November. I won't try and pronounce his surname, just comments obviously, I presume you're very happy with that person, just a bit on their background and, you know, do you see things changing materially within the business in terms of your revenue trajectory and go-to-market sales strategy, et cetera?
No. Look, Jeff's, he's very, very strong capable person. We were happy when he came on with us. He's like, an incredible background, 18 years working in Akamai, obviously in the cloud industry. He knows everything, knows the partners. He's like I said, he's what? 50 odd days into the job, and right now is like I've asked him to look under the hood. The way we both felt about in the process and how we were going through it and with the team was that we kind of felt we've made a lot of the big changes we need to make, either with the channel or with the programs and all with that. It's just like, well, how do you feel about how do you wanna run it and how do you wanna shape it?
I think if there's changes to be made there, they're kinda gonna be more on the minor side of things as in tweaking things to make sure that we're optimizing our sales structure to give us the best benefit for what we have, plus also our go to market, right? What tweaks and changes do we need to make there. Just what we've spent probably the last 10, 15 minutes talking about is not only that, now we've got a network that's optimized, it's built, we have the operational efficiency there. How do we leverage that with the sales and go to market plans so that we can actually get more revenue coming in? Obviously that obviously helps then with our, with our cost profile and maintaining a cost control that we've got, and it helps us then with our financial outcomes.
Thank you very much.
Next on the line, Tim from UBS. Go ahead, Tim.
Hi, guys. Can you hear me?
Yep. Thanks, Tim.
Great. Okay, sorry, just a couple of questions from my side. Vinnie, just wondering if you can touch.
Sure.
a little bit on the ports added during the quarter on a growth basis. How are you thinking about the go-forward trajectory relative to that June quarter of, I think you did 533? Maybe can you make any comments in terms of the pipeline that you guys see at the moment?
Sure. Thanks, Tim. Sorry, I'm just moving on to my slides here and look at them. In terms of the ports, we have seen a good strong start. We're nearly at the end of January now, so more or less at the end of January. We've had one of our stronger months in January compared to previous periods. There has been a little bit of, I suppose in general that most people are talking about people are probably holding off on making decisions on buying things, you know, a little bit of uncertainty around the economy and what have you.
Having said that, we provide very kind of key connectivity solutions to customers who want to use cloud in a very efficient way. I think we've just seen a little bit more of a timing difference there, and it probably will continue a little bit going forward, as other macro developments happen and things settle down. I think sometimes big decision makers coming into your period at the end of the half year or in our case, their calendar year in the U.S., some of those decisions get held off until a new financial cycle opens up and a new budgetary cycle opens up for a lot of enterprise customers, particularly in the U.S., which is a calendar year.
We started to see that come through for the beginning of this quarter.
Got it. Just kind of following on from that, in terms of the strategic port consolidation impact, I mean, I know that you guys said that you're expecting a little bit more consolidation following the pricing increase that you're about to put through. Should we think about similar sort of kind of impacts around that kind of 125, 165 ports for the next couple of quarters? Or do you think that's, you know, that reduces materially from here? Then just the final question from me, can you talk a little bit about SD-WAN, the partnership with Cisco, how you're seeing the sales pipeline momentum, et cetera, going there, please?
Look, there's still a bit more port consolidation to happen. I think we'll see it through to the rest of this financial year over the course. It'll reduce over the next 2 quarters. I think that's the. That's a positive thing, by the way. you know, obviously we have to grow, keep growing our sales, and that's important from that point of view. The consolidation of the port has a big impact on our margins, right? as we've talked about that and how we consolidate our network. I think that I think that's that has a bigger impact for us, not just, I mean, it's not revenue impacting, that port consolidation. It's all internalized.
What it does have is it has a big impact on our gross margin and our operating costs. I think we'll still see that, probably as we finish that over the course of this financial year. Sorry, Tim, what was the last part?
Just a bit of an update in terms of SD-WAN partnership with Cisco, sales pipeline within that part of the business, please.
I had that chart there on, let me say page 8 on the presentation where we talked about Megaport PartnerVantage. We're continuing to build that out. That's with our SD-WAN, not just our SD-WAN partners, but with resellers for all of our products, right? 'Cause that's important. Like, it's not just about MVE either. It's also about selling more ports, more VXCs, more connectivity across all our product portfolio. That's continuing to grow. We expect that to continue going forward and sort of throughout the rest of this year and onwards. We're, like I said, we've got our team in place. We're building on those relationships every other day of the week.
Got it. Okay. Thanks, guys.
Next on the line, we have Bob Chen at J.P. Morgan. Bob, your line's open.
Morning, guys. Can you guys hear me?
We can.
Great. Just in terms of the further strategic review comments, can you provide a little bit more color on, you know, what you're potentially thinking about here? I see some words there around operational efficiency as well as maybe automation. Could we see maybe some changes to headcount across the business as well going forward?
Well, basically, I think there's enough information in there that we're looking at doing that, and I think it's more of a half year. We just wanted to give some, be open about how we're doing that. I mean, honestly, from our standpoint, we've done great work on reviewing the cost of goods sold in terms of network side of the business. The significant reduction in CapEx, increase in revenue. The one area that we really wanna focus on is how do we make sure that we do a full cleanup of the, you know, legacy contracts, arrangements and things to make sure that they're fully automated and actually within the business, and to make sure that as a business, we're operating as efficiently as we can.
Probably just add to that.
The automation component is really important for me. That's one of the key things that we see is really important to driving our financial outcomes and our margins, and that's optimizing and automating as much as we can, not just on the customer journey, but also internally in how we manage and run our business, right, and our support internally and how we do that. Taking as many of those manual areas away and making it automated and streamlined as simply as possible, the same way we deliver our service to our customers. The two aspects to that automation piece that are really important.
Okay, perfect. Just on the comments around Megaport ONE, the MRR driven there. You know, sort of AUD 2K at the moment with another AUD 10K close in January. It looks like the pipeline of around AUD 100K. Like how healthy is that pipeline and, how is that pipeline sort of growing as well?
Megaport One or just in general? Are you talking about?
Just Megaport ONE.
Well, we've only got one significant customer or two customers, but one significant customer at the moment has continued to grow, and maybe Sean might want to jump here on the actual numbers themselves for revenue. We, we just came back from PTC, Pacific Telecom Conference, which we go to every year, and it's a, it's a huge event for us and a lot of our partners, and we had a whole demo demo room set up for Megaport ONE. It's not, it's not for every enterprise, right?
It's mainly geared towards large resellers or a data center operator or a network service provider, et cetera, who have got many, many clients, and we want to help them with a white label solution to actually optimize or resell our network and our IP that we've got to help them sell their own their product, right? The case in point, I think it was Orange Telecom in out of Southeast Asia in Singapore, they've adopted it, they in turn, they don't have a corporate portfolio, they don't have a corporate service offering that has a cloud service offering, they're using Megaport ONE to sell that. It looks and feels like it's an Orange product, it's our services, the same way we've done it with Digital Realty and et cetera.
I think it's, I think it's something that's gonna continue to grow. Coming back from the conference, we have a strong pipeline. There's at least, you know, there's half a dozen at least, very strong prospects that we have that we're looking through, that we need to. They're, you know, they take a bit of time. It's a bit, takes a bit of work to deliver it and get it all put together, but at the end of the day, they're meaningful, they're meaningful deals. Do you wanna add to that?
That's pretty much the way it is. Sorry. That's pretty much the way it is. We have 2 active customers at the minute. One that is very much concentrating on the through the cloud element as they turn up compute, and the other one is using kind of the to the cloud, the more traditional kind of white label of Megaport portal. That deal was signed in Q2. We're starting to see kind of their reselling of that coming through in the current quarter. We're seeing their as they put RFPs out for their customers, they're winning deals and using Megaport ONE or using Megaport Cloud Connection Services as part of the overall solution that they're providing to their customers.
It seems to be very compelling proposals that they're winning business with. They're extremely keen and they're working very closely with our account managers and giving us good visibility of the kind of deal registration and the life cycles of those deals that they're working on. If it's an indicator of how versatile and how adaptable Megaport ONE is as a product for these kind of resellers, I think it's a clear exemplar and I'm only happy that Orange Business allow us to use them as a reference.
Great. Thanks, guys.
Next on the line, we have Ben Read-Martin at Goldman Sachs. Go ahead, Ben.
Hey, guys. Can you hear me?
Yes.
Excellent. I might just ask 2, if that's okay. First one's just on MVEs, obviously had a bit of a difficult quarter, both from MRR and new customers. I'm just interested in what's kinda changed in that quarter, whether it's less of a sales focus or whether it's anything to do with the kind of partners that you sell through having less success.
MVE specifically, there's probably two aspects to it. One, We've had a good few, what we call proof of concepts or POCs, which were activated in the first quarter or whatever, and customers typically, you know, start them off, turn them on, and then turn them off again. Once the proof of concept project is completed, they re-engage with the service and build it out. Where that's part of what we've seen a big, an uplift in services in MVE have come into January. We had that same scenario that happened back in June, July, and August when we launched the product and services were turned up as proof of concept.
These are large Fortune 100, 200 companies, so they're not small, so they have to think about things, and they want to do it in a sort of an isolated way and bring it all up. Hasn't been revenue impacting because a lot of the proof of concepts we do have been more about here, take it, try it, see how it works. Then they stand it down and then they bring it back up, and that's kind of what we've seen on that. I'd probably just couple that with, you know, like I said earlier on, there has been a little bit of the, you know, the end of the financial year ending December and, also just with the overall macro economy side of things, some of the decision-making on certain things have slowed down a little bit.
These are big decisions they're making on MVE and where they want to locate and logistics and the size of them. They're not small. They're big decisions, and that's been a contributing factor to what we saw at the end of quarter two. The good news is the start of quarter three looked good and healthy from that perspective.
Great. Maybe just one more on the Cloud VXC pricing changes. Maybe just interested if you guys can talk into a few more of your assumptions on kind of the spin down or churn you're expecting, and the kind of net pricing increase. That'd be great.
I don't wanna go into a lot of detail. We're generally comfortable with those numbers. Probably at the half year, we might give a bit more analysis. I think we've got an amount of churn in there that I think is, let's certainly hope is conservative. You know, we'll wait and see.
Excellent. Thanks very much.
Hi, guys. Can you hear me?
Yes. Go ahead.
Okay, great. Thanks for the time. The first one is just in regards to our CapEx and the new markets CapEx. Are you able just to give us a bit more detail as to what that is? You know, do we have optionality, you know, to push that out into later periods if we feel that, you know, our cash balance isn't strong enough to implement that in the near term?
Well, okay, first of all, new markets for us is actually adding on a new country. Just to put that, give that context for what that means, as opposed to adding on a new site, which is we kinda consider that as business as usual or how we're building out things. We're looking at, we've obviously built into Mexico. We're looking at our business plans around Brazil, and a couple of other countries that I've mentioned, which we can get into more detail and we're planning to get into more detail on in our half year presentation. That's what that relates to. Whether we wanna push that out or not, to be totally honest, it's not about the cash CapEx decision about doing it.
It's about whether we have the commercial circumstances and the deals and the partners set up in the country that we want to operate in. Most of these countries that we're looking at from here on now are not. They're complex. They're complex because we're dealing with different currencies, different tax regimes, foreign ownership rules. How to do business in all of these countries is not the same as it is in Australia or in the U.S. or the U.K. We have to make sure that we're making a decision. We're not gonna hire 400 people in Brazil. We're probably gonna hire three, and they're gonna manage relationships with people in sites that are in an operating environment. They take time.
Until we are ready and we've got that commercial contract in place and we're happy and comfortable with that situation, we'll then invest, right. Right now, what you're seeing there on that new markets piece is like a placeholder for us. If that slips a quarter or so or whatever the case is, it's not because we didn't want to spend the money, it's because we wanna make sure we are setting ourselves up for success. If you spend the money and we don't have any partners, how are we gonna sell? That's kinda how we're looking at, if that answers your question.
No. That, that definitely makes sense. The other one is just in regards to, I think, you know, Ben kind of touched on this, but just the MCR and the MVE decline, and you talked about, you know, some of the customers spinning up and spinning down the services. Would it be that in the past, you know, if they had some, I guess, proof of concepts that that would have been included in our operating metrics? Is that, is that the way to think about why the numbers have declined?
In fairness and in full transparency, you know, everything we've built in our platform is automated. When a service gets turned on live, it gets counted, right? That's the way we look at it. We've always reported it that way out no matter what the service is. Some of them are free and some of them are proof of concepts, and other ones are all billing, right? We count them all as a service.
Okay.
at that point in time.
Okay. Okay. Just in terms of the cost out program, it was implemented in second quarter. How much of that would have flown through in second quarter? Is that something that we should be expecting from third quarter onwards?
next to none.
Next to none. There have been a kind of a few tens of thousands of AUD that we might have realized in the month end, but you're gonna see a little bit more of the impact of that through Q3, and you won't see the full impact until, well, towards the end of Q4 and into next financial year.
I think that's probably just an important part to kind of step you through. Certainly the question about, you know, pushing out new markets and cash and things like that. We certainly have options and levers to pull, and I think what we've done is, I think, you know, to help people probably create the bridge. I mean, all the data's there, but, you know, if there was a cash burn this quarter of AUD 12 million, you know, if you're looking at reducing your cost of goods sold by roughly a, you know, on a quarterly basis of AUD 2 million, if you're potentially looking at increase in revenue of AUD 2 million a quarter in terms of the VXC stuff, there's about AUD 1 million that was built late.
Well, not built late, hadn't paid in the quarter from a cash basis. You kind of take that out, that's AUD 5. CapEx reduction on a quarterly basis on average, you know, another AUD 1 million. You know, you're kinda getting to AUD 6 million-AUD 8 million of quarterly cash flow change just with the things that we've kind of done here. You know, an AUD 2 million expansion into another market, we can absolutely push it out. You know, our focus has been saving that amount of money, you know, three times it, four times that amount of money in a quarter. Once these kind of, these levers are kind of pushed through, I think the decision of whether we go to a new market or not is gonna be less of a, an issue for the, for the group.
That, that's an option for us to do that and if all these things don't come through. You know, if we are strict and diligent in what we're doing and very focused on it, you know, once these cost efficiencies, price upgrades, we've finished the reduction of those big CapEx programs, there's some one-time things that happened this quarter. You know, there'll always be one-time things, but when you wanna normalize that, there's $1 million of one of our data center partners paid a bit late, sort of been paid, but, you know, didn't happen in December, happened in January.
When you look at that kind of cash basis when the full impact of that happens in, let's say, Q4 or Q1, you know, I'd certainly expect the numbers will reflect that. It'll be material.
Okay. Last question is just, last quarter we did say that we expected a bit more of a ramp-up in the channel partners, in 2 quarters. I'm just, you know, would like to get an update as to our expectations as to whether we think that, from third quarter on, which we're still expecting, a bit more of a ramp-up in terms of that channel partner growth. Thanks.
I think so, right? I mean, like, you know, 40% in the quarter is really pretty significant, right? It was the same, I think it was just over 50% the previous quarter, albeit from a lower basis, we're continuing to grow. You know, our intention is to continue to add partners on board and bring them through so that they can actually expand and help us to resell our products. We expect that to continue. That's our endeavor, is to make sure that we're bringing on the best partners in the space that have the capability of selling our products. That we don't see that slowing down. That's a key, a key part of our sales strategy in terms of the channel itself.
We don't see that slowing down. It's a focus area for us to continue to grow it.
Wonderful. Thank you so much.
Sorry, Willie. I was just going to say, one of the things that we do here, you can see on these graphs as well, the number of partners that we have signed up that are going through the education process before they start to transact. We have 51 transacting a bit at the end of the quarter and about the same again who are yet to transact. We do expect kind of the customer behavior through these partners to be, to exhibit exactly the same way as our direct customers. You'll see kind of the spend for each customer kind of grow over time.
While the MRR per partner is currently low, you're going to see the number of partners transacting increasing as we bring kind of the signed partners through to be able to transact. The MRR per partner for those that are transacting now, you're going to start to see that grow with the same behavior that we've seen for all our customer or within our customer base to date.
Thanks, Sean. That's very helpful.
Thanks. Can you hear me okay?
Yes.
Thanks. A few questions. Willie, can I just follow up on the MCR and the MVE performance in the second quarter? Was the MCR the same issue with the pilots? Sorry, with the proof of concepts, the decline?
No, I think just with MCR, if you look back on the previous quarter, we had a spike on MCR. I think it just, it was more of a flattening out for that period. I think a lot of the MCRs is about hybrid and multi-cloud. I think that was more in the bucket of just a general macro kind of decision-making come to the end of the year scenario, as opposed to the MVE, which is more about the proof of concept. It's a different solution. It's more complex, and obviously, logistically, it takes more time and effort to put that together.
Sure. I mean, the fact that it's actually declined, is it churn or is that a swap out because of MVE? My understanding is MVE does MCR functionality, is that like a swap out? Willie, just on the MVE as well, you're adding like sort of 20 MVEs a quarter. Is the proof of concept that meaningful that, you know, removed 20 MVEs?
Okay. Well, two parts to that. To start with the proof of concept, yes, it is very meaningful because they have to. First of all, they have to order CPE or equipment, right? To put into their premises or their building or their branch or whatever that location is. They have to, then they connect to Megaport on an MVE and then order VXCs and then get to a cloud provider. You know, I think I said this before, there's a fair amount of upfront work that needs to be done by the enterprise customer.
Before they even can connect to an MVE. What they're, what they're doing as part of a proof of concept is that they're doing that on a 1 to 2, 3 location site, standing up an MVE with VXCs, and then proving it out that it actually does exactly what it's supposed to do. Then they switch it down, and then they have to order a bunch more stuff and put up more locations. An MCR is the very same thing as, you know, like a port or a VXC. It's instantaneous. You can stand up that service, and you can stand it down and bring it back up again, right? I mean, that you can do that in minutes. That's the whole idea. It's multi-cloud.
I think that's just what we've seen over in quarter two, so particularly with MCRs, is that there was a certain amount of services were stood up, left up and running and operationalized. Then, some things that weren't used and customers, whether they're trying to save money or whatnot, just basically just held off on increasing. That's our experience. We haven't lost customers as a result of it or any other services like that. It's just been more about their ability to use our platform and our services and our products the way it was meant to be, which is consume it as you want.
I think the to your point, really, what we mentioned in the deck was lengthened decision cycles and some of the proof of concepts that people were doing spun it down. You know, already in terms of this quarter, we're kind of seeing people converting again. At the moment, you know, we're seeing positive numbers there, but, you know, it's January. There's a few months to go, but people seem to be making decisions and turning their services on.
Got it. Thanks.
I think, also, Siraj, in the global activity, you actually mentioned this specifically. We're not seeing any significant uplift in turn. We're just seeing kind of a soft sales cycle.
Got it. Just clarifying, on the pricing uplift, right? My math could be wrong, but otherwise or it could mean that your churn assumptions are quite high. If you had 16,000 VXCs, it's increasing by $100 a month. That should imply closer to $80 million in additional revenue, isn't it? We only got not much money.
Not all VXCs. This is just this is port to cloud, port to cloud, so and less than 1 gig. It doesn't include port to port, long haul, those types of things. The numbers, you know, I probably won't kinda go too far out of camp in terms of the numbers, but, you know, there are somewhere around like 8,000 of those services somewhere around the network, so thereabout. It'll impact around 8,000 services.
Got it. Thanks for clarifying.
We'll be more clear on that in the half year.
You're right, there is an amount of churn in there that's probably, you know. We did the 1 Gig port churn once before. We don't necessarily think that there will be. The correlation between the 1 Gig to 10 Gig will be similar in terms of the churn. We thought it best to probably use that as a proxy for it. There is a, to your point, even on that basis, there is a reasonable churn figure that's built into it. You know, we're optimistic it won't be that, but we'd rather be cautious.
Got it. Can I just follow up?
Just to be clear, it's a subset of the VXCs on one product that we're readjusting and rebalancing to bring it in line with the rest of our VXC pricing for metros. For product particularly 1 gig only. Okay? It's a subset of a subset.
Got it. Last question is in two parts. Just, following up on that, on the churn. I mean, Bevan, where do you reckon the customers can go? I get the price increase is there, but your pricing is quite attractive. Where could they churn to? Just I guess the broader question is, this has been two quarters where customer adds has been quite weak. Understand the macro delaying impact, but there's no churn uptake. Just, I mean, do you think competition is a factor? What's impacting the whole growth in the KPIs, I guess?
Look, I think it's fair to say, you know, not having a focus CRO for the last pretty much six months up until Jeff started. You know, I think in May, we had the departure, and then Jeff started in December. I think that's certainly a key part of it, you know, in terms of having that focus. You're right. It's actually gross adds, which has been the thing. The churn's been pretty much consistent all the way through. As I said, our focus is on the profitability element, been impacted by the CRO thing, which obviously we've been fairly involved to sort out.
So once, you know, Jeff really gets this under his belt, along with, you know, we wanna get some external consultants in as well to get to work with Jeff and the board and the executive team to make sure that our go-to-market is good to to work on getting those gross adds up. We're not seeing people flight to another competitor. We just don't really see any other competitors out there, to be candid. It is the gross adds that's kind of impacted that. Again, part of that's, you know, it's the second half of the year's been, you know, a lot different for everyone, I think it's fair to say in terms of that side of it.
You know, we're basically gonna do some pretty in-depth analysis of how we improve that gross element of it. You know, possibly we'll be looking at, you know, some significant expansions in not necessarily new markets, but just additional facilities around the world. There'll be significant amount of analysis that goes into that and basically working with third parties as well as our data center partners, as well as our sales team to actually sit there and say, you know, "What is the most efficient way that we can actually improve our sales pipeline and accessibility to our products and other data centers around the world?" I think that's a more of an FY 24 decision in terms of what the outcome of that's gonna be.
I think that's very much gonna be our focus and how we, A, improve our go-to-market, but B, also increase our addressable market.
Thank you. On the line, we have Paul Mason at Evans & Partners. Paul, your line's open.
Morning, guys. Just two from me. The first one, just last time that I caught up with you guys, you guys were still considering, maybe making targeted expansions to the sales team. Today, there's, like, a lot of cost out discussion. I was just wondering if you could sort of clarify, like, are you still thinking about, like, potentially expanding headcount in the sales team? Or is, like, the mode now in, like, just full-blown cost control across every element?
The second question I have is just on this consolidation of services, what your thoughts are around how what we're seeing with port consolidation could play out with your other product lines over time as well, whether that's something you guys plan around, and that we should sort of model to, or whether you think it's sort of unique to the ports and the generational upgrade there.
I mean, I'll have a first stab at this and let Benny. Really important that people don't see port consolidation in terms of customer consolidation. The major part of that port consolidation is us consolidating multiple 10 Gig legacy cloud interconnections that re-restrict our scalability, but also significantly increases our cost to service that. The example being our average spend for a cross-connect, physical cross-connect in North America is around $375 a month. If we can use 1 cross-connect to connect to a 100 Gig port versus 10 cross-connects to connect to a, you know, to 10 Gig ports, you know, that's a $3,400 a month saving in terms of doing that. Right?
When we talk about that kind of port consolidation piece, that's really what's kind of a big part of that's driving it. One is improving scalability, and also we can offer bigger VXCs to clouds for our customers, and we have to do less manual work to just to get those ports set up. Do n't infer that that's a customer thing. That's actually an efficiency on our side. I think the second part is, you know, the full kind of blown-out cost control. You know, I don't think that's a really good. It's nice that you think that. Well, it's true that we're watching a lot of things, but we're not just cutting things for the sake of things. You know, we've done this process for the last.
Every two, three years, we do this upgrade of infrastructure, usually the core network or whatever, we make decisions on how we architect that. How we architect it has a technical component of it, but a commercial component of it. Right? What we've been doing is we've been re-architecting the network to be technically superior, whilst at the same time using that as an opportunity to realign our commercial reality of that. Example being, why would we put our core locations in one of the most expensive data centers for cross-connects and space and power? Let's use this as an opportunity to put our core location in a partner-friendly data center like a Digital Realty, for example.
That's an example of just us focusing on the cost of goods sold element of that. To your point about the sales team, it's not about we're gonna cost control sales team. We've got a sales team now, a sales group, including, you know, support people, leaders, whatever it might be. It's about 90 people. You know, we're not looking at doing any kind of drastic change to sales, to the headcount in sales. What we are looking at doing is actually doing an analysis of where is the most efficient and best way for us to leverage that sales team. It's a lever we're gonna pull, but it's not a lever we're gonna pull to reduce our costs. It's actually going to pull them to make them more effective and efficient. Making sure that they're going.
The partners we work with are the right partners. Making sure they fall under a category or a Megaport PartnerVantage program that best suits it. Make sure that when we sign up new contracts, they're consistent. Make sure the billing part is automated. Make sure these things happen. So we're gonna make sure our go-to-market motion's much, much more focused and consistent amongst the group. The second part, we're gonna make sure that our go-to-market motion is much more efficient in how we do it, and that we're not creating. I mean, we've got some contracts that we work with our partners that are seven years old. You know, the market's changed a lot in seven years, but also so has our billing capability.
We've got some great automation in that, we haven't transitioned some of these agreements to a more consistent platform. We're not doing crazy cost outs and crazy things like that at all. I don't think we're gonna see any material change at all in the headcount, for example, on sales. What you might see is, you know, we might focus some of the people on the partnership sides to work with different partners. I think that's probably the best way to answer it. I think that last sentence pretty sums it up. What we're doing is we're taking a good review of the organization. That's Jeff's job, his first 90 days is to look at that.
Like I said earlier on in the questions, it's retweaking it or repositioning some of the people that we already have to put them in the best place to get the best possible outcome from our sales and revenue generation point of view. If that means more of a shift to channel versus direct or account management, at the end of the day, we still have 2,740 customers. That revenue base is growing. The revenue per port, per service, per customer is continuing to grow, and we'll show that, some of that information in our half year. It is working. We just think that, you know, maybe it's fresh pair of eyes, fresh when you look at it and say, 'Maybe we could be working even better.' Again, that's all. That's what it is.
This won't necessarily change this quarter, and it might even change the next quarter. The thing with this business, it's been a growth company. Our focus is going to stay profitable growth company. For us, we wanna make sure that our resources are used efficiently, but we also absolutely keep the trend where it is. If not lower, but the trend where it is. We wanna make sure we get all the things right to massively scale our people's capability, so we continue to be a growth company, for example, in FY 2022, but we really add an element of profitable in every sense of the word. We're in no way looking at reducing our sales force.
Thanks guys.
Final question from the line is Lachlan Brown at Credit Suisse. Lachlan, you can go ahead.
Hi all. Thanks for your time. Most of my questions have been asked, so I'll just keep it to the singular question. Just on the slide 15 of the slide deck, where you show the half-yearly CapEx projections. Do you mind just going to, again, further detail on the BAU CapEx reset in the second half? Thanks.
For FY 2023 or 2024?
On the half-yearly. It must be the slide afterwards, just in the second half of this year, there's that BAU CapEx reset.
Sorry, I'm just referring .
The CapEx by half year. Page, I'm just on the best page.
Sorry.
You're saying the reduction. Okay. In FY 2023, the two half years we're gonna go from, we're estimating that we're gonna spend roughly between around $33 million for the year. There's that reduction that you're seeing from the first half down into the second half.
The BAU-
Is that what you're referring to?
It steps down obviously quite significantly in the second half.
step up a little bit again.
Do you mind just going through the?
of that again, please?
Sure. Sure. No problem. I think that's the point we were talking about earlier on where we said we've just completed the 400 Gig upgrade, right? Which is a large chunk of that, on the previous two bars, to the left of that. We've completed a lot of that work. That project was a one-off thing. It took a lot of investment to do it and upgrade the network. Allows the capability for 100 Gigs so that we can move forward to that. That, that's not business as usual anymore 'cause it's finished, and therefore the back end of this year we're just carrying on as normal.
Okay. Because the 400 Gig upgrade, that sits separately, in the last 2 halves to the BAU. Is there part of that that sits within the BAU CapEx as well? Is that what you're saying?
There's part of that. Remember we did spend cash CapEx on our inventory in over the last 18 months, we built that up because of the logistic and supply chain issues. Now we're starting to eat into our inventory and use that as normal. We're not spending the cash because we've already got. We already spent it. As a result of that, we're not future spending cash because we're actually just utilizing the inventory that we built up as a result of those underlying supply chain issues and logistic issues that were there before.
Some of the BAU that we're seeing as well is just the increase in customer capacity, whether it be for kind of MVE type servers or port capacity within existing footprint or the normal expansion of our footprint. What you're gonna see is, as we kind of go through this cost optimization program, we're making sure we're in the right locations. There's going to be some instances where we're going to swap out locations to make sure we are best located to service our customers. You're going to see a redeployment of capital. The spend in the second half is gonna go down as we reutilize stuff that has been deployed elsewhere.
Okay. That's clear. Thanks for that.
Thanks very much. Look, I suppose just in closing, we're reporting on February 9, and we'll have the half year presentation, et cetera, and we'll be doing in-person investor presentations and Q&As with everybody in the couple of days preceding that. Thanks very much for hosting this here at Morgans and that's it. Thank you.
Thanks very much for joining us.