Megaport Ltd

ASX:MP1

Earnings Call Transcript 2023-Q1

[Operator]

Hello, everyone, and thank you for joining the Megaport First Quarter 2023 Investor Briefing and Q&A. We will begin with a presentation by the Megaport management team, followed by a 30-minute Q&A session. [Operator Instructions].

Now over to the Megaport CEO, Vincent English.

[Vincent English, executive]

Thank you very much. Good morning, good afternoon. Welcome to our first quarter FY '23 Global Update. I'm going to take you through some of the highlights. Some of the key highlights for our first quarter, our continued EBITDA growth. We've had a very strong quarter 1 in terms of revenue performance at AUD 33.7 million, up 10% for total revenue for the quarter. Our monthly recurring revenue is AUD 11.6 million the end of September, up 9% and gross margins overall for the full quarter are just over 64%.

All of this has contributed to our second consecutive quarter of EBITDA growth, delivering a 1 million EBITDA result for quarter 1. And in terms of the channel strengthening and as you -- as everybody has known, we've invested quite a lot of time and effort into building our channel program over the last 12 to 16 months. We've seen an increase of quarter-on-quarter since the end of June to end of September, a 31% increase of signing on partners. And of those partners that signed on, we've seen a 77% increase in those transacting in quarter-on-quarter. So I'll touch on that a little bit later in another slide or 2.

MegaportONE, in terms they're now in their commercial cycle after completing 2 cycles of technical endeavor and complete successfully have now 2 scores on the board with 2 major customers and have a strong pipeline moving forward. So we see MegaportONE being an integral part of our overall platform moving forward.

And recently, you might have seen in the news, in some PR and social media that we've announced a strengthening of our relationship with Zenlayer, which are very focused in a lot of markets that we're not in. And so that allows us to partner with them on a much more network level where our customers can reach countries that we don't have a presence in.

And likewise, their customers in those countries can reach our extensive network, which cloud presence across a lot of the major countries that we operate in. So it's a very symbiotic relationship, and we're really happy about that. And we're starting our first focus on that. It is going to be in the whole of Asia and Southeast Asia region. And then we move forward from there as time moves on. But yes, very exciting news for us in terms of having us not to do a whole lot of heavy lifting.

Next slide, please. Now in terms of our performance on ports. Overall, we had a reasonably soft quarter in terms of port performance, notwithstanding most of the other metrics that we have included in revenue and other service -- services were well up. Our total ports this quarter are only 286. But we had some consolidation happening in our business. And starting with the softening in the quarter, a lot of that had been kind of factored down to seasonality, a lot of vacation time, a lot of decision-makers been away between Europe and the U.S.

The second part of that has been probably there's been a little bit of a vacuum with the lack of a CRO in our organization to rally the troops, which we -- I will address towards the end, but we're down to picking a candidate very shortly. So there's been an advance in that regard. But that's the general feedback.

In terms of port consolidation, as you know, we've rolled out an extensive 100-gig network across our platform. So we've seen a lot of port consolidation where customers are turning down 3- and 4-, 10-gig ports to take up a 100-gig ports. So we are not -- it's not revenue impacting. For us, as far as we're concerned, it's just more of a metric count on ports in terms of that strategic port consolidation with the likes of AWS and Microsoft and Google has had an impact of 123 ports reduction, but doesn't have an impact in terms of our revenue.

But more so, it does have an impact on our cost saving because we now turn off some other costs that we were using to support 10-gig ports in our network costs. So it's -- overall, financially, it doesn't have an overall impact, but it does have an impact on our KPI.

The second consolidation that happened as we rebalanced our 1-gig pricing in the APAC region to bring it in line with the rest of the pricing that we have globally. So again, this is a lot of the 1-gig pricing brought up to what the 10-gig pricing has been. And so again, similarly, there's been a lot of consolidation there where customers are turning off multiple 1-gig ports and taking up a 10-gig port to allow them to utilize more services instead of taking up more 1-gig ports.

So that's the breakdown as to what's happened in that. We expect some of that to still continue into quarter 2 in terms of that consolidation. But once that's complete, then we expect a lot of customers to actually use more services over the larger capacity ports that they have to support their business.

In terms of the customers added just under 60 customers in the quarter, just to bring it up to 2,700 customers. In terms of our quarter 2 outlook, we've got a strong pipeline for quarter 2 last up, that didn't happen in quarter 1, has now trickled over into quarter 2. So we're expecting that to be a much stronger performance in quarter 2 overall.

Next slide, please. In terms of the underlying MRR growth, and I should preface this -- most of these -- all these numbers are in AUD. And the reason we've done that is just to keep it consistent what people get used to our functional currency, which Sean will address the different -- the -- both of those currencies later on in the financial section of the presentation. But for consistency purposes, these are in AUD.

We've had a growth of AUD 637,000 in underlining MRR growth in quarter 1. And our total MRR for exiting quarter 1 was AUD 11.6 million. And the split of that between direct and indirect has been 65% direct and 35% indirect. Overall, MRR for the quarter was up 9%.

Next slide. In terms of the breakdown on the split, we're continuing to see that the largest component of our revenue growth is coming from the North America region, a 13% increase up to AUD 6.5 million of the AUD 11.6 million MRR, contributing an increase of AUD 800,000. Our Asia Pacific region was reasonably flat. And again, that's an impact of the repricing that we've just seen. And we probably -- we won't see the impact of the positive impact coming through from that until quarter 2, which we're already starting to see from a billing point of view.

And in Europe, continuing to grow, up 10% again quarter-on-quarter up to AUD 1.8 million. And overall, like I said, a 9% uplift in total revenue to AUD 11.6 million.

Next slide. Switching to PartnerVantage and our indirect and our channel program, starting with the chart on your top left-hand side as you're looking at your screens. New partners signed, we had just over -- we had 78 partners signed at the end of June. That's now just gone over -- up to 102, up 31% of partners signed, and we continue to expect to add more partners going on quarter-on-quarter.

To the chart just below it, we've seen, of those partners, those just under 40, an increase of 77% partners who are transacting, and that means bringing deals and closing deals. So that's the sticky end of where we want to see a lot of our downstream partners bring in business and closing business.

And as a result of that, over in the top far right-hand corner, you see that we -- the MRR from June, which is just over [ AUD 50,000, AUD 53,000 or AUD 54,000, ] has now jumped up to over [ AUD 80,000 ] or 54% increase, as a result of those transactions starting to come through. And the MRR per partner is just around -- just over AUD 5,000, an increase of 18%, and we expect that to increase just due to timing differences partners come on at different stages during the quarter going forward.

So overall, a very healthy position. It's taken us a while to get here, but I think we're on the right track in terms of what we're expecting it to be. And the momentum is there. And we still have a very strong pipeline with a lot more partners to come through and a lot more partners that have signed to funnel through. As you can see from the chart, over 100, there's another 60 of them they are going through various different stages before they can start transacting. And we've been focused on trying to be very efficient about how do we speed that up and making sure that they're in a position to close deals as quickly as possible.

Next slide. Just in terms of the -- you would have seen this slide in our full year results, but on the far right-hand side, I just wanted to kind of update to give you a size of companies that are using Megaport overall, and we've added the bottom 2 charts on the right-hand side, where we have a 32%, 1/3 of ASX 100 companies are using Megaport services. And of the ASX 200, 24% are using it. Notwithstanding, we still have very decent percentages of the Fortune 100, still 20% and growing as we continue to add.

I think this symbolizes the fact that we're using -- a lot more larger companies are using Megaport to solve a lot more deeper reach, a lot more cloud regions, a lot more global reach, but also more complex things and the ability to use SD-WAN, MCRs, not just ports and VXCs and MVEs on top of that.

So we believe we're in the right space. This is just that phase whenever we're just starting to accelerate through and bring on larger customers, sometimes take a little bit longer than usual. But when they do come, they bring a lot of revenue.

Next slide, please. Okay. I'm going to hand you over to Sean Cassidy, our CFO. He's going to take you through the financial performance for quarter 1.

[Sean Cassidy, executive]

Thanks, Vinny. Good morning and good afternoon, everybody. Like Vinny mentioned, while the U.S. dollar has become our primary currency and our dominant currency, for the sake of familiarity, while we work through the transition to solely reporting in U.S. dollar, most of the figures I'll be talking about today are going to be in Australian dollar. You may have seen that we have filed our 4C completely in U.S. dollar.

So at the full year, we noted that we don't Necessarily need every metric to go our way every single quarter for them to be judged as a successful quarter. And Q1 is a prime example for that. Gratefully, we just had a very solid quarter, and that's one of these financial results.

The customer consolidation of the 1 gig per port saw in APAC has had an impact on MRR that increased capacity that they have taken up. The MRR will come back to us in future quarters as they provision more services. And notwithstanding that, that small impact in MRR, our revenue for the quarter at AUD 33.7 million is up 10% from Q4, it's up 37% on the same quarter last year. That quarter last year, if you might remember, was an absolute record of revenue growth at that time. So the revenue growth in this quarter should be considered [ and not like ].

I appreciate that, that revenue growth has been helped by an FX tailwind. We're talking about if we're talking U.S. dollars. That obviously -- that conversation flips on the tail a little bit. And revenue in U.S. dollars for the quarter at $23 million, it was up 5% versus Q4 impacted by FX headwinds.

Direct network costs of AUD 8.2 million rose slightly versus previous quarter. And that's because you have the full quarter impact of the network expansion that we completed in quarter 4.

Partner Commissions of AUD 3.8 million have risen just 41% higher than they were against the previous quarter last year, which is an increase in excess of the revenue increase, but that's what we would expect as more of our new business has started to come through in direct channels.

I will point out that while our revenue has increased year-on-year by 37%, our gross profit or profit after direct network costs and partner commissions has increased 51% is a good strong indication the operating leverage within our business continues to come through.

Our biggest OpEx expenses, employee expenses, employee costs of AUD 14.9 million have grown 9% year-on-year. It should be noted that across this period, our average head count has grown 12% year-on-year. So we're not seeing a great deal of wage inflation impacting in this regard. I will point out that our annual pay increases have only taken effect from 1 October of this year.

An increase of 10% in our employee cost for quarter 1 versus Q4 is largely due to fact that we have a lower internal capital or capitalization of internal costs in the quarter just passed. But I'd also like to point out that employee cost as a percentage of revenue for the quarter at 44%, marked a significant improvement over FY '22 average, which was 53% as we continue to drive more productivity out of our said expenses.

Professional fees are largely flat quarter-on-quarter. Marketing and travel expenses are increasing as we continue to normalize in a post-pandemic world and we continue to support momentum build within the channel. And again, the big highlight for the quarter was that this is the second consecutive quarter where we have delivered an EBITDA profit.

Moving on to our cash flow. In addition to building on our profitability quarter-on-quarter, and we have delivered a second quarter in a row where we have been cash flow positive from operating activities. I have noted in the past that there is some seasonality in our operating cash outflows, and quarter 1 includes our annual bonus payments to our staff, and that was a significant payment of AUD 2.8 million. It also includes the cost of the reduction in workforce that we had in the quarter as well.

I'd also like to point out that when we look at this in American dollar or U.S. dollar terms, the cash flow generated from operating activities is significantly better. And that is a better indication of the effective natural hedging that we have operating in our business. Our CapEx in the quarter of AUD 16 million is a little higher than it was in Q4 and higher than -- slightly higher than it was in the second quarter last year. And we continue to buy CapEx on a 1-year horizon.

It should be noted that we have enough equipment and inventory at this stage to complete our growth plans for the current fiscal year. That is not to say that we are going to stop having CapEx in future quarters. We will still have the installation cost of that equipment that we continue to have in stock. We will continue to have IP development costs capitalized as well as rights-to-use assets. I've previously guided that the year -- the annual CapEx should be about [ AUD 30 million ]. And it's looking like we will spend slightly more than that for the full year.

You will note a cash inflow of AUD 4.1 million, noted as cash flow from borrowings. This has nothing to do with the revolving credit facility that we have negotiated and we spoke about previously. This is simply interest-free vendor credit from an increase in CapEx [ notable ].

Our net cash flow for the quarter at AUD 13.9 million is effectively flat year-on-year, discounting the cash impact of the InnovoEdge acquisition in Q1 FY '22. We are left with approximately AUD 17 million in the bank at the end of the quarter. And as we see the continuing drive to profitability and the cash flow generated from operations in successive quarters, and we're starting to see the operating leverage come through. I remain confident that we have the cash reserves and the wherewithal to continue this journey to free cash flow without the need to raise additional capital.

And with that, I will hand you back to the moderator and we can take your questions.

[Operator]

Thank you, Sean. [Operator Instructions] So we'll start with a question from Siraj Ahmed from Citi.

[Siraj Ahmed, analyst]

Just -- I'll ask one question in terms of port consolidation, what you're seeing in 2Q, right? Would it be fair to assume that the big impact of port consolidations is in the first quarter? Or is -- I mean, I guess, the question is kind of ports have been negative in the second quarter. And just the natural rhythm of the business, Vinny, you mentioned the CRO and seasonality. Are you seeing things improve from seasonality or the CRO thing keeping things constrained.

[Vincent English, executive]

Look, it depends on the part of the region. I think it's just some of the feedback that we've got from our teams, just trying to rally the troops and then people have taken extended [ leave ] and not only have people taken that a little bit of [ leave ] but it's more the other way around where it's our customers, our partners that we're talking to take an extended [ leave ] , decision-makers trying to get things across.

So what's happened is a lot of that stuff has trickled into quarter 2, and it's bolstered up the pipeline. A lot of the work still needs to get done. But just going back to the first part of the question, there is going to be a little bit more of that port consolidation happening in quarter 2. We expect that to be completed over a pretty -- I think most of the 1 gig compound has been pretty much done. There might be still a few more in there. But the 100 gig is still -- there will be a slight impact there. But again, it's not revenue impacting. So it's just more of a port consolidation.

I think -- it's encouraging for me though as the overall growth sales coming through on the ports and the pipeline that we've got in quarter 2 across all our services and our customer pipeline and actually new logos or new customers coming through. And then like I said, we've been working very hard. It's not easy to find the right person for a role for Megaport in that. So we've been diligent and taking our time making sure we're getting the right person, and we're very close to that one.

So I think all of this just -- it's more of a slight timing issue as well as seasonality that's kind of -- has probably a softer quarter, I suppose. Best way to put it in terms of natural sales growth versus the one-off activity around port consolidation.

[Sean Cassidy, executive]

Absolutely. And just to follow up slightly, I did mention that ports are an important KPIs to us absolutely. And it's difficult as we start to sell more bigger ports. And if you talk about kind of provision to customer or provision capacity on our network. That has continued to grow. But also, even if that was not the case, we talk about our customer numbers still went up in the quarter. Our revenue per customer went up to doubling, will not increase in customer numbers as well. So ports are not the only measure for growth.

[Siraj Ahmed, analyst]

Yes, I agree. But Vinny and Sean, both customer adds were also not great, right, 57 up from [ PCP ], but I think the second lowest for years, I think. But again, that is talking to the seasonality, I guess, right?

[Vincent English, executive]

It is. they're hand in hand, right? They're both equally linked. But like I said, having said, the key thing here for us is what its quarter 2 look like and where do we stand and where we see it going. So I think this is more just a big impact on seasonality and a lot of the pipeline that we thought would get delivered in September has trickled through into October. So there's a flurry of activity going on at the moment around that, including the acquisition of new customer logos, not just ports.

The interesting thing is that our VXCs and our MCRs are continuing to grow extensively as we start every quarter and the same thing for MVEs. We're seeing a big uptick now in MVEs and a very strong pipeline around that. So some of these things take a little bit longer to come through than month-to-month or quarter-to-quarter, sometimes they slip and they take 4 months instead of 3. And I think that's just an impact of seasonality.

[Siraj Ahmed, analyst]

I just have a quick question, Sean. Did you say CapEx will be slightly higher? Is that same [ AUD 10 million ] ? Or is it higher than [ AUD 10 million ]?

[Sean Cassidy, executive]

It might be closer to our [ AUD 38 million ] that we had last year.

[Siraj Ahmed, analyst]

[ AUD 38 million ]. Okay.

[Operator]

Next, we'll move to Wei Sim from Macquarie.

[ZheWei Sim, analyst]

Two questions from me. One is just on the cash flows. I noticed that in our 4C this time, the leased asset payments was not in the first quarter 1. So I'm just wondering to double check that these numbers are comparable to the 4Q? Or if there's any adjustments on that?

[Sean Cassidy, executive]

It's not an adjustment. So there was an inconsistency in how the rights-of-use assets were being treated in the 4C versus the accounting rules. And after discussions with ASX, it was agreed that the 4C should better reflect the accounting for those rights-of-use-based assets. And so we've reflected that in the current quarter. We haven't restated it.

[ZheWei Sim, analyst]

Okay. Got it. And then the other one is just Zenlayer sounds very exciting. I'd be keen to hear more about how the economics of the partnership work. And what does that expand out enabled DCs to?

[Vincent English, executive]

Well, it depends on each country, but it gives us access to like the Philippines, Vietnam, South Korea, countries like Thailand, countries that we're not in. So what -- well, how it will physically work is we're already mutually connected in 3 different countries that we're in, which is Japan, Hong Kong and Singapore. And so customers will hand off customers that are, say, outbound.

So in other words, if you're coming from the Philippines and you want to get to Sydney, they'll get handed off to Megaport to connect to Sydney and we'll take them from either 1 of those 3 countries to Sydney, and they will consume services in Sydney. As a business, it would be on Zenlayer's paper.

And then if it's an inbound customer, so somebody who's a Megaport customer and they're in anywhere in our Megaport network and they want to do business in the Philippines or in South Korea, we will hand our customer off, but we will handle the paper and dealing with the customer on our end.

So that's how it's kind of commercially sell, and it's all based on our -- both our mutual pricing that we give to customers, and then there's kind of a discount wholesale pricing mechanism between ourselves and Zenlayer.

[ZheWei Sim, analyst]

Okay. So it's more so that we kind of do a bit of an internal transfer in terms of the cost rather than having a revenue share model or anything like that?

[Vincent English, executive]

Correct. So we'll give them the cost what it costs to take the customer to Sydney or New York or whatever it is from 1 of those 3 countries, and they'll invoice that to their customer, and then we get the discount on the wholesale and it works both ways. It's just the easiest economic model.

[ZheWei Sim, analyst]

Okay. Perfect. That's all for me.

[Sean Cassidy, executive]

Regulatory as well. So I mean Zenlayer aren't necessarily regulated for business and in markets where we currently operate nor vice versa. So it makes life easier as long as a regulated entity invoices to the customer in the right...

[Vincent English, executive]

And if you look at the map, if you look to their website, you look at the map where they've got their coverage and if you look at the glaring holes that they have, it's pretty much all in North America and most of Europe, which we've got a large footprint in these countries that they have that we have not access to. So it kind of fills in a void for us with some to go extensively build straight away.

[Operator]

Our next question comes from Paul Mason from Evans & Partners.

[Paul Mason, analyst]

One probably for Vinny and one for Sean. Maybe Vinny first. Just curious on Digital Realty. They've announced like a whole bunch of stuff to do with this rebranded thing, ServiceFabric, but it sort of reads like they're rolling out Service Exchange, which you guys power across Europe now formally across all the interaction assets and then South Africa with Teraco. I was wondering if that's -- if you can just make sure I've got that right, if I've read that accurately.

And then secondly, sort of what the sort of the time lines are, like whether that has started benefiting your business yet or whether that's sort of kicking in later in the year?

[Vincent English, executive]

It's later in the year. It's more like the second half of the year. Nothing here moves slowly. Yes. No, look, we're in all of the interaction sites. We're actually -- we kind of did a sticky cluster kind of thing so that customers can connect from interaction to anywhere in the network through not using Serve Exchange, we're actually manually doing it. So we were able to enable that to connect all -- believe it or not, all the interaction sites were connected in the first place before the sales. So we filled in that gap.

The second thing then was just connect interaction to the rest of Digital Realty, which we were already connected to. So Service Exchange just means the white label underneath it allows its self-provisioning driven by Digital Realty themselves. So that's the natural next step, and that helps because then they're selling their own product, just using our platform.

[Paul Mason, analyst]

Great. And just for Sean, I was just wondering if you could help with the U.S. dollars versus Aussie dollar cash flows? Because the U.S. dollar operating cash flow and CapEx numbers actually look a lot stronger than the Aussie dollar ones in terms of how close you are to sort of a cash flow breakeven target. And there's a big difference in like the working capital line as well, in particular. So could you just pick that apart for us sort of what the differences?

[Sean Cassidy, executive]

Yes, it's certainly the timing of payments and non-AUD. Like I say, we're operationally hedged. But when you account for non-AUD payments versus when you actually make the payments, you see a lot of FX movements within the working capital when that's the case. Well, in actual fact, we're paying a lot of American customers with American dollars.

So when you do the consolidation it happens now the corollary of that is a lot of our cash balances are held in AUD. When you change, you have this FX impact, which is huge on the USD cash flow, which is relatively minimal on the AUD one. So it's effectively, you're going to feel the pain one way or others, either on the balance sheet or kind of balance sheet part of the cash flow or on the P&L part of the cash flow.

It's a little bit confusing. But the U.S. dollar cash flow, the reasons why we have been forced to look at or I've said in the past, the U.S. dollar is our dominant currency, both in terms of revenue and our cost, the U.S. dollar cash flow is closer to reality than the AUD one. And that's what's been driving this change.

[Operator]

Next up, we have Nick Harris next from Morgans.

[Nick Harris, analyst]

And also appreciate the great disclosure. It's really helpful. So thank you for helping us work through it. Just a couple of questions from me. Just the ANZ, the 100-gig price rise. Could you give us sort of a percentage and a timing? Like does it really kick through on the 1st of October. Do you want me to shoot the other 2 questions or one at a time?

[Sean Cassidy, executive]

No, no. It started on the 1st of July. So it's already in place. Everything is effective 1st of July.

[Nick Harris, analyst]

Got it. Okay. So it comes through in the second quarter because people have to basically switch off the 10 gig onto the 100 gig, so it takes some time to adjust. Is that...

[Vincent English, executive]

Yes, there's an element to that. So that's why I was saying there's an element of transition and the billing impact doesn't -- you don't really see a lot of it. A flurry of that happened mid-quarter. So just getting adjusted to it as well. So it's -- yes, go ahead, Sean.

[Sean Cassidy, executive]

Yes. Sorry, Nick, the -- a lot of the strategic port changes from 10 gig to 100 gig or want to be on our back end to allow customers to access bigger capacity so they don't -- we don't need to take 2 or 3 10 gig on reps on their behalf, it's not that much revenue impact, and it's going to save us cost, gives us greater flexibility on the back end. They end at 1 gig to 10 gig pricing. As you know, this is where we started out, and we have a very substantial inventory of the 1 gig. And where our customer has 2 or 3 1-gig ports in 1 region, you're going to see them consolidating that into a 10-gig port.

It's a short-term kind of hit to us in that regard because they're turning down a couple of $350 ports and turning off 1 $500 port, but it allows the actual capacity that the customer now has provisioned is very much more, and it makes it easier for them and their kind of networking needs are more cost effective and cost efficient for them. And as they push more and greater workloads to the cloud, they will attack different services and the MRR is going to come back very quickly.

[Vincent English, executive]

The VXCs are bigger, too. So you get to charge more for them.

[Nick Harris, analyst]

Excellent. The second question was just the MVEs. Congratulations. If my math is right, you had a record adds quarter. Could you just maybe make some comments on what's happening there? Is that starting to resonate? Or do people kick off new projects at the start of the year? Just wanted to dive into that a little bit.

[Vincent English, executive]

No. I think Nick, that's a follow through. Like I said, a natural MVE sales cycle is much longer than we talked before than a port or a VXC or a traditional service. So just because of logistics and just coordinating things and trying to get it set up and you need hardware and you have to get a license and then you turn on an MVE. So there's a couple of stages that the customer has to put pieces in place before you can start utilizing an MVE.

So a lot of these activities have been coming through since early in the year and they're starting to come through now. The good news as far as we're concerned is we do have a very strong pipeline. And we expect that now to start to increase month-on-month as we move forward, marginally, at first, because, again, like some of these are all at very -- they're all at various different stages of where they are in the conversation.

But yes. Look, I think it's just a tight -- a lot of these discussions with larger companies for 6 months old, right, and they are just starting to come along. And as they get there, they drop then. And also the -- our trick is to make sure we've got enough of them in the pipeline, so there's consistency -- and that just takes a bit of time to build up.

[Nick Harris, analyst]

That's great. And just my last question was just obviously the employee expenses line. There are a few changes made in Q1. I don't know if you're comfortable giving us a bit of a feel for just in the second quarter. Should we expect those expenses to drop sort of a reasonable amount? Or how should we think about that going along?

[Sean Cassidy, executive]

Yes. Nick, I would say our Q1 employee expenses are probably close to run rate with your expense going through Q2. We had our annual paying increases that will take effect from the 1st of October. So they worked in Q1. Against that, you will see the full quarter impact of any reductions that we had. But we are -- we're done with that. We've got our arms around it. I think we are completely in control, and we continue to grow the business. And there will be additional head count as we continue. It's just we won't be taking large individual step-ups in head count numbers.

[Operator]

[Operator Instructions]. Next up, we've got Bob Chen from JPMorgan.

[Bob Chen, analyst]

Just a couple of questions for me. Just on the free cash flow trajectory given you've got CapEx a little bit higher than expected this year. I mean are you still maintaining that target of getting to that run rate breakeven point by the end of FY '23?

[Vincent English, executive]

I don't think I've ever given out a target yet. And in most of my projections, it's a [indiscernible] with additional kind of -- when we talk about I've just mentioned CapEx should be slightly higher. It's [ AUD 2 million ]a quarter higher than previously guided. Most of that's happened in Q1.

[Bob Chen, analyst]

Yes. Okay. No worries. And then just in terms of the partner channel starting to ramp up, I mean, can you talk a little bit about what types of partners are starting to actually fire across the PartnerVantage? I mean, is there any distinction between the different partners that are transacting now versus the ones that aren't yet transacting?

[Vincent English, executive]

Well, look, it's the education cycle. It's that funnel that we presented at the full year results, right? So the first chart that I had talked on the top left and corner talked about signing -- signed partners, right? So that's when we've got legal documents in place, and that's so we can get them on the port and may get them educated. And we have to go through those various different stage gates with them.

The chart down below. So we've now, at the end of September, we just -- I think it was 102 partners signed. And we just had around 40 of those transacting. Each of them have a step-up in terms of their level of activity in the quarter.

So that 60 gap that you've got there. They're now going through those stage gates, right? And we expect there's going to be a chunk of them, they're going to fall through in the quarter. In quarter 2, that will be transacting and then we'll be adding more as well as the new partners that we're signing.

Remember, I did say we were targeting the top 3 in every country where a partner program was in. And it's -- in Europe, there's a lot more partners that are not just global partners. They're actually unique to the markets that they're in. So there's still a huge amount of heavy -- we're still working through it. I think we're just getting into a rhythm now that we found the best way of doing it and getting a little bit more efficient. And the trick is to make sure we do that right. So the partners that are transacting are actually have a pipeline and have deals, and we're actually able to close them. And that's what's contributing to the monthly recurring revenue.

So it's just getting into that rhythm and getting that going. I think that's been the biggest thing or our original challenge. And now I think we've just found a way of making that happen. And it also takes time, right, because you have to talk to them and bring them through it and say, why is this important? Why do I need to have it? So you have to do the sales pitch first to get them on board before they even sign a contract. And then when they sign the contract, you got to do the education. And they're going to want to have Megaport as a product so they can sell it.

So these are all the kind of, not just psychological reasons, but the kind of physical things you have to go through before you get them up and running and selling. So I hope that answers the question.

[Bob Chen, analyst]

Yes, no, perfect. And then just finally, just on that partner channel. I mean in terms of seasonality of your partners versus your core business, do you expect any differences in terms of that channel?

[Vincent English, executive]

No, I don't think it's as extreme no. I think the partners will be incentivized to continue to sell recurring products and build on Existing Customer base, right, because they're [indiscernible]. And I think they will be astute enough to make sure they get deals done before people take vacation and things like that and seasonality. So they're pretty hungry.

Once you get them hooked, they're pretty good. So I think that's part of the reason why another plus, I suppose, in that side of the house to take away that kind of don't say seasonality kind of impact that we may experience either in quarter 1 or towards the back end of quarter 2 so, yes.

[Sean Cassidy, executive]

Certainly, while the growth is quite strong at the minute. Well, that growth might be having any kind of seasonality, you'll see within it. I suspect there will be some, but I don't think we'll notice it for a while.

[Operator]

Next up, we've got a question from Roger Samuel from Jefferies.

[Roger Samuel, analyst]

I've got 2 questions. First one, just looking at the EBITDA margin in q4, you reported 5% And this quarter, it's down to 3%. And I appreciate that it could be some one-offs there, as you mentioned, about the bonus payments, but also you're talking about head count increases and some pay rises as well coming through the next few quarters. So I'm just wondering if you are so confident that you can grow your EBITDA margin for this financial year, yes. And how do we get there?

[Sean Cassidy, executive]

Absolutely, Roger. And we were helped out a little bit towards the end of last year with some kind of standard year-end auditing adjustments where we realized we haven't hit quite some of the targets, we end up even providing before we were able to release them and/or a provision or 2, and that might have given us an extra 1% from the EBITDA point or something.

We are going through a phase where we are -- we have given the channel time to grow. So we don't -- we're not expecting kind of the real revenue kicker from that channel to start coming through until the back end of this year.

And that will give us the operating leverage to really start lifting up EBITDA number. It is -- I am fantastically -- I don't want to say relieved. Relief is not quite the word. But while we're going through this kind of delicate period in our life where we are only marginally EBITDA positive, but thankfully, there's been no kind of shocks to the system that we've gone through this, but we have steady EBITDA positive when we grow from here.

[Roger Samuel, analyst]

Okay. And my next question is just on the MRR for Asia Pacific, which is like this quarter, I think you mentioned about the consolidation before, but I thought that there's no revenue impacting. So I'm just wondering why...

[Vincent English, executive]

The customer consolidation is revenue impacting. Our customer has a number of individual 1 gig ports, the VXC attached to them consolidated onto a single 10-gig port, compared to all those VXCs on the same one -- same 10-gig port, there is a little bit of MRR that we've lost there, and it's about AUD 150,000 that we have lost there.

So I'd like to say, we now have the capacity. When a customer has a 1-gig port, your ability to attach secondary and tertiary service to that 1-gig port is extremely limited. And that's the ability of sales services -- of [ sale ] services on a 10-gig port is so much easier and quicker and immediate, in fact. And we expect that the customer who is used to spending x amount of money on their network, we have just given a little bit of that back to them, and they can further optimize their network by fishing more workloads to the cloud, and we'll get it back then.

[Operator]

Next up, we've got a question from Tim Plumbe from UBS. Yes. Hi, guys, can you hear me?

[Tim Plumbe, analyst]

Just 2 questions from me, if possible. Maybe a bit of a follow-on from Siraj's original question, just in terms of those ports added, obviously, a seasonally softer period. Should we still be thinking of 533 that you did in the fourth quarter as kind of the normalized seasonal run rate? And then from which, we would have some consolidation impacts?

[Sean Cassidy, executive]

I think that sounds fair.

[Vincent English, executive]

I think that's fair. Yes.

[Tim Plumbe, analyst]

Got it. Cool. And the second one, just in terms of that slide where we're looking at MRR by channel, indirect has gone from 36% to 35%. Obviously, you're getting positive trends coming through from PartnerVantage. But at very early stage, that's only like 2% of the total indirect MRR, if I've done my calculations correctly.

Can you talk a little bit about what you're seeing within the rest of that business? And why was that going backwards? Has that got to do with some of the changes coming through in terms of the data center operators or doing their indirect sales strategy?

[Vincent English, executive]

I wouldn't go so far to say it's DCOs. It's already changed. And going backwards is a little hard, to tell you the truth. But it doesn't mean -- it hasn't grown the way I would have quite liked it in the quarter, but part of that is going to some individual success within the direct sales organization, where there's 1 or 2 significant companies have turned up a huge amount of services that MVE customer that we showed at the full year that has 11 MVEs took 3 additional MVEs in the quarter, which was a significant uptick in the MRR, and that's all direct. So things like this play into it a little bit. And moving it 0.5%, that kind of runs up to a 1% here and there, it has gone backwards. It's held it to...

[Tim Plumbe, analyst]

Got it. I appreciate it, and that's right. What do we need to see? I mean, the longer-term target is [ 70-30 ] ,right? So what are some of the main drivers that we need to see to start getting that acceleration more towards the [ 70 ]?

[Vincent English, executive]

And that's going to be the number. So the number of new logos, so that what we presented there is a number of new logos that are partners with us working their way through the accreditation process and PartnerVantage and when they get to transacting. And then you will look at the MRR being generated per partner.

And that's what's really going to start driving it. We have given internally in our own projections, we've given time and space for this to start building its momentum. We see it happening, albeit still the mathematics to small numbers. But you can see from the P&L where our marketing is coming up, and our travel is coming up, and this is how we're putting a few marketing dollars behind it to really start supporting that growth. I have said we're giving it space. I don't really expect it to get to gain real traction until the second half of this year.

[Operator]

Our next question comes from Lachlan Brown from Credit Suisse. Lachlan please go ahead and unmute yourself.

[Lachlan Brown, analyst]

Sorry about that. Can you hear me now?

[Vincent English, executive]

Yes.

[Sean Cassidy, executive]

Yes.

[Lachlan Brown, analyst]

Perfect. I'll fire my questions off pretty quickly. Just on the October price increases, are you able to talk to any potential yield benefit you're expecting from these? Or would you say these increases are more of a customer-retention strategy if customers were entitled to take up longer-term contracts?

[Sean Cassidy, executive]

Neither.

[Vincent English, executive]

Neither. Yes. Well, look, well, first of all, this started on the 1st of July, not on the 1st of October.

[Sean Cassidy, executive]

No, no, no. This is different. Vinny, this is the term pricing that we've moved to. Our products have moved -- our different products have moved to 12 months. If our default on the portal is 12 months, you shouldn't be selling your default product at a discount. So this is what we've moved to. I would imagine this will trigger a migration from month to month for a lot of people to contract in. But in the same way, mobile operators on our pre-existing tariffs after the tariff changes, we will be doing that as well. So I will not expect any revenue change.

This may, over time, impact our churn rates or port churn rates a little. But I haven't factored in anything for any uptick. And this is kind of a philosophical pricing restructure rather than anything to drive revenue.

[Lachlan Brown, analyst]

Perfect. That's very clear. And just on the AUSD 2.5 million of lease payments in the quarter. Is there any seasonality in that number? Or should we expect to sort of step up from these levels going forward?

[Sean Cassidy, executive]

No, that should be fairly consistent. One of the things that we have done is that we have -- as part of the kind of cost-out exercise when we have looked at our network cost, we have built a very coherent database or the contract database that allows us to monitor our -- every element in our network. So we can start to bundle these together. And when we're able to bundle them together, we can look for pricing and put it over a period of time that would -- that accounting rules would demand that we capitalize on.

So there has been a slight uptick while -- as we go through the process, but it should be relatively stable from hereon in. So when I say uptick, I meant uptick in the capitalization. What we pay against the leases should be very similar.

[Operator]

Our next question comes from Ben Martin from Goldman Sachs.

[Unknown Analyst]

I've just got 2 quick ones, if that's right. Sean, maybe just digging into that CapEx commentary. Maybe just worth understanding what kind of drove the difference in full year CapEx expectations? Are we looking at kind of CapEx pricing increases? Or is there any kind of accelerated investment?

And then the second one is just on the MegaportONE contracts you guys spoke to today. I'm interested if you're monetizing those at the moment? And what kind of annual run rate we should kind of expect for that product segment?

[Sean Cassidy, executive]

I'll take CapEx and then you take the MegaportONE.

[Vincent English, executive]

Yes.

[Sean Cassidy, executive]

Yes. So the CapEx, when I talk about -- when I talk about the full year and when I'm revising my CapEx -- my short-term or medium-term CapEx estimates. Cisco had come out, and they were talking about pressures in the silicon supply chain to be easing, and they were expecting to start to be able to recognize a lot of the kind of order book that they have on their balance sheet. And that kind of filtered into my thinking that I would be able to run down a lot of the inventory that I had on my balance sheet. I do not see any evidence of the silicon supply chain issues going down, and I continue to buy on an extended horizon.

[Vincent English, executive]

So on the MegaportONE then. So 2 deals, one in Canada and the other one based in Singapore with a -- I'm not sure if I'm allowed to say, but a large telco operator that's based in Europe. And then the other one is effectively, what would we call a cryptocurrency kind of mining and all that stocks that are using it for orchestration and cloud connectivity, et cetera. So that's our own internal purposes. They're both double-digit numbers, MRR, so 10 and higher for both of them, and they start billing this quarter.

[Sean Cassidy, executive]

Yes. There's 3 elements to this, Ben, in that those customers are very different. One is using it for a lot of cloud compute and there's kind of a subscription element to MegaportONE for that end of things. And when we pay for access to the platform for the other company, which is the European-owned global telco, and this is contracted out of the Singapore business unit, you will see them driving a lot more of our kind of standard products address. So you won't see the revenue necessarily coming through the MegaportONE. You'll see VXCs imports and stuff being turned up.

[Vincent English, executive]

Yes. there's a paragraph that we had on a global update, I think, at the end of the business where I talked about the MegaportONE and the 2 different -- differences between the 2 customers. One is used in orchestration, like I said, for a lot of heavy condensed work that they're doing themselves, and the other one is using it for our normal services, which is Network-as a Service connectivity, multicloud, multiregion. And as Sean said, those types of services, they're just using the white label version of -- which is a MegaportONE for themselves. And it looks and feels like it's their product, and they're studying it, and it's going to come through to our network as ports and services.

[Operator]

So that brings our Q&A session to an end. Vinny, I'll hand back to you to close off the call.

[Vincent English, executive]

Okay. Thank you very much. Listen, I know probably people have a lot more questions. Let me settle for the next 24 hours. But yes, thanks very much for attending the call. We'll try and keep the meetings. I would probably get on and try to get quarter 2 done. But I appreciate all your support, hence, the reason for this call they're trying to get ahead of some of the questions for you early after reporting the numbers. But if there's any chance you want to reach out then, please do.

I know Sean is down in Sydney for the next couple of days there. So he's probably more available than I am local time. But if you need me hit up in an e-mail or whatever at the same time, I'm happy to jump on a call with whoever. That's it. Thank you very much for attending and talk to you soon.

[Sean Cassidy, executive]

Thanks all.