Megaport Ltd

ASX:MP1

Earnings Call Analysis

Company Rebuilding Momentum with Unchanged Guidance

Despite a period of rebuilding momentum expected to take time, the company has maintained its FY '20 EBITDA revenue guidance and aims to stay cash flow positive, with no concerns about its performance. Operating expenses are set to increase, averaging around $21 million for the upcoming quarters against $17.4 million spent recently, even after considering new hires. The recent $15 million EBITDA aligns with the higher end of previous guidance, which doesn't factor in the yet-to-be-added sales headcount and upcoming marketing expenditures.

Revenue Growth and Operational Efficiency

For potential investors, the first quarter of FY '24 painted a picture of strong financial health for the company. The annual recurring revenue (ARR) climbed to $189.8 million, a significant 6% increase from the previous quarter and a substantial 36% surge year-on-year. This increase is a robust indicator of the company's growing market share and ability to retain customers. The company's EBITDA followed suit with a $15 million result, marking a 27% quarter-on-quarter jump. Together with an impressive 143% year-on-year net cash flow growth to $5.6 million, these figures underscore successful business operations and fiscal management.

Strategic Investments and Cash Position

The investment in the go-to-market engine is yielding fruit, indicating the company's commitment to expansion and increased market penetration. Furthermore, the launch of Megaport reach and Megaport 1 introduces new potential for growth and broadens the company's horizons to a swath of new data centers. Meanwhile, financial stability is reinforced by the company's net cash position of $38.9 million and a healthy cash reserve of $55.2 million.

Analyzing Key Performance Metrics

In terms of business metrics, the company tracks an array of key performance indicators including total services, customer ports, and others, to monitor the health and expansion of their operations. A notable shift in the reported quarter was seen in revenue-generating metrics such as the Megaport Virtual Edge (MVE) platform, where a more focused measure moved from negative one to a positive eight, highlighting a more accurate reflection of revenue impact.

Revenue and EBITDA Improvements

The financial narrative further blossoms with a 5% revenue growth over the prior quarter, aided in part by favorable currency exchange rates, a point of interest for those examining international revenue streams. The gross margin and EBITDA figures have shown continuous improvement, a testament to the team's efforts to optimize network costs and the company's persistent operational enhancements.

Fiscal Strategy and Future Adjustments

The awareness of net cash flow being positive for the full financial year suggests cautious optimism about the company’s future financial sustainability. The discernible confidence in the trajectory of investments geared towards market expansion and efforts in refining cost efficiencies signal a clear strategic direction. Anticipated changes to the historical metrics will aim at providing clearer insights and stronger signals to market watchers, promising even greater transparency and alignment with actual revenue-generating activities.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. And today, we have Michael Reed and Leticia Dorman, CEO and CFO, respectively, to take us through a short investor presentation that will be followed by Q&A where you'll be able to ask your own questions. And so just raise your hand and I'll get to you at the end. Michael, over to you.

[Michael Reid, executive]

Fantastic. Thank you, Steve. Good morning all, and good evening for those joining us in the United States and around the world. All right, let's get straight into it. This is the investor presentation, first quarter FY '24. All right. First quarter, let's talk about the highlights. Annual recurring revenue at $189.8 million, that's up $11.2 million quarter-on-quarter or a 6% increase. EBITDA was $15 million, up $3.2 million quarter-on-quarter, a 27% increase. positive net cash flow and focus, we called out net cash flow positive for the full financial year, our first quarter at $5.6 million, up 3.3% quarter-on-quarter, 143% year-on-year growth. Investment in the go-to-market engine is progressing extremely well. We're going to talk about that later on in the presentation. We launched Megaport reach in the quarter, which gives us an ability to access a whole range of new data centers. And we also announced public availability of Megaport 1, and we'll talk about that later on in the session as well. Let's look at EBITDA as a comparison to how it's performed over the prior quarters. So $15 million of EBITDA, you can see how that's been trending up over the period of time. I just want to acknowledge the massive turnaround that's occurred and thank all of the Megaport staff for their continued efforts to drive our EBITDA to this record growth of $15 million. And you can see how that's trended over time. Net cash flow. And as we called out last quarter, the very first quarter we had for net cash flow positive for Q4. And as we said, again, we called FY '24 positive net cash flow at $5.6 million for the very first quarter, a great start as expected. Net cash flow position or net cash position, I should say, has us at $38.9 million, and our cash at bank has us at $55.2 million. Annual recurring revenue, and you can see that continues to grow up and to the right. Quarter-on-quarter growth saw us at 6% quarter-on-quarter. And from a year-on-year perspective, we saw a 36% year-on-year growth in our annual recurring revenue, and you can see how that's trended over time. Key performance indicators. And so the metrics that we've been running for a long period of time, total services customers, customer ports, which we added last quarter, total ports, VXC et cetera, MCR and BE. Now I'm just going to get a little on a later point here. If you have a quick look, this is -- the first column represents the metrics that we've been sharing for as long as Megaport has been around and the quarter-on-quarter change. As you can see, as expected, we've been sharing that the metrics will be, I would say, fairly average until we start to see the performance of the sales investments actually come to fruition. We'll talk about the hiring that we've gone through. Most of those folks will land in seat in this quarter, so we'll start to see that turnaround moving forward. But this is obviously representative of Q1. What I want to highlight is this is the net or quarter-on-quarter change of the metrics in the quarter. And as you can see, if you roll your eye down, you can see that, as an example, Megaport Virtual Edge, our MVE platform is indicating a negative one. Now whilst we said the metrics would be slow, we also want to actually give perspective inside some of the metrics of this -- of the small account products that we have, MVE and MCR as an example, versus our total services of 31,000, because it's a small accounting side MVE, the net movement in the quarter can show a signal that could be slightly off. Now I want to just spend a moment in time and articulate this for a second. What we've done is we've shared our entire metrics as we have backed out of them, et cetera, inside the KPI file, and that is what's representative in the quarter-on-quarter change here. What I've included is a preliminary net quarter-on-quarter revenue-generating ports, MCRs, MVEs, et cetera. Why would we do that? Inside Megaport, our entire platform is live. As soon as a customer spins up a proof of concept, it actually represents a metric inside the system because it's live inside our systems, our proof of concept as an example, for an MVE are actually as they're spun up and spun down, et cetera, just for proof-of-concept, can actually move the needle in terms of net quarter-on-quarter. And so this is really a focus on that net movement. So if we look at MVE specifically, as an example, a company like Cisco could have run and they often run their proof of concepts without us for their customers. They could spin up 20 different MVEs for a customer to prove out a proof of concept as they're competing against a competitor. And then the tender would go in, they'd respond and then they could spin down that proof of concept. Now in that time, none of that was revenue generating. So whilst it can show a metric moving up and down for the quarter, it's actually not the metric that we should be worried about from a revenue-generating perspective. Now in the half, our plan is to go and actually change our historical metrics to give more -- I think, remove noise and give more signals, certainly from a quarter-on-quarter perspective. And what I've given you insight here is the reason why you can see that when we remove and just focus on revenue-generating MVEs as an example, it moves from negative 1 to positive 8. MCR moved from 18 to 39. We can see our Period customers move from 7 to 31. The same thing with customers. When we spin up those proof of concepts, they spin them up under a customer name and they call the MVEs, MCRs, et cetera, under that. And so that's what can create this movement. And what I don't want the market to do is look at a signal that isn't actually representative of the business in a particular quarter and then try and flow that forward. Whilst the broader numbers are pretty much the same, you won't get a signal inside that. Breaking down quarter-on-quarter is important. And what you'll see is in the half, we're going to give you full transparency in backdate those metrics. So it cleans up backwards moving forward. Obviously, in the short term, we don't want to be changing your metrics. We've given you all that information, giving you an insight as to why we'll be doing that. And we'll work with you as our investors to ensure we get the appropriate metrics for you in that half. All right. Now, we are very excited to announce actually throughout the quarter that we have a new queen of numbers, our new CFO. Now the team here in the office here, we're very excited when Tish took over that role, and they created her crown, actual real crown. And I said on your first earnings call in the official role, you must wear this crown, and that was the feedback from the team. Sadly, the crown went missing mysteriously overnight. But the great news is, I have my ways, and I found the crown that was created by the team for Tish.. And so of course, on our first earnings call, she must wear that crown as we hand over to Tish, our new CFO.

[Leticia Dorman, executive]

Well, thank you. I can't believe it went missing. So Michael has referred to ERR, and that is the exit run rate for the quarter for revenue growth. However, the revenue growth for the quarter was up 5% compared to Q4, which is indicative of not only the organic growth, there is the FX tailwind for those who watch the USD to AUD rate as closely as I do. With regards to the gross margin and the EBITDA, that does still continue to show that improvement in not only the revenue growth, which is able to drop to that line, but also the continued efforts across the team from last financial year flowing through into Q1 around the network costs. In addition, another headline callout is the net cash flow, which, again, is reflective of that growth from the revenue as well as the continued cost control efforts in not just the direct network costs but across all categories. With regards to the EBITDA, some call-outs there is, of course, the gross margin. One item to draw your attention to is when you're comparing the employee expenses. Now in -- in the last quarter of FY '23, we did reclassify the full year-to-date staff cost for accounting purposes outside of that staff cost line. So if you compare it to that largely comparable, not only do employee expenses reflect the decreased headcount as post the redundancy -- but it also, as you can see, as Michael has discussed earlier, and we'll continue to talk through a little bit later is that go-to-market engine firing up and the rehiring of the sales organization. Overall, the quarterly results really reflect that consistent steady growth from the last quarter as we continue to move into the first quarter for the FY '24. The cash flow, as a result, as you will see in the appendix 4C, the operating activities is an inflow of $10.7 million for the quarter, which is an increase of 67% compared to the previous quarter. Now as detailed in the appendix 4C itself, that will be largely due to higher build revenue for the quarter. However, there are also some one-offs that we have paid within that largely around working through and commercial closing out the commercial arrangement for the renewal for a key rev share partner. And there's also a funding of a new upfront payment for a new network provider. Investing activities has increased slightly, which is a reflection of inventory purchase also under the vendor financing activity under the vendor financing facility. And then the financing activities, therefore, reflects that increase in the borrowings. There were also some employee share options exercised during the quarter. Overall, cash flow -- the cash balance itself has increased from $48.5 million to $55.2 million quarter-on-quarter, which is 14%. When you take into account that vendor financing facility, your overall closing net cash has increased to 38.9%, which is an impressive result for the quarter and continued and in line with expectations. And on that note, I will hand back to Mike.

[Michael Reid, executive]

Thank you, Tish. Skip back into it. She's hard to walk even with the little crown. The Megaport portal demo. Now they tell me never to do a demo on these things, but I think it's important, why? Throughout the quarter, well, last quarter, we launched an update to the Megaport portal front, and I'm going to show you that in a second. And very recently, not in Q1, but just 2 weeks ago, we launched Global WAN as a Service. And I wanted to give you some perspective on how that looks. So let me just cross now live to our portal. So on the last earnings call, actually the full year, I gave a quick demonstration into how the portal worked. And we lived inside this services tab here. So if you look at this, what we looked at was all the different services. When I first joined Megaport, my view was, these are all the different services, and they're great, but it's very hard to visualize. What I'd love to see is a dashboard like this. that gives us a way to actually visualize the platform globally for you as a customer. Now the most important thing to point out is that there is a rocket here and on the rocket is a witch. And I had nothing to do with it, but I love everything about it. And so that's the first piece I'd like to highlight. Now if you have a quick look here, we're in Australia, we can start to see -- we're looking at a customer a lot -- in effect, this is a demo quarter for us, but this is an example of what a live customer would see about their services. All of these long connections represent Global WAN and ability to actually have all these different connections. And what I want to do is I'm going to do something similar to last time, I'm going to zoom into the United States here. What you're looking at is every one of these black dots represents a data center that Megaport has built infrastructure in that you can in 60 seconds spin up that connectivity. And you can see that anything with the blue represents a data center that you, as a customer, have a port activated and a connection in them. And it's really easy to use. That's one of the pieces. So if I just zoom in here, and we pick some random locations. I'm just going to zoom right in here. Here is a number of different data centers. You can see in Portland. There's Hillsboro, Flex Central, NTT, we've got Digital Realty, Edge Connects. And you can actually see by hovering over than what we offer. So you can see 1 gig ports, 10 gig ports, 100-gig ports. And here, we can also deliver Megaport cloud routers. And so with one click, I'm going to go and deploy a port. I want to quickly do that. And you saw this in the last ammo. I'm going to -- we'll go pick a 100-gig port give it a name, go next at the port. And what you'll see is that data center is now alive from a port perspective. So you can see these are black and this one is now blue. That port is available. I can click on that location. That's my port. It's as simple as that. I'm going to add another connection. So what I'm going to do is show you how to connect to the cloud. There's the cloud. We've done this in the previous one. I'm going to connect you to Amazon Web Services. And we'll go to pick a location will go down to the United States. And let's pick West Coast let's pick a random location, we'll go West Coast, North California. What you're seeing here are blue and red diversity zones. You have an ability to pick the path to get to those particular cloud providers, and you can choose different parts and different infrastructure being red or blue. So if a red -- if you'll read all the way through and there was a failure on any of that infrastructure or device and you have a blue connection all the way through and there was a or dig through a cable or something like that. If you have those 2 -- you have 2 independent redundant parts. We're just going to deploy a red one for the sake of their session. I'll give it a name, I'll pick a limit and go up to whatever you want to do, basically. Connect that through, pick an account ID, quick add. Now what you're going to see is, here's our port, there it is. And now you see this line. So there's this beautiful line that's going and connecting all the way down to the AWS data center across here. So now you can see that connection run through. So that's the quiet connectivity. We did that literally in a few seconds. And now what I'm going to go and do is I'm going to connect to Brisbane because I think that we should go and show where we're currently sitting. So I'm picking Australia, I'm going to scroll down, and we're going to pick his location next DC in Brisbane. We'll pick a red zone, red diversity. I'll click through here, give it a name, pick a rate limit, whatever it may be. You can go wherever you want on that, pick next AVX connectivity. Now what -- if you zoom out on this, what you can see is the connection from here all the way across to Brisbane. So you can actually see that connection is now spun up and connected into the Brisbane office. That there, imagine being able to connect from San Francisco to Sydney, from Sydney to Tokyo, Tokyo to London, London to New York, Chicago and spin up a Global WAN in less than 60 seconds. That's folks what we've launched, and this is visually how this comes through on the map. All right. Let's move back into the presentation. Hopefully, that starts to showcase what Global WAN brings. Now we constantly bring on new logos into Megaport. And you'll be surprised the logos we get really at the top end of town. What I'll call out here is this is a subsection of the logos, a very small subsection of the logos that we've brought into the business. We have to get approvals from our customers before we share them. And so that obviously takes a huge amount of time and most customers have a legal process, where they're not comfortable to share publicly. In this instance, these are just a subsection of what we've grabbed. And as you can see, some really amazing customers with huge locations globally all around the world. We continue to bring on those new logos and really excited by that progression. So as you've heard me talk, we've shared this a number of times, been very open and transparent. I think it was the 27th of July. And the reason I remember that is because it was my wife's 40th birthday, and she reminded me that I was presenting to the market on that day. So on that day, we announced we're opening 20 net new heads into the sales machine for Megaport and we went on a global hiring spree to go and bring those folks in. So it's important that we continue to report where we're at from that. So the -- as we've said, the global market, the -- let me just put my laser point on, the go-to-market overhaul absolutely remains our #1 priority. At this point in time, you'll see us continue to execute against that. The roles that we opened up, I'm incredibly pleased to share that we have 90% of those roles hired and almost all of them in the seat. 2 offers have been accepted this week for the last -- there's another couple of roles, but basically, that gets us to 90% in seat and hired, and we have 2 more roles outstanding, which is a pretty impressive achievement given that we've opened those in August, September, October. So -- and by the way, world-class caliber. We did not bypass the process to hire folks that weren't right for Megaport. We spent a huge amount of time finding the right folks that will ramp the fastest to experience in our space to actually understand the market that we're going after and have plenty of experience to go in to deliver upon what we need. I'm incredibly happy and excited about what that team will deliver. The sales leadership, we actually hired a number of different folks into roles, incredibly experienced folks across the business. We had Chief Strategy Officer, Adam Mitchell come into the business, who's been working with me for a long period of time, rockstar from a SaaS and as a service business perspective, from a go-to-market. Very recent announcement, EVP of go-to-market transformation [indiscernible] joining the team, rockstar, both based in the U.S. We've also hired Fred, our Head of North American sales leader. He is in seat and incredibly experienced and very happy about him coming into the business. We've got 3 new customer success hires in seat in North America. Their function is to protect and expand the existing customer base well and truly beyond product-led growth. So if you think we've talked a lot about product lead growth over the period, Megaport is this incredible platform. It's so simple what I just demonstrated to you from a technology perspective, once you've spun up that connectivity, if you need to add further more and more connectivity, different cloud providers, et cetera, you can spin that up in 60 seconds. And what we've talked about in the past is that if you have bought one particular product line from us, you quite often grow and expand that. What I found is that when we've gone and looked and spoken to our customers is our customers really only think of us for whatever it was that they purchase is for. So if they just connected to a cloud provider from one data center, basically, that's where they stayed. What we want to offer them is an ability to go, hey, by the way, you can run Global WAN and all your cross connections, all your connections across the United States, across to Europe, across to Australia in that region, you can deliver in 60 seconds. Your cloud routing capability, which is this ability to connect into cloud. So we've needed the customer success machine to go and service those customers. We've got 1,600 customers in North America. So with those 5 folks in seat, we're going to have a much better experience for that team. Solutions architects. These are our -- the brains behind it all. When you look at architecting like a very complex solution, you can actually use, I'd say, the Megaport LEGO blocks to build incredibly sophisticated networking models, again, spun up instantly, but you can actually build them in incredibly redundant ways and use them in so many different use cases. The solution architects are key for that. Our channel team has been refocused to drive engagement around the partners that can deliver the outcomes from Megaport and that we can get incredibly close to data center operators agents in the United States, managed service providers are incredibly powerful for us. And so continuing to service those AWS, Azure, GCP, Oracle, our cloud providers, partnerships and also MB. So if you look at Cisco, Palo , et cetera. And so tightly focused on the folks that can provide us the best support and we can provide them the best access to solve their customer problems. That has been key, and that's been rolled out and underway, really, really impactful results already. So strong -- let's look at the outlook. We're in an incredibly strong financial position. Tish, thrilled to have in the seat as CFO, is incredibly diligent and focused on this business from a cost perspective and also where we're investing to ensure that we keep those numbers in line and the business remains in line. We are delivering sustained improvements in EBITDA. We called out net cash flow positive for FY '24, and we're obviously delivering upon that based upon what we've planned in the first quarter, and we'll continue to do so. We launched Megaport Reach. I talked about that before, but this is an ability for us to go into new data centers, new locations, new countries, et cetera. Megaport 1 beta went live that's free for all of our customers and noncustomers to actually go and spin up cubinettis clusters and deploy them across different cloud providers. And particularly when you think about this coming wave of AI and actually hunting down GPUs to deploy compute across that. Now Global WAN, while it wasn't in the quarter, as I said, 2 weeks ago announcing Global WAN, this is a big thing for us. It offers us an ability to go and deliver high speed, massive connections for our customers incredibly quickly. We also just shared the portal dashboard and you can see that visibility from that demonstration. I'm going to announce -- doing something a little bit different here. I'm announcing the imminent launch of Megaport Enterprise Internet product. We're actually launching that in the next few weeks. Why am I explaining that here? I think it's appropriate to share on this call. We take a lot of feedback from our customers. When I first stepped into the seat and sent out the CEO survey to find out how -- what can we do better? What would you love to see inside the product set. Actually, a huge amount of that input leads to guidance for us. And this week, we were really proud to share that we had the customer advisory board in North America. We've also in Asia Pacific. Getting that guidance from our customers around what they want to see in the product is so important and Internet was one of the first pieces that came up. So if you look at the Megaport Enterprise Internet product coming live, what does that mean? It means that inside your Megaport platform, if you need to get connectivity to Internet and it's basically, if you think about it, Megaports, you're probably thinking Megaport is the Internet now. Megaport is a private connection across the globe and then private huge connections into cloud. But inside your data centers, you're still going to have to go to another provider to get Internet access for your enterprise, while in 60 seconds, you can spin up Internet in North America, Australia and the U.K. first. The next thing to call out is the Internet Exchange rollout. This is big for us. Across the United States, we launched Charlotte a few weeks ago, and we're actually going to add 8 additional Internet Exchange locations across the United States in the next 2 quarters. Projects in Curion, I'm going to share this. This has been sort of a stealth mode project that we've been working on here at Megaport, and we're really pleased to unveil that here. What is this project? In the background, the team have been working on building out huge 400-gig backbone upgrades across the globe. And if you look at all these different backbones, what happens is when we get the ability to have 400-gig connectivity with all the redundancy and diverse paths that we need, you can then run 100 gig ports more and more 100 gig courts for our customers. And so what we've been doing is rolling out 100 gig ports and were over -- the majority of our customers today can access an upgrade from 10 gig to 100 gig ports right now connected into that 400 gig backbone and what that leads to is a pretty big announcement in terms of the fact that we can go up to 100 gig VXE connectivity across those backbones where it's available, and we'll constantly push the barriers there for what we need to do. Why would we be doing this? Well, firstly, customer demand. We're always going to follow where our customers give us guidance what they're looking to do. But also, if you think about the explosion in AI, one piece that Megaport will tremendously benefit from this is if you are in say, Oracle Cloud and you've got all of your data sitting in an Oracle cloud database as an example, and you're looking to get all that data and train a model on your data so that you can interrogate your model, it's likely that you need to move that data out of Oracle Cloud and place that inside a GPU farm or inside AWS, GCP, depending on where you've built out those GPUs. You want to train that model process it. and install that in an inference model and bring that back out. But we're talking about huge amounts of data that need to then be dynamically moved around and would depend on where you're going to train that model. So this is part of us delivering upon this AI explosion, but it doesn't rely upon the company's taking on AI. We've already got so many companies requesting for 100-gig connectivity where it makes sense. So this is exciting. This is a big deal for us. We're continuing the data center expansion. We're in a healthy financial position. It's time for us to continue to expand into the data centers that make sense and do it in a fiscally responsible way, which means you will see us open up new countries and markets over -- as we close out the FY '24. As we confirmed earlier, the FY '24 guidance has not changed. The rebuild and recovery of the momentum is expected to take time. I wanted to put that note in there. First is that FY '20 guidance is absolutely unchanged for what we've called for EBITDA revenue for the year and remain cash flow positive. No concerns around that performance. The rebuild and recovery of the momentum expected to take time, I just want to set the expectation that whilst we've gone added all those sales folks, they are landing inside the business now. We need to ramp them up. And then what you will see is metrics towards the end of Q4 start to turn. But the important why I'm saying that it takes time is because you won't see that in revenue until FY '24. So you'll see metrics towards the end of Q4 and then what you'll see is revenue impact in FY '25. Why? If you think about it, if we sold a whole -- let's say we sold $10 million of ARR in the last month of the quarter, you would only have 1 month of that revenue, and that's why you start to see that flow for the next year, just to give you an extreme example of that, so I can sort of make my point. All right. We did it. We got there. Over to questions. Steve, I think I'll pass over to you, and I'll get Tish to join me in the room here.

[Operator]

Okay. Thank you, Michael. We have a few questions coming through the Q&A function. We might start there. Just as final I guess for you. Is it fair to assume that the first quarter in FY '24, so the September quarter just gone, will represent the trough in OpEx base given the new hires coming into the business?

[Leticia Dorman, executive]

A trough as in? Could you clarify?

[Operator]

The low point for -- if you look at the OpEx for these 4 quarters, is it going to build from Q1?

[Leticia Dorman, executive]

Yes. So we've -- a lot of the style ties have really only joined us either towards the latter months of the quarter. And so whilst you see the revenue uptick, we haven't kind of overlaid the full expectation of the sales head count. So that's why we continue to guide towards our previous guidance for the FY '24 EBITDA range.

[Operator]

Okay. And any update on CapEx guidance for FY '24. You recall it was $28 million to $30 million for the period. And I suspect this has been triggered by the new 400 gig backbone and ports and other things.

[Leticia Dorman, executive]

No change on this part. We did note that, that excluded any strategic initiatives. We have been planning this. So that's within the $28 to $30 million range.

[Operator]

Excellent. Going to the analysts that have asked questions in the raise hand function. Roger Samuel, if you could go ahead with your questions, please. Roger, from Jefferies.

[Roger Samuel, analyst]

Yes. Maybe just on that, I just came back from a diluent the conference and I've seen people talking about the 800 gig backbone and also the 1,600 gig backbone as well. Do you think that is a risk that you may need to upgrade further as the 400 gig?

[Michael Reid, executive]

Not in the short term, I'm looking over to Cam, who's our Chief Engineering Officer here. He was the #2 employee at Megaport and built this piece. So what you'll see, I think in those obvious you'll always have extreme examples. Megaport is not built to deliver on one-off extremes. We're here to deliver for the majority. And so if you look at that, even pushing into 100-gig connectivity, it won't be the majority of our customers. It will only be a very small subset at the top end of that range that will require 100 gig. If you're pushing well and truly beyond that, they'll be for specific particular companies that are doing something unique, I would say. So at this point, we don't see that demand and have not actually had any request for it. But I agree what you're seeing from the data centers globally, there is a massive explosion. Data centers are adding -- they -- I think pretty sure that they can't build fast enough to basically deliver what is the AI requirements. What you'll see is a lot of customers have been working out how that plays out. But if -- what I will say is, for us, it's not hard for us to resolve if we need -- if we have the demand from a customer for particular routes, we can upgrade those routes. And so it's not like we have to go and do an entire network upgrade globally to try and deliver that connectivity. And if you think about it, you end up then with an anchor tenant to fund that particular route anyway. So I don't see that personally as a concern even if we did have that demand. If we did have that demand, we'd respond to it, I think that's unlikely for us from a -- just the sheer quantum of customers that would require that level of connectivity. Hopefully, that's helpful.

[Roger Samuel, analyst]

Yes. Okay. And maybe just a follow-up question on your new product, which is the net product. What's the trial market? Is it going to be available in every single regions? And what's the margin profile? Because if you look at the telcos, reselling NBN, the margin is pretty slim.

[Michael Reid, executive]

Yes. We -- so I'll be clear, we're certainly not trying to sell anything like what NBN is. It is purely for enterprise customers. It's for connectivity from the big data centers. So unlike you and I sort of running NBN from home, we have no requirement to connect -- we're not looking to go to last mile. So the profit margin on Internet is not as high as your traditional products. However, in our case, we do it in a way where it does make a lot of sense from a gross profit perspective. That's why -- how we're launching the product. So I feel confident there. The addressable market is basically any of our customers it depends on how you've architected your network. But if you look at it, most customers, if you bring in all your connectivity back into the data centers, you have to have a big connection into the Internet somewhere. And so I would say the majority of our customers are currently purchasing Internet from their data centers today. The question is, I mean, that's like I said, the feedback from our customers was actually to deliver this service. The question is how do they go and deploy that in different regions. So we'll see how it plays out, and that's why I say this because of the addressable market pieces, we'll have to see how that plays out for each of the customers. And as you see, also, you've got this play for SD-WAN. So you'll have different ways to deliver the Internet. We, by the way, have always had an ability to deliver Internet. We just didn't make it a product. And what I mean by that is if you look at our Virtual Edge, which is our ability to have, say, Cisco's SD-WAN infrastructure spun up on our compute platforms, SD-WAN is delivered across the Internet and so you've actually had to have an Internet connectivity, which is why it's easy for us to actually expand this beyond what we just had for MBE, but actually into the data centers with really large connectivity with competitive rates, et cetera. So yes, it's an exciting announcement actually. It's -- I don't think it's going to -- it's not going to transform the revenue of Megaport compared to the existing revenue will the cloud connectivity, but it's certainly going to add another arrow to the quiver and most importantly, it's solving customer challenges. This is like keeping everything so simple, one click to go and access that space instead of having to go and get a contract with a different carrier as an example.

[Operator]

Barren, Eric, would you actually go ahead with your questions.

[Eric Choi, analyst]

I wonder if I can do 2. Maybe first one for Michael. Can I just confirm you've reset the sales initiatives even for existing staff and whether those KPIs are based on the rev-gen subs number now rather than those sort of nonrevenue-generating subs. And I wonder if this could be the difference between the performance of those 2 subscriber numbers?

[Michael Reid, executive]

No, so yes. The answer is the -- well, we've -- so firstly, we've never countered those proof of concepts or ports that are not -- if you look at the MVAs as an example, that spun up as a proof of concept. The team have paid on monthly recurring revenue. And so if you think of it a proof of concept, there's not delivery monthly recurring revenue. So there is no payment, no commission function towards a sales representative for that. What we have done is we've focused the sellers around -- if you look at the compensation models, I'll just sort of walk through it. Roughly, you typically have like a 50%-50% at-risk portfolio. So if I said for the sake of this, it's not the right number, but let's say a salesperson in $100,000 as an example, 50% of that is base salary. So that's $50,000 as base. The other $50,000, which is at risk is purely commission related. That commission is based on monthly recurring revenue only of -- and also if something is spun up, as an example, and spun down and moved in a very quick point, that does not get included inside that monthly recurring revenue. So it's really longer term monthly recurring revenue. And in fact, we're pushing our team to go towards contracted revenue, more contracted revenue over time. So there's 2 elements to that. We then we split that down to the existing customer base is roughly 50%, which is the expansion inside that. Imagine going back to your existing customers and talking about Global WAN as a service and what we can actually go and change inside that existing customer base, Megaport cloud base, et cetera. You do that in partnership with the customer success manager. The other 50% of that falls into net new logos and it's on access products. So for us, it's ports, MCRs, MVEs is basically the monthly recurring revenue that you're targeted against. When you sign those up for the quarter, that gets included. So yes, there's never been -- there's no payment of those, what I'll call, the nonrevenue-generating metrics at all. It's -- the reason I expose them in terms of -- is more around the MVE component because of the size of the sample and the sheer quantum that our partners are constantly speeding up and spinning down as they test them out, it was giving them, I would say, an inappropriate signal either way for better or for worse. And so what I just wanted is very clear viewpoint on that. I certainly measure the business based on revenue generating. I'm not going to take a signal from a whole heap of proof of concepts that are spun up other than the fact that there is a potential pipeline for the future. Does that cover you?

[Eric Choi, analyst]

Very clear. It sounds like the right way to do it. Tish, since you're the queen of numbers, I wonder if you can bear with me on the convoluted math question. Steve mentioned you sort of affirmed that the OpEx needs to step up from this quarter. But I guess if you do some quick math on your full year guidance, I think you're guiding to about $80 million of OpEx for the full year, which means you'd need to average about $21 million of OpEx for the remaining three quarters, and you've just done like a $17.4 million but just thinking about it, if you're going to -- even if you add an extra 20 head count from here, it doesn't really get you that step up from 17.4% to 21. So I'm just going what else needs to step up in that cost base? Or is there a bit of conservatism in the cost EBIDTA?

[Leticia Dorman, executive]

I guess, don't forget a quarter on any business, particularly will change in terms of your OpEx. So OpEx does vary. It's not just staff costs. We haven't -- the business has undergone significant change throughout FY '23 around cost reduction with that comes a cultural shift. And so a lot of that has, I guess, flowed into Q1, where there's you've got less staff, they're spending less, we're rebuilding the whole sales engine, the go-to-market, the marketing machine. There hasn't been a lot of spend this quarter. And there hasn't been a sort of -- where I've had to had et out Q1 with significant OpEx or anything like that. We are rethinking and looking at everything that we do. We're still predicting to spend money throughout the rest of the financial year. It's just the timing of it is probably going to be key. So that's there's no chance at this point.

[Eric Choi, analyst]

Before you go, I promise you would have a little [indiscernible] for you. You don't have to answer this one because I don't expect you to get it because it's a new one, but did you hear about the first artificial intelligence to take a photo of itself. Well, it became selfie aware.

[Operator]

Nick Harris from Morgans.

[Nick Harris, analyst]

Tish a bit disappointed you're not wearing that crown. And also, thanks, Michael, for just explaining that move to revenue-generating KPIs, as Eric said, that makes a lot of sense. So I guess I just really had 2 questions. One was for Tish. Obviously, you guys are adding a lot more sales staff in the second quarter. Just thinking about the costs, are there going to be any sort of big one-offs that we need to think about like bonuses and recruitment, things like that? Or are all the costs really just layering in the extra sales staff?

[Leticia Dorman, executive]

The staff cost line is layering in the extra head count, so not just that it will depend on their pay mix, which will be the mix as Michael explained before, mix between your base and your incentives. In terms of one-offs, no, there's no -- I mean, I never intend to do one-offs, but the intention is to just be considered, I guess, conscientious as we go through the rest of the financial year.

[Michael Reid, executive]

And Nick worth calling out that -- and this is what I also think is impressive. All of those higher-end assets, we didn't pay a single recruiting fee. So that was all from our internal recruiter. Chris is based in the U.S. and worthwhile giving him a big shout out because the talent that has gone in sourced has been incredibly right for our business and he's done that in record speed. So I think there's still smoke coming off is keyboard, but just acknowledging that component. It's important because you can -- as you brightly pointed out, recruitment costs, particularly in this market is expensive because really expensive. So very proud to say that we did that with our teams internally. So acknowledging the efforts that the team have gone through.

[Nick Harris, analyst]

Excellent and well done. And I just had a second question, which was just talking about the -- I'm not sure if I'm crossing my things here, but the Mega 1-- sorry, Megaport 1 beta and how you enter new data centers. So you've kind of flagged towards the end of this financial year, you'll end up and if you will expand into a few new data centers. I'm just trying to understand are they the same things and the economics around it. So when you go into a new data center, should we expect the cost to be similar to what they used to be? Or are you tackling this quite a different way with, I don't know, virtualization or something?

[Michael Reid, executive]

So Megaport 1 is the SaaS platform that goes in -- orchestrates all of the compute. Separate that piece, Megaport Reach is the ability to go and land in new data centers with a lower operational expenditure for us, and that gives us access to those Tier 2, Tier 3. We will still continue to land the data centers that are critical for us to be in immediately. Those data centers, it wouldn't change our OpEx. But in reality, the larger data centers that you'd be focused on will quickly give you a return and cover that cost. At the Tier 2, Tier 3 level, the Megaport Reach platform gives us an opportunity to learn in more data centers with a lower operational expenditure profile, which gives us the chance to go on land in those locations. What we've talked about was opening up new markets falls into that category. Each new market is slightly different. When we look at different countries around the world, you've got different regulatory components. You also have different partners inside those environments who are -- and each deal gets constructed, particularly for the new countries in a slightly different fashion. But where it makes sense, we've seen these new countries align to a -- there's a few options inside Megaport Reach to how we would deliver that for our new date center partners, but it's all falling into that Reach style of some way, shape or form. It just depends on each country because countries are the countries we're going to now, we've obviously got the majority of the countries that are easy to learn in. We start to get into some countries that are a little bit harder from a regulatory standpoint or a carrier license as an example, or how we deal with it from a finance and legal perspective. This adds a bit more complexity and nuance to it, but we are absolutely committed to go and do that. And the reason we're doing that is because our customers are requesting it from us. I hope that answered it, Nick.

[Nick Harris, analyst]

Yes. Michael. I guess I was just trying to understand the cost going forward if you do decide to ramp up in, say, maybe not even this year, but next year into more locations, should be a fair bit cheaper under the Reach platform. Is that the right way to think about it? Or do you have a big wave of CapEx and OpEx coming? Or is it relatively incremental?

[Michael Reid, executive]

Well, the CapEx -- I mean, if you look at it, we actually still have ample infrastructure. So we have a lot of the -- the CapEx component being the hardware that we need to deploy. We have a huge amount of that sitting in stock available. So there's actually -- we would take a long time to deplete that stock firstly. So that is less of a concern. The thing that is always the concern is just repeating -- the continuing costs that come out of it. The answer is if it's reach, it will be less compared to our existing data centers or again, the majority of the existing data centers, there are nuanced data centers out there. And the reason I say I can't answer specifically for the new countries is because each one, we've got to do a little bit different slightly, if that makes sense.

[Operator]

Hannan at Goldmans, if you'd like to go ahead you review your question, please.

[Kane Hannan, analyst]

I've got 2. So I guess, firstly, a bit of a follow-on from Eric's question. The $15 million EBITDA in the quarter is run rating at the top end of your guidance, and that was like due to timing of spend and likely some currency. Does this mean that the second half -- sorry, second quarter EBITDA should be the weakest for the year? And I guess, secondly, can you give us a bit more color around that MVE performance in the quarter and what drove the decline there?

[Leticia Dorman, executive]

So with regards to the EBITDA, that we've got -- we just haven't added the sales head count yet. So it's that, plus we've got the marketing spend, the overall OpEx spend. So yes, I wouldn't simply came 15 times forward to get you to your results. There's a lot more to come throughout the full financial year.

[Michael Reid, executive]

So on the MVE, if you have a look at the metrics that we shared, as I sort of explained, the proof of concepts, the nature of MVE is slightly different to our other products in that. If you look at what happens is, firstly, an SD-WAN deployment for -- I'll use Cisco as an example, there could be thousands of sites that Cisco is rolling out an SD-WAN project to could be a bank that has 1,000 different locations. And what happens is when the bank goes to market for these SD-WAN solutions, they're big, they're huge contracts. They're typically linked into carriers who have then obviously 1,000 connections to each site or could be 2,000 with redundancy, then you end up with 2,000 routers. And so what happens is the customer comes out with a tender and then we'll offer it to multiple providers. It might be 4 Cisco and a few others, Palo Alto, et cetera. And they all bid on this project. And they all run a proof of concept. And so what happens is Cisco can quite often spin up multiple Megaport Virtual edges, their own Cisco platforms inside our hardware. They would spin all of those up. They're not revenue generating at this point. It's purely to prove out the proof of concept. They might win that particular deal as an example. When they win that, they go into a big contract and then the contract is to roll out 1,000 sites. So what happens is you'll see it's spin-off of Megaport. And then maybe even 6 months later, when they've actually gone and deployed all the sites, have bought the infrastructure started to deploy, you'll see it spin back up. And so the problem with the -- the great thing about Megaport is it's 100% life. Every time you add something to the platform is instant. And the way we've always reported is actually from the platform itself and exported those numbers, which is appropriate when you look at the total figure. What happens in quarter is if you had someone spin up 40 MVEs and then spin them down as a test, you'll see them up in one and down in the other. And it's not actually indicative of the reality of it. And the reality of our MVEs is the majority of them are contracted because they're long term. So you shouldn't see this sort of whipsaw movement in it. to solve for that, it's, I believe, the right way to look at it is revenue generating. And so when you actually do an export of all of our services and flag that they have monthly recurring revenue associated to them, then what you have is you remove the noise and you just get the signal, and that's an appropriate way to look at the business. So if you look at it, our numbers showed let me just swing back to the rigs. Where are we -- here we go. All right. Yes. So if you have a look at the metrics here, as an example, -- what I don't want you to get either a positive signal or a negative signal that's not actually aligned with what the actual performance is take MVE. We take it across here. And whilst we're showing a quarter-on-quarter change of negative 1, when you actually say what is the monthly recurring revenue associated to a Megaport Virtual Edge routing component? Well, actually, when you extract the proof of concept, everything that's not billing basically, we are up 8%. So that is the right signal in my opinion. When I look at measuring the business, that's what I'm looking at. I'm less concerned about proof of concepts coming in and out is not the right signal. The last thing I want to do is pivot a company based on an incorrect signal, and that's the last thing we want to share externally as well. You can see the same thing occurs for Megaport Cloud routers. And you can see that plays out in our customer count. So you can see the difference between those.The remainder of the large total set, like if you look at the ports and our total service VXC, it's actually a mind huge difference between it because of the sheer quantum of them. But if you look at the MBA, MCR component and net customer component, it actually -- it plays out in the quarterly. So that's why I've exposed that here. I'm mindful that changing metrics is not something we want to be doing. I'm obviously new into the seat. When I first looked at these metrics, and we're continuing to give you the metrics we've been sharing forever. We haven't changed that. What I'm suggesting is that at the second -- sorry, the first half, I believe there's a better way to look at the metrics that I think we can all look at and get a better signal for where the business is heading. And so that is, to me, revenue generating. And it's a very common thing, by the way, in many SaaS businesses. You'll see companies report paid customers and nonpaid as an example. So they might have 15,000 nonpaid customers 2,000 paid. Why would they report the 2 of those? As the nonpaid increases, it's an indication to show that there could be potential future paid customers. And so I think we're in a similar stage of our maturity, where I think it's the appropriate time to start doing that. We didn't want to throw in the market now. We wanted to take our time and do that at the half. Hopefully that gave you some guidance, not only on MVE, but also what revenue-generating metrics are associated to.

[Operator]

John Atkin, I'm not sure from where in the world you dived into, but if you could go ahead with your question, please.

[Jonathan Atkin, analyst]

It's actually yesterday in California. I got a couple of questions. So you've talked a lot about the United States on the last several calls and conference appearances and so forth. Can you talk about maybe the most meaningful EMEA markets that you've had a chance to kind of sink your teeth into and maybe the most meaningful non-Australia APAC markets and talk a little bit about how the go-to-market motion differs there. Maybe it's a different mix of direct versus indirect partnerships and whatnot. So just want to get a flavor for kind of rest of the world. And then from a product standpoint, what is the velocity with which we start to see security and other sorts of kind of capital-light add-on products to your platform?

[Michael Reid, executive]

Really good question. So yes, I have talked a lot about North America. The reason that I've talked a lot about North America is always a bias to go for what I would call the low-hanging fruit. So if you think of the easiest ability to access the market than the customers is in the United States, it's easier because there's no language barriers. It's a huge market. There's huge cloud adoption. It's a very -- it's a huge continent. And so you have this requirement to have data centers on the East Coast, West Coast, all these different connectivity. You have a huge range of data centers that sit in there, et cetera. All of that plays extremely well into Megaport. And you can also -- it's a much easier market to then go and hire folks to go and execute against. And plus, you're always billing in U.S. dollars, which obviously, at the moment is very strong. So that's why we -- the first low-hanging fruit expansion is into the U.S. And as I mentioned, we only had 4 frontline sellers in the U.S. We had one customer success person servicing that 800. So we were -- not only would it be the right investment even if we were appropriately sized. We were inappropriately sized. So that's the first piece. So yes, that's why we've gone very hard very quickly there. Your point is also true. Hey, Megaport, you are one of the biggest powerful components to Megaport is our global region. And certainly, when we look at our competitors, they just don't have something similar to us in terms of our locations and the global nature of it. So your question was, what are we seeing globally? We do see different pricing in different locations around the planet. Europe, as an example, has -- is different to the United States. It's different to Australia. Japan is different again. And so you're constantly balancing the pricing component and also the go-to-market. So you'll not be surprised to hear that the U.K. is very strong for us, and that obviously aligns back to the U.S., U.K. and Australia is a very sort of easy part. We're also very strong in Germany and if you look at our IX presence, which is our Internet exchange presence was an acquisition some time ago is very strong. We're also having incredible success in France. And so we've got an amazing leader in France who's been driving that business and adding some of the largest -- if you look at all the global logos that are from France, we can't share them because they're not public, but the -- we're rolling out to the largest French companies who have global requirements. Again, where we suit those particular customers we're very strong. Japan has been really strong for us in Asia Pacific. Again, if you -- once you go beyond U.K., Germany and France, you start to -- it's a -- you need a new language component. You need to localize the tech, you need to install the infrastructure. So there's elements associated with that. We are going to continue to expand, but it's an easier -- I'd say right now, it's much easier for us to go after that low-hanging fruit in the U.S. and also in Asia. So we also have opportunities to expand in Asia and also South America. So I'd say South America, Asia and then expansion. You'll see us land in new data centers, which is what our customers are acquiring. But we have the majority of those -- if you think about the large banks, they land in the U.S., U.K., Hong Kong, Singapore and in Australia, and that's sort of that we already in all those locations. You asked one last thing, which is security. So firstly, it's not well known, but one of the major benefits about -- and a huge amount of our customers leverage Megaport for this purpose. Megaport is a private network, which means it's by definition, secure in that you would run a private network, you encrypt your traffic across that, not only is your traffic encrypted, but it's also not accessible by any bad actors. And so if you think about the security space, even if you -- and Internet is a good example, lots and lots of companies want to get off Internet as close to the office or close the entrance to that Internet as possible. Lots of SaaS providers are actually suggesting that you go actually by a private connection. And that's where a lot of our private connectivity into cloudless. If you look at our marketplace, we have a huge amount of SaaS providers that actually connect into our platform and suggest to their customers to leverage a private megaport high-speed connection in, why? Because the Internet is constantly changing. It's constantly -- it's like a never-ending mesh of movement and failure points is constantly re-healing. But as you look at that, you can't guarantee latency, you can't guarantee that throughput at all times. But more importantly, from a security standpoint is even if you encrypt your traffic, you're still running across a public network, which means if a bad actor is trying to take out that particular route that you're on, they might not hit your traffic, but they could DDoS attack the path, destroy the path and actually take out your connectivity. So what you're seeing is a lot of companies are trying to leverage Megaport to get off a public domain, get into Megaport. Megaport is private, we're not exposed publicly, so you can't be attacked like a DDoS attack because you can't see it. And so once you're in there, you get that public activity. The other piece to it is where do we head from a future standpoint, from a security perspective. And I'd say the strategy for Megaport is going to be constantly looking at what we can -- what challenges and problems we can solve for our customers that leverages this incredible backbone that we've built and security falls part of that. So we're constantly exploring what makes sense from a software perspective that could actually solve a customer problem that leverages this incredible backbone. If you just have the software, it doesn't leverage the backbone, it's not too novel for us. But if you have any software that requires that, there's really no other company that could deliver something similar because you'd have to go and build out the backbone. And so that from a strategy perspective, becomes more of the technology longer-term strategy for the business. And it's not just security.

[Jonathan Atkin, analyst]

And then just one last one for Tish. You mentioned a new network provider. I think there was maybe a cost associated with that. Can you elaborate on that a little bit in which region or regions is that taking place?

[Leticia Dorman, executive]

That's part of -- that's a global platform. Now it's largely the reason I called that out is because we did make an upfront prepayment for the 12 months, but it will -- it shouldn't increase our cost base. It's around the timing of the cash.

[Jonathan Atkin, analyst]

Thanks very much.

[Operator]

Tim Plumbe at UBS.

[Tim Plumbe, analyst]

Two questions for me, if possible. The first one around spend per customer. So ports added obviously important for media and longer-term growth. Spend per customer is going to drive more of the near-term growth. Michael, you previously said that the sales team can do more to leverage this opportunity. Can you maybe just spend a minute in terms of explaining how that shifting strategy goes ahead? And how quickly can we start to go? How quickly could you see a change if you drive the sales force to deliver on the increased spend per customer?

[Michael Reid, executive]

Yes. So the change will always as we've said, as we've landed the folks, they're all sitting in -- well, majority is 90% are in seat now. Last year, a couple more to hire but the other 2 offers are out there. So they'll be landing as soon as they start. So the majority -- the vast majority are in seat. We then ramp them, train them, teach them, et cetera, and then they need to build that pipe inside the existing base. I would say what you'll see is, again, we're sort of pointing towards Q4 from a metric standpoint, and you won't see revenue until flow through until next financial year. As I pointed out, the easiest and fastest way to expand your business is if your customers are not yet leveraging all the products that you have to offer are not aware of them. And that's why we've launched a whole range of different products actually going to access that customer base. Now as an example, to give you some perspective on Global WAN, you could take a connection to the cloud, which is a VXC for say, $200 or you could take a single 7,000 connection across the U.S., as an example, for a higher-speed connection, you can see the quantum between those 2 pieces is significant. And then as you start to lay that across multiple connections, you then have an opportunity to expand very rapidly inside the existing customer base. And so that's new for Megaport to actually go and not only incentivize our sellers were never incentivized to go and talk to our customers about that in the history of time. And so being able to bring that story to our customers and also be able to offer that from a contracted standpoint, which is what we're launching at the moment is basically an ability to contract those connections gives us an opportunity to not only deliver very, very high revenue items that we weren't delivering prior and also delivered them for a long period of time. So I'd say that is, I would say, one of the fastest ways we can expand and access faster annual recurring revenue in the business, which is why we launched Global WAN. And all of that flows back to that piece. The other piece is that, like I said, we have a lot of customers that have multiple cloud connectivity. So for example, they have Asa CP, AWS. And they don't leverage a Megaport cloud router. So they're actually just connecting just back to a port or whatever it may be. And if you look at -- that is a really easy example to go on if you want to egress traffic and particularly now, and I think what we're going to see, there's a whole of companies needing to access the data that they've got inside their compute platforms, extract it and then process it somewhere, particularly if you think about this explosion in AI. Well, Megaport Cloud Router falls is a beautiful part. You don't need any port, you can literally just go and spend that connectivity between the clouds. There's a couple of factors. One, you get high-speed connectivity. The second is you have your egress costs dropped significantly, something to the tune of 40% reduction in the cost to get your data out of that cloud provider. So they're the sorts of easy, like I call that low-hanging fruit stories that we can go back to our customer and articulate that, too. So we've got to forget that our team trained up to a point where they can show that to our customers. A big part of that was that demo that I gave before. One of the things about Megaport, you probably experienced it, I certainly experienced when I came in articulating what Megaport is without drawing it or seen it or trying to like -- if you're not understanding the 100% of the market, you've got to constantly articulate it. Whereas that portal not only gives me the ability to articulate this and show investors. But when we have customers, we literally bring the portal up we can actually log into their account and we can expose their entire network environment there. And really simply, without having to understand like all of those services that I've shown you before, and all the acronyms, you can start to see how it's constructed. And really quickly, you can see, "Oh, you're actually running an MCR connection from one side of the planet, one side of the U.S. as an example to the other, you should be moving that to a very close point so that you reduce down your latency as an example. Or you didn't realize that you're only connecting just to AWS, the amount of time to get on a customer call and bringing it up to see how to deploy Megaport. They've literally just got a data center and disconnecting a couple of connections into the cloud. That's great, and they love us for it. But that's just like the tip of the iceberg of what we can deliver for the customer. And we just need to articulate that. So that's what we're working through that training process with the team, but giving them the tools to have that discussion is the portal as an example.

[Tim Plumbe, analyst]

Got you. Apologies. It sounds like you -- I missed a little bit at the beginning. So apologies if you've already answered this one or an extent as well. But the second one around the ports added. Can you just maybe touch a little bit in terms of how we should be thinking about the current pipeline of opportunities that are there, right? How long does it take to build up that pipeline? And then remind us how we should think about the sales conversion process or the sales cycle?

[Michael Reid, executive]

Yes. So 2 things. One, I'll keep indicating we're expecting to see that turn around in sort of Q4 time frame from a metric standpoint, early indications that, that metric start to change. It's -- we're a recurring revenue business. So to move it either up or down significantly takes -- it's just the expansion of your net retention and the new logos that you add as you add new log as it starts to expand, which is why we keep referring to FY '25 from a revenue perspective. That hasn't changed since I took over the role. Your question is around like how quickly. So there's -- one of the awesome parts about Megaport is that -- and this is evident with the quarter. If you look at -- and this will change, by the way, what we're sensing, we've had so much new sellers to this business. The actual -- what we'll see the sort of run rate change depending upon how all those folks touch our customers and engage with them in effect. So you move from 4 to 14 frontline literally in a really short period of time, we're going to see this change. But what I will say is Inside Q1, 50% of our revenue came from opportunities that were created inside the quarter, that is quite astounding for me anyway, coming from more traditional SaaS businesses that take longer sales cycles.Look, if you think of a sales cycle for some companies, it can be like 18-month sales cycle, what is evidenced by the revenue is that the sales cycles for a decision to actually go and connect to the cloud, spin up Megaport and execute against it can happen within 24 and 50% of that revenue sits inside there, which is really interesting because kind of if you think about it, Megaport's not -- I'm not convincing anyone that they need to go to the cloud. I'm not trying to convince you that you should connect to AWS. You've made that decision. What you're deciding is that you need to get there, and you're just deciding how you're going to get there. So all we need to do is showcase how you can get there. if you've decided that Megaport if you've experienced Megaport, and you see how easy it is to leverage and use, you're quite often going to go with Megaport. We're well priced, we're incredibly fast and so simple in being you can spin that up and to all your redundancy, et cetera. Well, the time to value is instant, it's 60 seconds before it's up. And so if you think of the sales cycle being relatively short, once someone's decided that's what they want to do. And the fact that we had time to value is pretty much instant as soon as you roll out the -- you deploy. Those 2 factors bode incredibly well for a much faster turnaround compared to, say, something that's like an 18-month sales cycle. Like if you're hiring an army of sellers for an 18-month sales cycle, you're predicting that in 18 months' time, that they're going to move the needle. That's definitely not the case with us. But as you can see, I'm just tempering the expectations around late Q4 and then into the next financial year from a revenue perspective.

[Operator]

Andrew Gillies at Macquarie.

[Andrew Gillies, analyst]

Just in terms of competitive intensity, are you noticing anything changing over the last kind of 6 to 12 months kind of flagging your normal sort of competitor set? Obviously, there have been some changes at one of their competitors. If you've got any comments around that, that would be great.

[Michael Reid, executive]

No, yes, I did have comments, of course. The -- obviously, I wasn't here 12 months ago, but are taking feedback from the team and obviously very focused on this. What we see and the question earlier around the regions was an appropriate question. Each region or country around the world has sort of a different story, i.e., in the U.S., we have a single competitor that's only based in the U.S. We have Equinix, as an example, that form -- that roll out to their data centers, but they only live inside the 200 data centers that they have. And so if you think about it, there's 15,000 data centers across the globe, if you're not in one of those 200 data centers, then it makes sense to leverage Megaport. And kind of interestingly, on that, Equinix is actually a big partner of ours as well. We have some of our largest data centers on the planet in terms of connectivity and throughput because actually Equinix. So it's sort of an interesting one. The other piece to it is in Equinix, as an example, if you're looking to get redundant services to AWS, as an example, you might choose to run 2 different fabrics. And so in that case, we have a lot of redundant circuits or whether either active active or leveraging us to connect as well as Equinix in that example. So that's sort of an interesting play on it. In Asia, we see different competitors who have been stronger in, say, the China regions, those sort of Chinese markets and have sort of expanded out. The requirement for our customers from a Chinese perspective is we don't yet to have much request to get to China. And so that's probably less servicing the customers that we certainly address. And obviously, it's not an easy market to go and land in. And then some of those companies have expanded in those regions. And so we don't come across them much because the customers that they're servicing are not really the customers that we're servicing. In Europe, it's just -- it's slightly different again because you've got each country -- and it's also a mixture of adoption of cloud and where yours you sit in. So I wouldn't say that the -- I don't think anything is heated up. I don't think there's any change from a competitive standpoint. I think our competitors -- some of our competitors have gone through some pretty tough times and no different to a lot of the startups that are based in the Bay Area, where the funding is incredibly difficult to get access to today, net cash flow has become the key. And so if you didn't cross that sort of critical mass from a revenue perspective, to get your costs under control, you couldn't land at a point where your net cash flow positive. And that's why we're in such a good position because instead of having to worry about like the costs, what we can do is continue to invest and keep our costs under control, so we can deliver profitable sustainable growth as opposed to looking for a funding event to try and keep the lights on as you sort of struggle to get to a critical mass of revenue. So the other piece to that, I'll add, there's 2 other elements is we're really differentiated on 2 points. One, we're based in -- the majority of our developers are based in Brisbane. And so we've got a beautiful lifestyle here in Brisbane, and the costs comparatively to living in the Bay Area of the U.S. are significantly less, particularly when you've got the FX position. And the fact that Megaport is so automated. Like if you look at the platform, it's so incredibly automated, we actually have a very small number of team servicing what is that substantial annual recurring revenue. So hopefully, that gives you a bit more color. Did I answer your question?

[Operator]

Siraj from Citi.

[Siraj Ahmed, analyst]

I actually have 3 questions. I'll just ask them one by one. Michael, in terms of your tracking towards an improvement in 4Q, has something changed there? Is it a bit slower? Because you previously said it could be towards the end of the March quarter. I'm just wondering, customer growth was quite weak this quarter. I mean is something impacting your confidence in the turnaround?

[Michael Reid, executive]

I think it's -- we can't -- you can never predict the exact response and exactly when. And so that's why I'm just tempering when that's going to land. But towards the latter end of Q3, we've always shared towards the latter end of Q3, we refer to the green shoots, you would start to see the metrics change. And then in FY '25, you would start to see the revenue flow through. So we haven't changed that position. I think -- and if you look at it, and Steve has been great at getting us in front and yourself and all the different analysts have been great at getting this in front of all the investors, all the analysts and so forth. And I think what's important is that most of those questions were expecting a much faster turnaround even though beyond the guidance we've given. So folks were thinking, well, at the end of Q1, you're going to start to see a turnaround, and we'll start to see those metrics. In reality, no one was in seeds in Q1 as an example. And so just resetting expectations around the fact that we have only just landed those folks inside the business. We'll start to see them ramp in this quarter. We should expect a turnaround from a metrics point in that latter half of the year, but the real metric turnaround would be in Q4 and then what you would see is FY '25 from a revenue perspective. So it's pretty much in line with what we've been articulating. I think it's ensuring that the market doesn't get too far ahead of that. That's all I'm trying to remind folks of. It's exactly the same messaging that we've been giving. I'm just noticing that folks when we had those discussions had a different perspective, and I'm just reiterating that message basically.

[Siraj Ahmed, analyst]

Perfect. Secondly, in terms of -- I think the question from John Atkin, -- just on the -- you made a comment about pricing in different markets is quite different. Is that an indicator that your pricing could be potentially a bit too high in some markets? Or just can you just clarify that?

[Michael Reid, executive]

Yes. It's sort of -- it's actually it's more nuanced than that even because if you look at it, you can't broad brush EMEA, as an example. The U.K. is different to Germany, is different to France. And it will also depend on the data center in that particular location and also depends on what data center offerings that particular data and it has all the local carrier in those regions and whether they offer and what they offer. And then the other piece to it is you look at the customer. So if a customer has like huge global requirements, it's a no-brainer to go with Megaport. But if you offer a customer that literally just lives in the U.K. in this one particular data center and they're getting this one particular connection, it opens up the landscape for more competitors to us because, obviously, they haven't had to build out a big backbone like we have, the Pick1o02 data centers. So in that instance, in that particular location, we just need to be more aggressive on pricing. It's not -- it's still highly profitable. But my point is it's what I think Megaport when we first landed in the market was to try and do one blanketed price across the globe. And as we've evolved, and it's natural, by the way, you would expect that, that is never the case. You could just put this sort of one price across the globe. And so that's what I was referring to that in certain regions. Japan is slightly different. U.K. is slightly different. U.S. is actually in line, Australia is in line. So it's just tweaking that as we go. And what happened -- just more expansion on that is the sheer number of potential connections that you could leverage the platform for, as you add so many different locations, so like permutations of how you could connect to a different data center as an example, each one in theory needs to be priced. And so that's constantly changing. We don't have people that just sit there and look at that price with that location, like from Belarus to Frankfurt from Frankfurt to Sweden, something -- it's -- so we're constantly evolving that. And we take feedback from our customers on it, which is why we have like pricing desks inside the business to go and service that. And that actually works really well, where we get direct feedback from our customers around where we need to be. So it's still a really healthy position. It's just that it's different. It's not like you can just say one price to roll them all across the globe.

[Siraj Ahmed, analyst]

Just last question for you. I know there's been multiple questions on this, and the OpEx will change going forward. But given most of the people are in the seat now, could you maybe give us an idea of where the run rate employee expenses is running at now? Because I think it was $13.4 million in the first quarter. You have hired 20 roles or so. So anything that you can give us on where the run rate employee expense is at right now?

[Leticia Dorman, executive]

So probably not at this point to as not in the first quarter. However, a lot of those have really either landed late September kind of really into October. So you still have a bit of increase to come there.

[Siraj Ahmed, analyst]

Okay. And on CapEx, you said $20 million to $30 million. I mean you're only run rating at $24 million. It sounds like you already have a lot of the inventory, et cetera. So where is the step-up coming in?

[Leticia Dorman, executive]

So there's also -- we've got to deploy the equipment. We've got to get it out there. So there's still more to come. The kit itself is just one portion. It's the big meaty portion of it, but there's other costs to come.

[Operator]

We might close it there. Thank you very much, Michael, Tish and everyone, for attending. And the next event will be the AGM on the 1st of November next trial, which is next Wednesday. Thanks all.