Good morning, ladies and gentlemen. Welcome to the quarterly update for Megaport for the Second Quarter, FY 2024. Today, we have Michael Reid, the CEO, and Tish Dorman, the CFO, ready to take us through the quarterly updates. We'll have questions after the short presentation. If I could ask you please to restrict yourself to one question with one part, and then we'll give you another turn at the end. Thank you.
Thank you, Steve, and team, welcome to the 2Q FY 2024 investor presentation. We've got some wonderful highlights to share. Revenue, AUD 48.6 million, up 31% year-on-year. That's an AUD 11.6 million up year-on-year. EBITDA, AUD 15.1 million, up—well, it's up 529%. It's up a lot. A AUD 12.7 million increase year-on-year. Total cash flow, AUD 7.3 million, up AUD 19.2 million year-on-year, and just goes to show the significant turnaround in the business. We've been talking about hiring direct sales roles in NAM, up 3.6 times from where we were when I joined the role back in May. That's 18 roles, up 13. We continue the strong cash flow turnaround.
You can see the dramatic turnaround of the business on the right if we look through that, the graphs there on the right. If we go through the numbers, we look at net cash flow up AUD 6.9 million, year-on-year comparison, up AUD 18 million. Operating cash flow, AUD 15.2 million, up AUD 15 million year-on-year. Cash at bank, AUD 62.5 million, up AUD 7.3 million quarter-on-quarter, putting us in an incredibly healthy fiscal position. The strong turnaround and profitability continues, but what we're pointing out here is that we are investing in growth. This is a growth business, ladies and gentlemen. You've seen us turn the fiscal position around, and from an EBITDA perspective, you can see what a dramatic turnaround that has been.
And now as you start to see the investment and the go-to-market play out, and we'll talk more broadly about that throughout the session, the focus now is to go and pour gas on that fire. That doesn't make sense in Australia. Pour fuel on that fire as we move forward. Annual recurring revenue, it's AUD 192 million of annual recurring revenue. Now, as I reported in the Q1 session, we actually had a tailwind from an FX. For those of you who follow FX, it does seem to be moving around fairly rapidly, the AUD to USD. So we had a tailwind in Q1. In Q2, we had a headwind.
If I give you some sort of insight into how that affected us, we had a net AUD 2 million increase reported in ARR, but as you adjust for foreign exchange or an FX adjustment, the net ARR increase was AUD 7.6 million in the quarter. Now, we're moving to revenue generating KPIs. It's a slight change, the same KPIs that are reported, however, we are moving to revenue generating. These are the metrics that I look at when I report the business. Our chairman made this announcement in the annual AGM, and referred to the fact that we need to look at our KPIs and what's the appropriate provides the appropriate signal, not only to our business, but to shareholders.
I'm gonna give you some examples and explain why this is important and why this is what matters to me. This is how I measure the business. Now, as you'll recall, we've had challenges with historically reported KPIs. In Q1, I gave examples of revenue generating metrics compared to the traditional metrics, and the challenges that come forward are in the form of trials and proof of concepts. So a customer that can spin up a trial or a proof of concept, or a vendor that, like a Cisco as an example, or a Palo Alto or a Fortinet, et cetera, could spin up a test account, and that would actually be counted inside the platform. Why? Because everything in Megaport's platform is live.
We don't separate the platform for a test bed for someone, or a proof of concept or a trial, et cetera. It's all live. And so when we report, all of those metrics come through. We saw challenges with cloud port consolidation, and I explained that when I first stepped into the role. And again, the reduction of the cloud ports was a good thing for our business, but was starting to throw an incorrect signal. Promotions, demo services, DC partner inconsistencies, all of these movements, whilst over the long term, actually made very little difference at all when you sort of took it over a ten-quarter period. The movement in quarter, so net, quarter on quarter numbers, could throw an inappropriate signal. It could have been a positive signal, or it could have been a detrimental signal.
The reality was, it wasn't the appropriate measurement for the business, and it could throw you off. So the move to revenue generating metrics makes complete sense. It provides a more accurate quarter-on-quarter signal to how the business is performing because we only report the metrics that our customers are paying for. It's consistent, simple, it's recognizable point at when the services are counted, or as I said, when the customer starts paying for the service that they've got. And for transparency, we've obviously been reporting these metrics for a long period of time. On our website, we're going back three years to provide full revenue generating KPIs and metrics all the way back for anyone who wants to look at that, and it's available on our website. 2Q FY 2024 revenue generating KPIs. Again, the KPIs and metrics stay the same down the left-hand side.
The difference here is the net quarter-on-quarter growth is associated to revenue generating only. Total services, 748. Customers, 39. Ports, 155, up. VXC and IX, 522, up. MCRs, this is our Megaport Cloud Routers, up 39. And our virtual edge platform, which is our vendor partners spinning up inside our compute platforms, is up 32. And so you can see those metrics there.... Now I'm going to hand over to Tish, who's going to run through our unaudited financial results.
Thank you, Michael. The quarter revenue growth compared to the first quarter grew 5%, largely driven by the organic growth in recurring revenue across the business. EBITDA was in line quarter-on-quarter, which reflected the increase in the expenditure, as we've referenced before, to reignite the go-to-market engine at Megaport. Which included additional costs for sales and marketing, and customer success staff, as well as marketing and travel costs, which were offset the growth in revenue. Hence, why you see the EBITDA consistent quarter-on-quarter. The net cash flow improved for the quarter, which continued our positive momentum from the first quarter, which was driven by that ongoing cost control and revenue growth. The gross margin percent has remained consistent quarter-on-quarter, at 70%, driven by that revenue growth and associated costs.
The employee expenses in the second quarter included the additional headcount for our sales, marketing, and our customer success teams in building that go-to-market capability. However, noting that a lot of the hiring did occur in the latter part of the year, of the quarter. We will see those full costs come into the third quarter. Marketing and travel expenses did increase from quite low levels in the first quarter of the year, and that does really reflect that investment in the go-to-market activity quarter-on-quarter. These events will continue into the latter half of FY 2024. The consolidated cash flow, which you will be able to see the detailed analysis of for our lodged Appendix 4C.
The cash flow from operating activities was an inflow of AUD 15.2 million, which is up AUD 4.5 million on the first quarter of FY 2024. This was largely due to the higher billing for that recurring revenue for the quarter. Cash used in the financing activities included the additional borrowings under vendor financing facility, and no employee share options were exercised during this quarter. Overall, the total cash flow, as at the end of December 2023, was up AUD 7.3 million from the previous quarter, which takes us to a closing cash balance for Megaport of AUD 62.5 million. This showcases the business, the efforts on the ongoing cost control, as well as revenue growth, which was offset by the hiring efforts, as well as the return to events, marketing, and travel.
The closing net cash to highlight here is AUD 45.8 million, which is up 18% on the previous quarter. And I'll hand back to Michael.
Beautiful. Thank you, Tish. So let's focus—let's just zoom out for a second. We'll jump in a helicopter, go up nice and high, and let's talk about the FY 2024 progress. So Q1, we stepped in, and we developed the strategy, and the focus is around world-class talent, our people. And there's a huge amount of work went into getting the right folks inside this business and lifted into the appropriate roles. Product, the innovation in product. We are a tech business, and we are constantly innovating in our product and providing world-class tech to our customers and our future customers. And a massive focus, if you remember, from Q1 and across Q4, when I entered the business on profitability, and you saw how we performed. Q2 is around executing that strategy, and I'm going to go through what we've been doing on the next slide.
Q3, which is where we're at right now, is around building the go-to-market momentum. We have to restart the marketing machine. We're fueling the new sales business. We're expanding the existing sales team. We talked about hiring, where we're up to now. We will continue to hire in the appropriate places where it makes sense. Geographic expansion and continued product innovation. It's not a surprise you see that in every single panel there. Q4 is about the recovery and KPI has become evident, and this, folks, is where we double down on the proven successes in sales and marketing. We don't just stop. We keep going where it makes sense. We continue the market expansion, we refine and optimize where we're at and what we're doing, and we continue, lo and behold, with the product innovation. Let's talk about the strategy, strategy execution to date.
We've hired 20+ go-to-market roles. We've implemented next-gen sales tools, a platform for training and execution. We've relaunched MegaIX in North America. This is a big deal. We've launched Global WAN, and I'm going to talk about that in a moment. We launched Megaport Internet at the request of our customers. We launched 100-gig VXCs. Now, these are numbers, but this is exciting, and I'm going to show you what that looks like soon. We launched contracted VXCs for the first time in 10 years. Would you believe it? We can contract VXCs. We launched Megaport Reach. We did 100-gig port availability across North America. That's the Project Centurion that we talked about, and that is 80% deployed. In the U.S., we launched a 400-gig backbone upgrade underway, and that is for completion in Q3.
I'm going to talk about the significance of that shortly. These are lots and lots of interesting numbers, but what does it mean for the business? We'll go through it. If you follow me on LinkedIn, you'll see that we've been hiring at a rate of knots, but what you'll see is we're hiring world-class talent, experienced in the industry that we're in, who can hit the ground running. Then if we look at the go-to-market transformation, we've been talking about that a lot on the last quarterly calls ... We're in the next phase. We've landed the folks. The focus now is on improving the effectiveness of the go-to-market team, lead generation, nurturing pipeline. We've updated. We have a huge process of updating sales messaging, moving towards a solutions approach. Not about a port and a VXC and all these complex terms.
It's Global WAN, hybrid cloud, connectivity to cloud, et cetera. We've improved reporting and commission structures for sales and leadership, one of the biggest overhauls I've ever seen in a company in my experience. We've enhanced go-to-market operating models and tools. You can see some of those images that sort of expand out there on the right. The partner program refresh is underway, and we're including a global partner roadshow and investing heavily into the channel. And probably the most exciting announcement is the Chief Digital Office that we've instigated and underway. This is a significant piece of work to sort out our digital marketing revamp, to get that underway so we can fire up this sales team moving forward and provide the lead gen that we need inside the business.
Now, you've probably heard me all launch this Global WAN, and you're like: Well, Michael's really excited about Global WAN. Why? This is why. The Global WAN launch has resulted in Megaport's largest deal in history. We're here for 10 years. This is the largest deal in history because we launched Global WAN. AUD 1.4 million in annual recurring revenue, contracted over three years. That's a total contract value of AUD 4.2 million. If I draw your attention to this graph here, this is the average size deal at Megaport, AUD 38,000 of annual recurring revenue. Grab a couple of ports, connect into the cloud. What does this look like? 35 times the size of an average deal at AUD 1.4 million of ARR.
This is an incredible opportunity to go back to our existing customers, of which we have 2,800+, and take a new opportunity to them. It also gives us a great opportunity to attract incredible new customers to us. In this particular case, the client solution was a major U.S. healthcare provider with operations across multiple states, and they had presence in eight data centers, hence that Global WAN component. In this particular instance, it was 16 100-gig ports and over 50 VXCs. So we talk about the outcome is the ports and the VXC, sure, but the story of what we're solving is the key for the customer. And it's such a great example of how we're pivoting the business to take advantage of higher revenue within our customers, helping them solve their challenges. Product expansion, Internet Exchange, and we talked.
For those who followed us, we have gone hard and launched into the U.S., U.S. in a big way. We're now at 23 locations globally. We launched Charlotte, New York, New York, Atlanta, Miami, and Denver in the last quarter. We had IX customers. When we launch an IX, we have the traditional content distribution network providers turn up, we have the traditional content creators, and we're really excited to see even new logos that are coming to our, our IX platforms. Companies like TikTok, who some of you may be familiar with, and Casefly. And in many cases, these are 100-gig port wins as we start to expand the throughput that we're delivering to our customers. Now, we talked about new product launches. Now, these are numbers, 400-gig U.S. backbone. Well, I'm really excited about it. Why is that interesting?
Because that enables up to 100-gig VXCs, which again, is just more numbers and letters. What does that mean? Incredibly fast connectivity that our customers can spin up across the U.S. and in many different global locations. That is 10 times the size of any VXC or any connection Megaport has ever been able to do. That's why it's such a big deal. And so we're finalizing the 400-gig rollout in Q3, which means in the portal, and you'll see that in a second, up to 100-gig VXC connectivity. We're moving well and truly beyond the data center. We launched a partnership with FibreconX here in Australia, for the CBD, so the major cities where FibreconX is available. You can actually get Megaport direct to the branch into the office tower, which is really exciting.
The last thing that we launched that I'm, I talked about was Megaport Internet. When I first stepped into the role, we asked our customers what they wanted from us, and a huge amount of them said, "Simple internet that can be spun up in less than 60 seconds," and that's what we're good at. So let's just quickly move across to a demo. And let's just put that down. Sorry, I have to move my Zoom thing, so I can see. Very good. All right, is that coming through? Excellent. So here we go. You're used to, you're hopefully, many of you are familiar with our, our very beautiful map here. So what we've got, these are all the different locations. I've gone through this before, so if you want to look at some of the previous sessions.
What I'm gonna do is I'm gonna zoom in here on a particular location. This is in Ashburn, folks. This is where the clouds live. We're gonna go to CoreSite. So here's a data center, CoreSite VA Reston. You can see that it's got one gig, 10 gig, 100 gig ports available. MCRs, it's also got MVEs, so we can spin up Cisco Virtual, et cetera. What I'm gonna do is I'm gonna create a port. You've seen me do this before, so it's nothing special. I'm gonna do it fast. I'm gonna give you a 100 gig because we love 100 gig, and bang! Done. 100 gig port deployed. What am I gonna do with that? I'm gonna say: Oh, geez, I wish I could get to the internet. Wouldn't it be great? Look at this, Megaport Internet. It's new.
I'm gonna click, and I've got a couple of options. I've got diversity zones for internet. Let's choose Digital Realty, and we'll connect that. Let's give it a rate limit, 1000, and then let's go next. Done. Oh! Did everyone see that? We have just deployed a port and connected to high-speed internet, and here we are in the ... where the clouds live. Let's just go one step further. I'm gonna go back to that port ... . I'm gonna do a private connection, and I'm gonna pick the United States, and I'm gonna show you something really cool. Let's see. There it is, Q2 demo. We've got that redeployed. This is gonna be more cool for technical people, but I'm gonna show you anyway. Right here, this is really exciting. See this rate limit? This is 100-gig.
So 100, one, two, three, and it just looks like numbers, whatever one is called, but this is a massive deal. This is 10 times the speed, and we've never been able to do that before. And the second thing, which is really exciting for the engineering team, is this minimum term. Megaport, in the past 10 years, has never put a term on a VXC. Now, we have terms. Let's go 36 months, and it's as simple as this. We've now got 100-gig termed VXC. Look at that. We need fireworks and what have you. Thank you, thank you to the engineering and product team. Behind the scenes to make that work is a significant amount of work.
I just want to applaud the team to get that done so quickly, and to the deployment team who's continuing to roll out all of our 100-gig and 400-gig backbones. Just an outstanding achievement. All right. Let's get back on with the session. Okay, outlook. FY 2024 guidance. FY 2024 revenue, 190-195 remains unchanged. FY 2024 EBITDA remains unchanged, AUD 51 million-AUD 57 million. FY 2024 CapEx is expected to be AUD 20 million-AUD 22 million, revised down from AUD 28 million-AUD 30 million. The second half of FY 2024 EBITDA and net cash flow to reflect the full impact of the increased headcount across the group, especially the higher salary of frontline quota-varying sales team, plus increased expenditure on marketing, advertising, travel, entertainment, and professional fees.
What we're pointing out here, folks, is don't take the first half of EBITDA and multiply that by 2. We've got a significant amount of spend that's coming in to actually go and drive this growth in the sales team, and we're really excited about that. The FY 2024 CapEx is expected to be lower than originally communicated due to the use of existing inventory, a reduction in capitalized wages, and a more efficient purchasing process. So this also, by the way, folks, includes the completion of all those projects that I referred to. Project Centurion, the 100-gig port rollout, and that 400-gig backbone to give us the 100-gig VXC ability across North America.
The third quarter focus, as I've continued to reiterate, is around building the go-to-market momentum, pouring gas on the fire for the U.S. folks, pouring fuel on the fire for the Australians, and driving that momentum. And we see expect to see the KPIs to be evident, a recovery in KPIs evident in fourth quarter, FY 2024. All right, we did it, Steve. So I'm gonna hand over to you, and I believe we'll open to questions. So thank you for those who've joined us.
Thank you. We'll now take questions. Please, a reminder, we'd like to give everyone a go. If you could please ask a single question, we will come back to you. Because we finished a little earlier, we've got until the bottom of the half hour. You can ask your questions either through the Q&A on Zoom or you can raise your hand to ask questions. Ciara, can you see any raised hands? I can't on my side.
Yes. So our first question will come from Tim Plume. Tim, if you'd like to go ahead and ask your question.
Yeah. Hi, guys. Thanks for taking my question. Michael, looks like you're maintaining guidance there, but some incremental reinvestment into the Sales force in the third quarter versus what we were previously expecting. Can you give us any insights in terms of, you know, what sort of reinvestment or how many incremental heads you're planning to add in that third and fourth quarter, please?
So the hiring that we went through, the 20+ heads that we exposed, I think, when did we call that out? In July - no, this is my last fortieth. It was the July 27th. That hiring process went through, and has been going on for a period of time. A lot of this, a lot of the folks landed at the latter end of Q2, and so a huge amount of those folks came into the business. You'll see if you follow the link, and you'll sort of see when they came into the business. And so that cost doesn't get seen really until Q3. So it's not that we're hiring 20 more folks in Q3, and that's why we're gonna see it.
You're really gonna see the hiring that we've done in the past six months come into that period in Q3. My statement around continuing to hire is that we are in a growth business. That initial hiring was just to get us back to table stakes, frankly. Like, if you recall, we had four frontline sellers in North America. We had one customer success person. We have AUD 100 million in ARR sitting, and we have 1,600 customers. We needed to get that back to what an appropriate business would service. The reality is, we have so much opportunity, not only in North America, but globally, to continue to invest for growth. That's what this company is. We are a growth company, and we have incredible opportunity.
So what you'll see is continual, I would say, organic, traditional investment that you would expect from any growth organization, versus what was the dramatic increase that we had to get the company back from wherever it was to something that made more sense. So it's less, I would say, less dramatic, but just a continuation on investing where it makes sense. And so you'll see, if you follow us on LinkedIn, you'll see opening roles in the U.K., in Germany, in Spain, further roles in the U.S. We opened an additional role in Australia, for example. Just what I would call traditional hiring processes that I wouldn't traditionally share on these sorts of calls constantly. I'd say it's more organic.
... Okay, so just so I'm clear, up to the second quarter, that was getting back to the previous stage, which is where the market told the market that you were getting to. Am I right in that there is incremental here, in that now you're saying we're going beyond that level, and we're taking on incremental heads, but you're saying it's more along the organic rather than the rapid?
It's more organic.
Okay.
Look, and here's the thing, Tim. So you will have people move in roles, I would say, just the traditional management of a business. Some folks move on, roles don't make sense, we reinvest that OpEx in appropriate areas to go and go after different opportunities. And we've still got headcount across the business moving. And when that moves, we take that OpEx, and we invest it for growth wherever it makes sense. And that could be across the board. So it's, I just say it's like the traditional how you run a business, moving forward. A growth business, not a business that's trying to reduce or constrain itself.
Understood. Thanks for that. I'll jump back in the queue for my next question.
Thank you.
Thank you. We have a question-
Thanks, Tim.
We have a question from an investor in relation to the Global WAN client deal, and the question is: What does the AUD 1.4 million ARR deal replace for the clients?
So in effect, if you look at that customer, we might go back to the... Just go back to it. So here's the, here's the deck. Hopefully... Am I still sharing?
Mm-hmm.
Yeah. In this particular instance, the customer, think of it as a major healthcare provider. They have eight data centers. So they live inside physical data centers. Now, traditionally, you would have some form of connectivity between those data centers, and that could be provided by carriers, or in most cases, different carriers that will be trying to connect those, different links. They also will have connections to cloud providers and all the different ecosystem that we have. So if you look on our website, if you look at the ecosystem of partners that you can connect to, all of those connections could be delivered by traditional carriers, potentially.
So if you look at, in this case, we've gone to all those data centers, add 16 different 100-gig ports, and then what you do is you mesh out a connection to all the different sites. So if you think of the eight different locations, you run diverse connections to each one, and you mesh them all up together. That's a very cool option that Megaport can deliver. What's really unique about us doing that is you can spin that up in 60 seconds, and you actually deliver it in a different way to traditional carriers.
I won't go into the technical component of it, but basically you're replacing all of that connectivity between those sites, and you do it in a diverse way, so that each connection, let's say, for example, a digger dug through a fiber cable, you have a diverse path that all the routes can continue to work down, so you build diversity for that customer. It could even be potentially more diversity than that. Hopefully that answers the question. Look at that-
Next up, we've got a question from Eric Choi. Eric, if you'd like to ask your question.
Morning, guys. Thanks. Good result. I just had a really boring one for Tish. Just on the CapEx, it looks like it's reduced by AUD 8 million, and you guys have called out a reduction in capitalized wages. So essentially, I guess CapEx has been put into OpEx? I was just wondering if you could help us quantify that amount, 'cause it sort of suggests underlying EBITDA. There's probably an underlying EBITDA upgrade there, if not for that CapEx to OpEx transfer.
So the majority, the large driver of the CapEx reduction is the use of the inventory stores that have been built up over the last couple of years. There is an element to cap wages, but don't forget, some people have left the business, and that will actually reduce the cost overall, for Megaport. So that's the reason we've kept EBITDA guidance steady, is because we, we don't anticipate significant change there at this point.
Gotcha. Okay, thanks for that.
Pleasure.
Thanks, Eric. I think our next question is from Kane Hannan at Goldmans.
Thanks, guys. I'm still trying to understand how you get back within that EBITDA guidance for the full year. I mean, you've previously disclosed an EBITDA margin for the last month of the period, which has given us, with all the moving parts with that sales investment. Can you talk to what the December EBITDA margin was for the business?
In terms of the overall piece or just in terms of consistency against the quarter?
Probably the overall piece. I mean, you-- I suppose you're implying basically a AUD 10 million, AUD 8 million step-up in costs in the second half at the midpoint of guidance. You know, obviously, I'm just trying to understand how much of an impact that sales investment had on, say, the December EBITDA margin when it was fully in the base.
So I guess one thing to be clear on is that these numbers, you know, we're just talking about the quarterly movement at this point. We're still undergoing. The auditors have arrived as of this week, so we're undergoing our half year results analysis at the moment, so we'll talk more to that at half year.
Okay. So we shouldn't be thinking top end of the guidance range for EBITDA, is this more, you know, where we could land, or we're still sticking to the midpoint?
We'll probably cover that more at the half year.
Okay, perfect. Thanks, guys.
Pleasure.
Okay, next question that we have from Suraj at Citi.
Thanks. Hi, Michael. Hi, Leticia. Just a two-part question. Just in terms of, Michael, just in terms of the second quarter performance for KPIs, it's interesting that services actually were down quarter-over-quarter. Services and net adds were down quarter-over-quarter, which is surprising given the launch of the IX.
and the fact that you had some reinvestment. And second part on that, I mean, you're still sticking to that 4Q inflection point. We are sort of two months away from 3Q ending. What gives you confidence, right? What are you seeing in terms of the pipeline and activity that gives you confidence on that pickup?
Okay. First question is, I think one of the things I'm trying to showcase, particularly with the Global WAN example, is that we. And I think if you measure services... I'll give you an example. A 10-gig port or a 100-gig port, there's a 10 times difference in terms of throughput. There's a big difference in terms of pricing, and yet they count as one service. Or a VXC, which is a service, and as I showcase with that particular Global WAN deal, which is why I think this is really important to understand, is that a single VXC could connect to the cloud for AUD 200 a month, or you could have a 100-gig VXC for 35 times the size of that potentially, or as showcased with this deal, and yet it's still one service.
So the focus is around improving the services that we offer and actually the ARR you can get out of the services. So that's one piece. IX, as an example, is very heavy 100-gig because of its massive throughput. And so the launch of the IXs is the first piece. We only just launched them, and so now what you need to see is customers now turning up. The other thing that we're reporting on is revenue generating, as opposed to what we had in the past, which was just anything that would turn up, and even if it wasn't billing. And so what you'll see is a slight lag because we're actually showcasing what is billing. So there's a couple of factors there. The second question?
Total services is slightly down, which is our-
I think that's, I think that's answered my first piece, so-
Just in terms of the inflection point into 4Q, the confidence on that, Michael, what are you seeing in terms of? Because, I mean, this quarter was another sort of, as I said, flattish quarter on additions. What gives you confidence in terms of the inflection in 4Q?
Well, as we've shared throughout the year, and as you know, we have only just hired folks. Like, that's why I suggest take a look at LinkedIn. You can see when those folks were hired into the business. And so if we just go back to the front of this, and to give you some perspective, we have 3.6 times the size of a frontline sales force in North America as of the end of Q2, versus when I took over the role in May. And that's only just been instigated. So if you remember the story that we went through, and if we go back to my little chart here. Here we go. We landed in the role in Q4, understood the business. We talked about people, product, and profitability.
We started to execute in Q2, which was the hiring, and so that process has now been done. You can't fast forward or speed that up. There is just no way to in to hire someone and then go back in time, ramp them, and somehow get a result from them sooner. And so all of those heads have come online in Q2. The ramping's continuing, and then you would expect to see that result come through in... We would see metrics in Q4. Now, as you know, the revenue won't come through until FY 2025, because you'll see metrics, but you won't see revenue. If you even did a, you know, a AUD 1.4 million ARR business, and you signed that in the last quarter of the financial year, right at the end, you've only billed for one month of that revenue, et cetera.
So you won't see all of that until FY 2025. So I think that's it. It's just the same message we've been sharing more broadly, and we're staying incredibly consistent with that.
Yeah, I was just going to say, is there anything in terms of pipeline that you're seeing, Michael, that is giving you confidence on that, right? I understand it's pretty early in that, but is the new sales team's pipeline or anything looking better?
So the other piece to it is we've, and as you know, we've rebuilt, and as I think I pointed out here, we've had to implement next gen sales tools and actually a process. There was no process inside Megaport, so there's nothing to compare to say, "Hey, one year ago, this was the pipe gen," and compare the two. We literally had to, I had to build this. So we've built it now, and so you can't sit there and say, "This quarter compared to a previous year was better." So I'm not going to give you an insight and just say, like, "Hey, we see that signal," right now. Remember, they've just landed. They're just in seat. So, let's talk more broadly about that towards the end of Q4.
Thanks.
Thanks, Suraj. Just a quick call out for those that are looking for the KPIs. You'll find that in the footnotes to the presentation, there's a link through to our website under the business overview section, and you'll see the revenue generating KPIs over the last 12 quarters, for those that were not following Suraj's question, which said total services were slightly down quarter-on-quarter, which they were. Next question we have Nick Harris from Morgans.
Hi, guys, congratulations. That was clearly a much better result than myself and others were thinking so, great quarter. I might be a bit cheeky and try and squeeze two in, but they're pretty short ones. Just the first one was the revenue booked, in this quarter, was actually higher than the exit rate MRR times three. So I'm just wondering, you know, how come the revenue is stronger than the, the MRR? And then the second question, that Global WAN stuff looks really exciting. Just wondering where we'll see it in the KPIs, and is it a short sales cycle? It looks like it is, given you just launched it and you've already sold one. So yeah, just trying to get a feel for that, please.
So-
First one. Yeah. With regards to the revenue, Nick, there's a number of elements that can occur quarter-on-quarter rather than just MRR times three. So that will start to build throughout the quarter. That's generally what will happen with revenue. There are some non-recurring revenue, but not significant.
Well, and Global WAN. So Global WAN depends. The sales cycle is obviously, and as you saw, it's a lot more different sites coming together, so it can be a longer sales cycle. It depends on timing with customers and where they're at and the relationships we have. I think one of the great things about Megaport is we're a trusted entity. We've got lots of customers that trust us and love us and love our simplicity. And I think they think of us as just a connection to the cloud.
And so when they realize that our, particularly the investment in customer success teams, where we go back and actually talk to our customers and love them, and find out that there's opportunities that we can provide services to all these different locations that they're currently using alternative carrier vendors for carriers, then that's a great opportunity for us to go and have that conversation. Is the sales cycle longer than a connection to a cloud? Yes, mainly because there's multiple sites, multiple. You're stitching together multiple pieces, so it's more in line with when a customer's ready to go. But when a customer's ready to go, the sales cycle can be quick, so it's more of a timing on the customer side. Hopefully that makes sense.
Yeah, that's very helpful. Thank you both.
Thanks, Nick. A question via the Q&A, just around the investment in headcounts and whether the Q2 employee costs included the full quarter of run rates and/or sort of where does that look to to roll out in Q3? Tisha, I might ask you to answer.
No, it didn't, as Phil noted previously. It's a number of those hires have been staggered, and largely towards the end of the first half.
Okay. We might go through to Jonathan at ABC.
Thank you. So, I guess, a follow-up to the Global WAN question, and then I have one of my own. But, that was that contract for, kind of like augmenting, or are you the secondary provider? And if so, do you see any scenarios where that may end up producing even more ARR going forward? And then a follow-up to the last question about sales cycles. More generally for new logos, I'm interested in whether you're seeing any elongation in sales cycles or a shortening of sales cycles, or no particular trend to note.
Finally, my question then would be, you've had a lot of travel recently, touchpoints with customers, including last week, and I'm just interested in general, kind of heading into calendar 2024, what are the, you know, the impressions that you're hearing from customers of Megaport? Are there particular types of products or use cases that you're hearing from your customers might show the most potential compared to, say, three, six months ago? Thank you.
Thanks, John. Appreciate the questions. I've written them down. So first one, backup links. It's you, you're obviously well versed with Megaport. There are a lot of customers that just leverage Megaport as a backup link, in many cases, and they're not always aware of the robust offerings that we have. Because they started with the viewpoint that I'll take a backup link, and I'll put a small connection across that, and if something went wrong, because we're a network as a service provider, you could spin up high speed and just flick all your traffic across to that. The reality is, we provide diverse services that could provide both the primary and backup, so we can deliver both of those.
So we have, as I've mentioned before, a tremendous opportunity to go back to our customers, understand what they're leveraging us for, beyond just like, "Hey, yeah, you've got this connection," but actually going a bit deeper and asking the next question: "What are you doing with that? And what are you doing with other vendors or other partners or other carriers, and how can we augment that?" So the discussion is basically, let me understand what you're currently doing, and let me show you how we could overlay Megaport across that, save you money, and increase your speed and connectivity, and also add significant diversity. Our backbones are really phenomenal, and so when you look at how we've built them out, you can actually get incredibly, incredible diverse offerings without the need to just use us for a backup link. So yes, that's the first one.
Sales cycle. One of the cool things we talked about rolling out is the implemented next gen sales tools. One of the tools that we rolled out is a platform where we can actually understand how a customer engagements are going. Actually records the video of actually the customer engagement, gives feedback, guidance, shares that with the customer, so they've got all of their details around the demo, et cetera, et cetera. Inside that, we get to see how our customers engage with us. Actually, you sort of see the black art of sales, I would say, and you get to see the speed at which the sales cycle can work.
Now, depending upon the type of product that Megaport offers, there is a really great example that I sent out just before Christmas, which was one of our top reps had a customer who started the call with, "Hello, we've never heard of Megaport." And he articulated who we were. This is a 30-minute call. Did the demo of what we can solve, understood their problem. Their problem was connecting between two cloud providers, Azure and AWS, and they had latency issues. They had all sorts of challenges. The call went through to the customer saying: I can't believe this exists. And then the end of the call was the customer sharing their screen, logging on, and actually setting up their billing set up and actually provisioning in a 30-minute call. That was MCR.
MCR is a fully virtual platform and provides a virtual router, and then you point your two connections, and it was some incredibly fast latency that solved their problem, and it was deployed. So why do I love that? The sales cycle was literally the second they found out about us, which is why you hear me say our challenge is getting to customers and letting them know what Megaport can do. And when we get there, customers love what we can do. The other piece was, that was a sales cycle of 30 minutes, and I know that's extreme, but that is an example of what can happen. And the cool part is the time to value for them is in that same is actually that day, because the connections are up and running.
What was the last one? Impressions, I've written down. Your last questions.
Yeah. Just the customer reaction that you've had during this kind of last-
Oh, yeah.
lot of meetings. Yeah.
I think it's more of the same. I think there is a genuine sense that Megaport is back, I think is the appropriate statement. We're showing up and supporting our partners and customers. We're turning up in a way that's meaningful. We're making the efforts to go and physically see the folks that matter. We're sharing that love. I think the world of COVID and sitting at home is thankfully over. And it's important to get in front of our folks again, which is what we've enabled the team to do.
That's when you're a growth organization, you can actually go and focus around that, which is why that fiscal riding of the company at the start, moving towards investing to growth, but doing that in a sustainable way, so that we derive profitable, sustainable growth moving forward. So, that outcome is basically the feedback is: You're back. You're exciting. A lot of them do comment on the new logo imagery that we have. So they do love our... If you follow us, there's some cool imagery, so that's also coming out. And for whatever reason, everyone loves a Megaport T-shirt, and we go through quite a lot of them. John, I heard you might have been wearing a Megaport T-shirt at a run recently, which we were very excited about. Paparazzi sort of spotted you off there in the distance.
Right. Thanks a lot.
Okay, we might move to the next question. Thanks, John. Bob Chen at Barrenjoey.
Hey, guys. Just a quick one for me. Just in terms of the sales team, can you give a little bit of color on how the sales team is now structured now that the hires are in place? And, I think you mentioned that you've brought in some more, sales tools, or platforms into that business as well. Can you give some color on what you've brought into the team or how you've changed the sales motion?
Yeah. So there's a lot of work there. But if you look at it, as I've mentioned, sort of through the sales team, we're very focused around a port and a VXC, port and a VXC, a port and a VXC, as opposed to stepping back and solving for solutions. But what are the connections that we're trying to do? Multi-cloud, hybrid cloud, Global WAN. How do you get faster connection to your cloud providers to solve for the applications that you're solving for? It's a different sort of discussion, if you can think about it from that perspective. And that's, that's a fundamental cultural shift, actually. And it starts at the top. It starts from me, and it starts down. And you'll see my passion around demoing the product.
You can see, part of that is to show you all what's happening, but a lot of that is to show the team, our team, that this is where we're headed. This is what I expect from the team to show this incredible technology, and it is cool. So that's a big pivot, I think, from where we were. I, well, frankly, remember, it's been such a dramatic shift from, like, four frontline sales. We've had to literally rebuild the entire team. I've never heard of a place where you go, you've actually 3.6 times the size of the team, and so it really is a massive move. We brought in some world-class talent to help us build out the sales tools and platforms.
We rolled out very quickly a platform called Gong, which gives us the ability to go and it's a conversational intelligence platform, I think is the appropriate term. But that ties in not only our forecasting platforms, it looks into all of our sales force, it gives us indication on the customers. It talks to us when we're not engaging appropriately, looks into their emails and the communication, looks in all of that. So we actually get to see how our folks are going, which gives us an ability to fast coach and guide the team and also celebrate that example I gave you before. So the tools and the systems inside that, and there's a raft of Rev Ops tools that are going through some quite dramatic change inside there.
The go-to-market team, as we've referred to, by frontline sellers, we've hired customer success folks, solutions architects, sort of in a pod to support that, and a big investment continued to grow out our channel, which is our - the areas that's helping us drive some, our new logos in the appropriate areas, I would say. I mean, that's a long conversation, and it would - it takes quite, there's an entire industry associated towards that, so it's not something I can simply respond to. Suffice to say that it's been a massive turnaround. I'm very happy with how it's progressing. I think the biggest one to focus on is actually marketing and actually the pivot towards solving that digital marketing piece, which is probably the most exciting piece that I had talked to you to.
Thanks for that.
Thanks, Bob. Next question from Roger Samuel at Jefferies.
Yep. Thank you. Thank you all. Very good result. Can I just ask you about the 100-gig VXC? Looks like the pricing uplift is double, so from AUD 200 from 10-gig VXC to AUD 400 for a 100-gig VXC. Are you pushing your customers to take up the 100-gig? And because they'd be getting 10 times more capacity, but they're just paying you twice the price.
Yes. I wouldn't look at the, this is welcome to pricing. When you get into this space, it gets tricky. Depending upon the distance, whether it's in the metro, out of a metro, is it crossing, where they're going? There is, you know, we've got an army of people that all they do is think about pricing for this to get this right. So the example I gave is a very short connection inside a metro, from memory. And so, if you're looking at long haul VXC connecting at 100 gig, for example, from East Coast to West Coast, it's a completely different story. So that I wouldn't, I wouldn't say there's really any signal you can draw out of that.
Okay, cool. And then, can I just ask you, why would someone take up the Megaport Internet instead of the VXC? Is it a lot cheaper through Internet? I mean, what's the use case for the Internet product?
It's funny. I mean, internet is just another VXC. Like, if you look at the platform, it's just another connection to another end location. So our internet exchange is a VXC to internet exchange. Our connection to cloud is a VXC to cloud. Our connection to internet is a VXC to internet. Our 100-gig is a VXC, a 100-gig, component. Why would someone take out internet? If you saw how simple it was, instead of... It's the same value proposition in comparison to going and trying to get a connection into a location from a carrier, spending, you know, four weeks negotiating, locking in 12 month- 24 month contracts, waiting 10 weeks for delivery, only to find it wasn't delivered or wrong cable, whatever. That process, or you jump online and as I showed you, in 60 seconds, it's spun up.
There's a raft of reasons why you would want that connectivity in those locations. We'll continue to innovate on that product as well. So it's more of the same value proposition that Megaport brings to market. Just adding another arrow to the quiver. An arrow to the quiver, not a quiver to the arrow. Imagine adding a quiver to the arrow.
Mm. Got it. Thank you.
Thanks, Roger. Paul Mason from Evans and Partners.
Thanks, guys. So I just wanted to ask about the contracted VXC proposition you guys have launched. If you could tell us a little bit more about sort of what product market fit you're trying to go for there by offering, you know, fixed term contracts instead of just having it variable like it's been historically. And then maybe if you could also add some color on, like, whether there's any significant discounting, say, for three years versus one year, or is it more just like price certainty that's provided to the customer when they do that?
It's both. Yeah, so great point. So if you're locked in for three years, you haven't got an increase in price. If there was a price increase, it would be a lower cost to go for three years, for example. Why would we do that? Megaport has evolved, and if you look... And by the way, if you think of where we came from, the cloud markets have actually evolved. And so we were lining up against, if you look at historically, lining up against how you would procure cloud. If you remember AWS back in the day, they literally came out with pure consumption. So it was basically like a month-to-month, if you use it, it doesn't matter. And what you'll see today is every cloud provider is locking in a minimum spend. So basically they've gone to, like, a contracted arrangement.
That mindset of just month to month for every single thing has changed. And I think that the opportunity for us was to catch up to, A, how people consume cloud. The second thing is, some customers do need that, that ability to just spin it up, spin it down for one month, two months, whatever, and we'll always offer that as the option. But a huge portion of our customers, they don't need to spin up and spin down. And so then what you've got is an opportunity to actually provide them, certainly from a pricing perspective, give them a little bit of a discount, et cetera, and lock in for a longer term contract. It's healthier for our business.
And then, if you look at Global WAN, Global WAN, the market that we're competing against, you do not spin up a Global WAN and spin it down tomorrow. You lock that. You want that stable for the next three years, and so it's an appropriate process for them to have that. So adding that to the portfolio is just a natural evolution. I personally, I was surprised it was there. I put a fair amount of pressure, I would say, on Cam to get it sorted. Cam's the head of engineering, and it's a huge change in terms of the back end, and so it's... I'm happy that it's there. It's a natural evolution of the business as the business has changed.
But we're not moving away from month to month because customers love that as well. You've got horses for courses.
All right, great. And, if I could ask as well, just about FibreconX?
Yes.
Could you tell us a bit about sort of the reach of your partnership with them? Like, has that given you, maybe like Australian coverage to be able to reach enterprise, or is that getting you, you know, in, you know, across all continents, that sort of capability? And if not, like, are you looking at any other partnerships in order to be able to make that a global capability?
You're asking the right questions, Paul. So firstly, FibreconX is a really fascinating company, for those of you who don't know it. It's worth taking a look. What they've built is fiber to every building, actually up to the risers in Sydney and Melbourne. I think they're underway in Brisbane as well, or close to nearly finished. And then they've brought all of that fiber back to a central point in the city, and then they've gone and they've dug tunnels to all the data centers and run fiber to all of those. And so what you have is glass to the office. And what Megaport is, is glass. So you can literally go into any office floor in those locations, get glass direct to Megaport. What does that mean?
Why are there thumbs up are popping up on the screen? Oops, sorry, folks. I'm just seeing myself getting a little thumbs up. It is worth a thumbs up, by the way. And so if you look at this, we can go to an office, take a major bank that has a small data center sitting inside an office in Sydney, and you get a glass from there to Megaport. It's Megaport in the branch, consider it like a cross connect from a data center into that location. So it's really exciting, and the cool thing is we're automating all of that. And so in a really fast timing to deliver it. I've never seen anything quite like what FibreconX is doing. It's quite fascinating, so we are doing that. Wherever they turn up, we will be....
And particularly, if you think about it, you can grab that connection, you can grab all the connections that we have in any cloud provider or any other data center and internet all across that same link. It's a really compelling offer, and it's incredibly well priced. It'll be very disruptive. That's the first thing. The second thing is, what do we do moving forward? So can we take that to other locations around the world? And the answer is: this is a great example for us to test the edge, Megaport to the edge, and then find partnerships globally that we can-- all the product side is gonna be solved. So if we find other partners globally, like in New York City or in San Francisco or London, et cetera, where it makes sense, we could do something similar there.
But that's a little bit further down the path. Nothing to announce as yet, but you, as always, are on the right future track.
Thanks a lot.
Okay, quick question from the Q&A. Any trends we're seeing in customer churn and are pricing trends in the market having any impact on the churn?
Any trends in customer churn? I wouldn't say there's any differences between our traditional churn inside the business, nothing of note. So I would say just consistent in how the business has been run.
Okay. Next question from Suraj at Citi.
Thanks. Michael, just as a Global WAN, I mean, lastly, I'm a bit surprised that it's been, it was done so quickly. Just in terms of other opportunities out there, was this... Do you reckon this is a one-off and take some time for the other deals to come through? Do you actually have quite a bit of pipeline here, because now that you've upgraded the backbone, should we think that there could be a few more deals in the summer?
Not just one deal. We haven't just won one deal. There's a mul-
Okay.
There's multiple, Global WAN deals actually, that we've won. That one was the largest-
Okay.
- and so we obviously showcased that. The purpose of showcasing that was to give you a perspective of actually what - when we launch a product and the reasoning behind that, and showcasing the difference that it makes, and also hopefully giving some insight into the fact that we have such a tremendous opportunity to expand the existing customer base. A VXC, like these core counts, these services counts, we can increase services counts, but we can also increase the revenue of those services counts, and the outcome is a improvement in annual recurring revenue. And so that is a really good example of that coming through. 35 times the size of a traditional deal in one. Sure, they take a little bit longer to do, but certainly 35 times the size.
And that was just one example of a number of deals that we had come through globally, actually.
That's excellent.
Yeah.
Great. Great. Secondly, in terms of CapEx, maybe one for Tish. On CapEx, looking out maybe medium term, because you're now sweating the assets or glass, as you say, a bit harder with this WAN deals, do you reckon CapEx will... It's good in terms of revenue, and the growth should be much stronger, but do you reckon CapEx also has to go up because you need to get better deals, upgrade your networks?
So we'll probably, if anything, we're still working through the half year and the future term forecast at the moment. We've just upgraded CapEx for this year, specifically. Don't forget the inventory stores that we did purchase over the last two years during COVID.
It's worth also noting that those inventory stores, I think. Sorry, those inventory stores were not for the 100-gig upgrade, and they were so Project Centurion and also the 400-gig. We've been procuring infrastructure to deliver that. So it's not just like we're burning down existing stock.
Mm.
Yep. Yep, just a quick one. In terms of competition, anything you're seeing because your former CEO's joined one of your key competitor, and anything that you're seeing in market that's impacting, impacting you?
Nothing that we can... That I see.
Okay, all right. Great. Thanks.
Thanks, Suraj. We might go to a last question from Andrew at Macquarie.
Hi, guys. Can you hear me?
Yes.
Yes.
Yep. Perfect. Thanks. I just wanted to clarify first off, that inventory, none of that's been reallocated at all from certain data centers to other? It's all just inventory that's been purchased and then not rolled out yet.
Yep.
Okay. Thank you. And then with sort of incremental CapEx requirements from here, you know, are they just driven by utilization, or are there other products in the pipeline, that, you know, we should be thinking of, that might be, you know, surplus to the backbone that you've built?
When we expand and add new data centers, when we add new markets, when we add new locations, that's where we're typically rolling out new infrastructure, or refreshing old. But I mean, that's just like painting the Sydney Harbour Bridge, as they say. There's always a process of going through that, and that would be just business as usual. New locations obviously need new infrastructure. But I think the point is, remember, we've done quite a significant upgrade this year, and that was not from the existing inventory, to get that Project Centurion, the 100 gig and the 400 gig backbones.
So we'll come back, I think, at the first half results, with some further commentary on CapEx. Thank you very much for everybody for attending today. Just a quick call, our next results are due out on the twentieth of February. We'll send around an ASX announcement with the webinar details. Thank you very much for your attendance. And for those in Sydney, we have a few group meetings tomorrow, with Michael and Tish present. And we'll be doing a few other calls around that. So if you would like a call, please reach out, investor@megaport.com. Thank you again for your attendance.
Thank you, too.
Thanks.
Appreciate it. Cheers.
Goodbye.