Megaport Ltd
ASX:MP1
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[Audio Gap] left-hand side of the screen, Chairman, Bevan Slattery; then beside him, Sean Cassidy, CFO; and closest to me, Vincent English, CEO of Megaport. So really delighted to have you all here today. Also from the Megaport team, we've got Helen; from IR and Adam also from the team. So I think the plan is for Vincent to kick off. We'll do 15-minute presentation, and then we'll open it up to Q&A. [Operator Instructions] So with that, I'll start it over to you, Vinny. Thanks.
Thanks very much, Nick. Appreciate it. Good morning, everybody. This is our Q2 outlook for the presentation. Just a couple of things to point out in the presentation everything that we're talking about in presentation is in Australian dollars. We do have everything in U.S. dollars in the appendix The second thing is after this call today, we are reporting our full half year results on the 9th of February in personal meetings and presentations for that period, we will be going into a fundamentally black-out period much after this call today. So just to make everybody's expectations, but a lot of material that we'll be in a half year, we will be discussing and going through to it.
With that, then, I'll just go straight into our highlights. We had very strong EBITDA growth in the quarter, AUD 2.4 million in EBITDA in quarter 2, total of 3.4 million for the half year, up from the EUR 1 million that we had in the previous quarter. The total revenue for the half year was just over near just $271 million. So up significantly on where we were in to grow in the quarter. We have continued focus on our operational efficiency and continue to maximize what we've already built in our operating model in our business, and we're starting to see that come through in our financials in terms of both the revenue, the margins increasing and optimizing what we have. We're going to touch a little bit on the sales channel and how that's continuing to progress and grow as we continue to build activity there, and again, is more of our future revenue generation in the periods ahead.
And also stand very focused on in IT trends in January because it contributed to the key part of our business with nearly 70% of our customers are connecting to one or more cloud partners today. So as a key revenue driver as a key focus point for us. And we've had some announcements with AWS where we were one of the first providers to get a credit for which allows us to work even closer with a lot of our data center operators. And also when in the space of with the in space of computing and has been more concrete because that's in the developing space as more and more data is being consumed and more and more partners and not just data centers, but providers out there need to actually be in a position to provide those types of services. So we want to continue to make sure we're at the forefront of that.
And again, like the and continuing to add more and this new partners like which are data center operator again with a much smaller, more boutique in Europe, but tend to be more at the edge rather than at a centralized location. So again, making sure that we're having -- providing the same interconnection platform to any data center up there. And we've had some other deals with DataBank in the quarter as we continue to develop, particularly with Megaport and In terms of key performance indicators. So we're continuing to see some consolidation on our network in terms of our ports. And a lot of that has got to do with the upgrade in the capital expenditure we've invested in the business over the past 3 to 4 quarters in terms of upgrading our backbone, our network match for a 400 gig capability, but also ability to sell and use 100-gig ports, which means that we get a reduction in our cost structure, we get a reduction in 10 gig ports that are consumed on the network as we maximize the book to 100 gig. You can see from the chart there, we have totaled 368 port growth for the quarter, of which 165 of those were sort of consolidating this part of that exercise.
Overall, customers went up just over 1% to 2,740 for the quarter. In terms of our monthly recurring revenue, up AUD 661,000 in the quarter, now at a run rate of AUD 12.4 million, up 6% or -- and in overall, in terms of our total revenue of $800,000 for the quarter-on-quarter movement. And you can see the -- you can see from the chart that it's an uplift of $800,000 from 11.6% to 12.4% quarter-on-quarter. So it's continuing to grow up 6%. In terms of the split of revenue, we're continuing to see up 9% of that what revenue uplift has been contributed from the North America region, up at 7.1% and it flows a monthly recurring revenue. Asia Pacific over 3% and then Europe is also up at 7% and continuing to grow, and we're starting to see more traction happening in Europe, as we said last quarter, continuing to move forward there. And with the business overall, like I said, $12.4 million, up 6% to $800,000 for the quarter.
In terms of our EBITDA journey, I kind of wanted to start to call this out and we talked about this at the last quarter and also at the full year results and we talked about where our trajectory is going in the business in terms of how we're performing our economic model and our data. And you can see going back to FY '21 as we done at just under $5 million for the quarter, a negative on EBITDA and how we probably sort of come out the other side of that towards the back end of last financial year and into the first 2 quarters of this year. And that's -- and I'll hand it over to Sean shortly and we go through the numbers. But basically, we had $1 million of EBITDA in the first quarter of this financial year and the $2.4 million in EBITDA this quarter. So total for the half year is $3.4 million. So it's starting to come through in the business based on our economic model.
As long as we stay focused on our revenues, managing our costs, the EBITDA model starts to flow through fairly efficiency. And that's the overall underlying trends that we're going to talk with you today. In terms of PartnerVantage, in the program, again, we just showing you the continued partner signings up 43% in the quarter as we're adding more and more partners. And again, just to remind everybody and who comes on to PartnerVantage or more like a third-party reseller. So they will have many customers are trying underneath that, that will help us to grow and continue to sustain our revenue growth by selling on behalf of Megaport. And of those 43% that growth that we picked up, which is just under 150 partners already. We've got 31% of them nearly half -- just under half the -- just in the 6 years then are actually already billing and transacting. In other words, registering dealers and bringing customers, and of that 26% of the monthly recurring, which is over $100,000 a month is coming from this pool of partners that we've built up over time.
In terms of some of the leading companies that we continue to add to our network of 2,704 customers that we have, we're seeing more and more customers albeit a little bit slower customers coming on, the customers are larger and they're bigger, and they're more global. And you can see from the brands in the logos, and you can see from the right-hand side there in terms of what the capability of the customers that we have in terms of Fortune 100 or 500 in the company. So anywhere ranging from 20% to 24.5% of large multinational companies are Megaport for cloud access and as part of their global network and our footprint.
With that, I'm just going to hand you over to Sean to take you through the next couple of slides.
Thanks, Vinny. I'll talk through the financials a little bit. As revenue of $37 million for the quarter is up 10% on quarter 1 and up 39% on the same period previous year. Our MRR in December, $12.4 million, means that we have annualized group revenues of slightly under AUD 150 million. For those of you reading our results in American dollars, our MRR in American dollars at $8.3 million means that the annualized revenues across an important threshold in U.S. dollar terms to our annualized revenues across USD 100 million. Another interesting thing to point out about the revenue in the quarter, $37 million in the current quarter exceeds the total revenue that we did in FY '19. And it just shows you the kind of continued growth journey that we've been on and continue to enjoy. Direct network costs of $8 million are down slightly or about 2% on quarter 1 and 11% up year-on-year. And we continue to drive a cost optimization program across our network footprint to ensure it is the most cost-effective network in the right locations to service our customer needs.
Partner Commissions of $4.2 million are up $0.4 million on quarter 1 or 10%, and not in line with revenue growth. Profit after direct network costs and partner commissions in effect, our gross profit of $24.8 million is $3.1 million or 14% up on quarter 1, and $8.3 million or 50% up year-on-year, and this shows the operating leverage continuing to come through in the business. Our gross margin percentage, 67%, is 2 percentage points up in Q1. Employee cost of $15.6 million is slightly up by 5% in Q1, and the annual pay increase was effective on October 1 came into effect. The employee cost as a percentage of revenue, at 42% year-to-date was 13 percentage points better than the same period last year. And as you see, we're getting much more efficient scaling our revenue and servicing our customers.
Marketing and travel combined at $2.4 million, it's 33% up on quarter 1. And we're seeing a normalization of marketing and conference activity across the world as the world regards to pre-pandemic or pre-covid levels of activity. EBITDA of $2.4 million had grew $1.4 million on quarter 1, 140%. This is the third quarter in a row of positive EBITDA. Our EBITDA margin of 6% is up 21 percentage points on the same period last year. Cash from operations, positive $0.2 million, on quarter 1 by 1.2, largely because of receipts from customers and a major supplier was a contributing factor to that. This is essentially a timing issue and therefore, receipts in January have been consequently very strong.
CapEx of a net -- sorry, $4.6 million includes a reversal of an amount of $3.6 million, which is now being treated as an operating expense. CapEx includes continued upgrade of our core and our capacity as we complete a number of major projects. The continued expansion of the 400 gigabit intellectual property of $4.5 million and includes further development of Megaport and security enhancements, both internal and for our customers. Vinny is going to talk a little while in a little bit more detail about CapEx and the full year view shortly.
Cash flow from financing relates to the repayment of the 0% vendor financing on the payment of operating leases that have been capitalized under AASB 16 regulations. Included in this is a one-off outflow of $3.6 million relating to the reversal I mentioned in CapEx as well. Our movement to cash balance is in the period of $11.9 million and $25 million year-to-date means that cash balance at the the end of the period of $57.5 million remain on hand to service the group as we go forward. I'll pass back to Vinny.
Thanks Sean. So just on that point on CapEx, just to bring everybody around, this is probably the first time we are looking a little bit more forward out in terms of projections on our cash and on our CapEx or cash spend. In FY '22, the period ending in June, we spent just under just AUD 39 million -- AUD 40 million in CapEx. And in this year, we're forecasting somewhere between $32 million to $33 million, okay, depending on FX moving in the second half of the year. I mean, for next year, we're looking between AUD 28 million and AUD 30 million. So the profile of our cash spend. There's a couple of reasons for that, and I'll touch on that in a second. And part of it is related to -- and you can see from the profile in the charts that the first half of the financial year typically is when we spend our heavy lifting on our CapEx because we want to actually put it in place and have it built in in the network for whatever we're spending it on so that we can actually optimize that in the second half of the year. So that's typically the profile of how the cash is spent.
In terms of the breakdown of the half year on half year, we've listed out here a few of the projects that we've spent, and a lot of this money that we had spent towards the second half of last year or FY '22 and then it fall follow through into the first quarter of this financial year in terms of our cash has been mainly about the -- some network replacement, but mainly massive upgrades on our 400 gig backbone and also on our 100 gig port capability. So we actually sell and service our network for those. That has now been finished. So we've done all the heavy lifting on that. And that's why the profile of our cash CapEx is starting to reduce.
It also has a big impact on our future outlook in terms of our cost control, in terms of -- we are now selling utilizing 100-gig ports on the back of the network that we can now move forward over the next couple of years without having to reinvest in that for a longer. And so that's why you can see from the chart here in terms of our business as usual, which is continuing to upgrade our network capability to add more locations or add more capacity where needed. But the big projects that we had that was part of our uplift, which you can see highlighted in the charts there, is starting to reduce significantly over time. I suppose this brings me down to the -- probably the last slide in the presentation. And if we talk about our operating efficiency. So again, we invested in the network significantly to allow us to move forward and continue to develop network as a service as a platform, usually the Megaport ONE and our capability to actually be relevant in the cloud space for the next 3 to 5 years, right, and stay relevant.
Part of that is -- as part of we've invested in the CapEx into the network, it also now means that we can start looking at utilizing our network efficiency and seeing where we can save money. And part of that is where we're not -- we've identified a major amount of work streams that we want to work through in terms of the annualized between $8 million and $10 million as a result of that investment in the CapEx and the investment that we've put into the business, where we can now actually make more efficient decisions about how we're managing our costs in the business. So a lot of that is related to the consolidation of cloud on ramps, our network operations, and like I said, the utilization of 100 and 400-gig ports in the network, which, as we said, we've invested heavily in.
The majority of these we've already identified, we were actually working through our work program right now as a result of all that, and we expect a lot of these to start to be coming to fruition over the course of this financial year and then obviously put us in a good place going into the new start of the New Year with a reset in where we're at. Also announcing that we are doing a slight rebalancing on our pricing on our VXCs for -- to bring it in line with our MCR and MVE, metro pricing on DXC, and there'll be more detail with that a little bit later just so price sensitive at the moment. But effectively, we're talking about rebalancing from $100 VXC in the $200 the same as our pricing bring and MCR as a lot of our legacy customers and legacy business has to sell.
I'm expecting that to be effective around May coming into June this financial year. There's no other changes in our pricing and gone through an extensive review of what we are doing, what we're doing that we believe all of our pricing is in line and it's competitive, and this is just one of those changes that we felt that was bringing it more in line with the cost structure that we have and also more in line with the value that we're delivering for the business for customers. And then we're also looking at a further strategic review. We've been -- 2013, '14, when we started the business, and we're now doing a big deep dive in terms of making sure we're set ourselves up for the next 4 or 5 years into the next -- where we want to go and where we want to be as a business focused improvement on what some of our new CRO, Jeff, who's only with, I want to say, 50 days. So he's obviously taken a good hard look at just not just the existing sales organization and how we're going to continue to grow that, but how do we maximize the channel and how do we make sure that that's more optimized under his management in the and sales group. That's kind of it for the presentation. So over to...
[Operator Instructions] So I'll see if anyone in the room wants to go first. If not, I've got plenty.
Just a question for Bevan probably. I understand you changed the effort executive team to focus on profitability. Could you mind explaining those changes?
All the changes?
Just I believe that shifted to an EBITDA focus and waiting towards that. Is that correct?
Yes. I mean the whole business has not just incentive package. But I think the whole focus for the company and the market has to right. So we didn't do it because that's what the market is, but it's always just a maturation of the business heading towards that. So certainly, our focus on profitability. And I think certainly, the things that we're seeing is profiting cash, obviously the 2 things we're really focused on. We're still some growth as well, very important. But we've actually built an incredibly amazing business here and an amazing platform. What -- I spend probably as the guys have noticed that the best part of November in an incredible detailed business and re-understanding and even rearchitecting some of that with the team. So knowing how important this is and obviously, the cash that we have, we sat down and worked out probably on annualized basis, we've said here $7 million to $10 million worth of cash savings there we looked at. And a lot of that is because we did that rearchitecture of and it's probably a bit missed. I mean we spent a fair bit of money doing this 400 gig upgrade. And let me just explain why it's really, really important. And it was such an important investment, but also that investment, that CapEx heavy lifting is pretty much completed now.
One of the challenges we had in the group, and we've been seeing this climb over the last 2 years is as enterprises consume more of the cloud, we have these legacy ports that we operate with the cloud providers, the AWS, Microsoft Azure and Google. We wanted to be ready with 100 gig when they start kind of opening up the 100-gig capability. And that's really important for a couple of reasons. One is people are ordering -- they want instantaneous access to cloud. Two, the cloud providers are not allowing oversubscription or very limited oversubscription. So we basically said, look, we've got to make sure that our customers can connect to us at 100 gig. And any time they want to serve it into the cloud, we're able to deliver that without wondering have we got capacity. The other point of that is we have to order a lot of cross connect. So from interconnect to cloud at this 10-gig legacy level. So doing that is what we basically found is we're now ready. So when the cloud operators say, we now have 100 gig available, we can do that. To give you an idea, I mean, our annual cross-connect teams clipped $10 million a year at the end of last year, which is extraordinary. But what that shows you is the growth that we've actually had in cloud connectivity, but also shows the big opportunity and efficiency when we go to 100 gig. So my focus was certainly with the team. And for the last 8 months, we've been deploying all this infrastructure out there to, one, reduce our cost, but also our scalability in the cloud. Two, it's also we replaced over 200 edges -- edge locations around the world. We've done it to make it consistent everywhere and the 100 gig available at all the places we need it available from a customer standpoint. 400 gig in the core to be able to carry this data through that. But the other reason as well, again, is to reduce some of our costs in terms of delivering these services. So that's been an incredibly big part of what we're doing. And this cost out program that we're doing right now, you're going to see that. But when we did that analysis and that deep dive and look at the legacy network, we just realized that we're charging too few, but -- too little money for these cloud cross-connects -- cloud virtual cross connects, particular to the legacy networks, where we've got all these 10 gig circuits. So what we've had to do is to make sure that that's in parity in alignment with how we do it on the other side. And I really probably can't -- I can't stress enough on the deleverage that we actually get in this capital investment that we've made. It's pretty much on that whole program in terms of 40, 100 gig. It's all done for now for this phase. We'll business as usual, do some upgrades over the next 2 years as needed. So the CapEx cash flow on that program, for example, is pretty much completed. The second part is that you see the strategic ports that we're talking about. We're transitioning off the legacy network or the legacy cloud availability zones on a 10-gig basis. We say there's massive amounts of crosstie gives a lot of scalability imports in those locations. And I think that's probably -- that's going to continue beyond this, but we've got this current phase brought out. So my focus and the focus of the team is to -- sorry, and just on that kind of point by changing that pricing, there's $7 million to $10 million we expect to annualize incremental revenue, that's pretty much. It's all profit, but it's not like we age in terms of the profit. It's more than -- it's now more than covering the cost of the investment that we've made. So we're continually reducing the investment -- the cost of that, and we've slightly increased the price of that 1 product to make sure that's aligned. And what I think shows is just, as I said, a really dedicated focus on cash and on profitability.
is it all about like every 3 years, you have to replace the old kit? Or is it all about growth and keeping and the network as a proportion CapEx budget like...
Yes, there's 2 parts to that look in any network, you always have to have a certain amount of enhancements after our typical profile is somewhere between 4 and 5 years. Now we -- just to clarify what Bevan was saying as well. So what we did as we removed over 200 edge locations and upgraded them from what their capacity was up to 400 gigs only. So we've swapped out that equipment and upgraded it after a 4-, 5-year period. So we continue to do that. But those -- all that equipment now is set and repurposed for 100 gig at the edge. So that's one thing. The second thing is there were various programs like what we just went through, it was upgrading the old network to 400 gig, which is kind of like a one-off exercise that you need to do. But bear in mind that we're in a lot of locations. So there's a lot of press we have to upgrade. So I think where we feel what we've done now is set ourselves up for the next couple of years, where we can really know maximize and leverage what we've built and the way we set it up and how the business is going to consume it and how our partners want to work with this and where we're at. When we go back to 2014 and '15, everybody would still talk about 1 gig. And we're one of the first to come out with 10, and at our But now we're talking about 100 because that's the way the conversation has already moved away to with broad consumer data is a business in general. So we just wanted to make sure that we were ahead of that. And that's what we did last year.
And just on those -- most of those sites, the devices are called devices, which, again, to Vinny's point has 40-gig kind of trunk or aggregation, which we've done 100 and some to 400. But the other reason that's really important is that there's a product consistency we will across the board, both in terms of being able to instantly other services and not have to worry about capacity, number one. It's always been a consistent thing we've had. But number two, there's a couple of new features that we want to enable. And we want to have it across the entire network. And for us to do that, those devices were replaced, they're an average 4 to 7 years old. So we've got certainly a fair bit of a lot out of those devices and replacing. So the path that we're working on is it's very much working on giving our customers, the enterprise customers, some intent-based network and intent-based routing, and that new feature will be coming at. Not that it's going to absolutely excite a lot of people, but the enterprises were on that product, and we're going to be able to deliver that.
Just stepping back a second, the 2 major changes I'm seeing from today's announcement are that repricing a signal revenue, you take 7 to 10 more costs out of the business. So put those 2 things together and next year, that takes you 2/3 of the way to being free cash flow positive. I think massively step changes the business. Is there anything wrong with my math there?
Seems consistent. And that's just -- again, I can't stress enough, the focus amongst the team is to make sure that -- but again, we built an amazing platform. We just had to tweak and rising on it to make sure that our revenue is aligned with our costs and investment that we've made. And that's obviously where we've done this massive amount of work on infrastructure investment, network aggregation and simplification; and third, in terms of treating the product pricing. So you can see, as you said there, there's a $14 million to $20 million swing. That will occur, that should occur over the next 3 to 6 to 9 months. On the VXC pricing, as we said, we'd probably expect to see a little bit of churn out of that. But because it's effectively a doubling of the price, it will be -- we expect it to be net positive, which is taken into consideration. And when -- as I said, when we look at that, I'd say that 67% of that increase will probably happen on a month recurring revenue base will happen in this quarter and then 30 to 40 will have to happen the second quarter or the fourth quarter, the next quarter because we have to give 90 days' notice to some strategic partners. So some of that stuff comes in pretty quick. We've identified the cost out. A bunch of those are already -- a number would have been completed. I'd say about 20% of it, there's another 25%, 30% that's -- we're just doing validation that's there and then the rest are expectedly done over the next 6 months or so.
One last question, and then I promise I'll open up the network. Just obviously, new Chief Revenue Officer joined in late November, I won't try and pronounce his team, but just comment, obviously, I presume you're very happy with that person just to get on the background. And do you see things changing materially within the business in terms of your revenue trajectory and go-to-market sales strategy, et cetera?
No. Look, Jeff, he's very strong capable person. We were happy when he came on with sees an incredible background in 18 years whatnot the cloud industry, knows everything know the partners. He's, like I said, what 50-odd days into the job and right now is I've asked him to look under the hood. And the way we both felt about in the process and how we have gone through and with the team was that we kind of thought we've made a lot of the big changes we need to make either with the channel or with the program to move that -- it's just like, well, how do you feel about how do you want to run it and how do you want to share it. So I think if there's a change to be made there, they are kind of going to be more on the minor side of things within tweaking fees and to make sure that we're optimizing our sales structure to give us the best benefit for what we have, plus also our go-to-market and what tweaks and changes do we need to make there. And then just what we've spent probably the last 10, 15 months talking about is not only that. Now we've got a network that's optimized. It's built we have the operational efficiency there, how do we leverage that with the sales and go-to-market plans so that we can actually get more revenue coming in. And then obviously, that obviously helps with our cost profile and maintaining the cost control that we've got and it helps us to our financial outcomes.
Sorry, just a couple of questions from my side. May just wondering if you can touch maybe a little bit on the ports added during the quarter on a gross basis. How are you thinking about the go-forward trajectory relative to that June quarter of I think you did 533. And maybe can you make any comments in terms of the pipeline that you guys see at the moment?
Yes. Sure. Thanks, Tim. So in terms of -- sorry, just moving on to the Slide 2. Yes, so in terms of the ports, we have seen a good, strong start we're nearly at the end of January so more or less at the end of journey. So we've had one of our stronger months in January compared to previous periods. So I think a lot of it has been -- there has been a little bit of, I suppose, in general, that most people are talking about people are probably holding off making decisions on buying a little bit of uncertainty around the economy and what have you. But having said that, we provide very kind of key connectivity solutions to customers who want to use cloud in a very efficient way. So I think we've seen a little bit more of a timing difference there, and it probably will continue a little bit going forward as other macro developments happen and then things settle down. I think sometimes big decision makers coming into the year period at the end of the half year or in our case, the calendar year in the U.S. some of those decisions get held off until the new financial cycle opens up and the new budgetary cycle opens up for a lot of enterprise customers, particularly in the U.S., which is a calendar year. And we started to see that come through for the beginning of this quarter.
Got it. And just kind of following on from that, in terms of the strategic port consolidation impact, I mean, I know that you guys said that you're expecting a little bit more consolidation following the pricing increase that you're about to put through. Should we think about similar sort of kind of impacts around that kind of 125, 155 ports for the next couple of quarters? Or do you think that reduces materially from here? And then just the final question for me. Can you talk a little bit about SD-WAN, the partnership with Cisco. How are you seeing the sales pipeline momentum, et cetera, going there, please?
Yes. Look, there's still a bit more port consolidation to happen. I think we'll see it's true to the rest of this financial year over the course. It will reduce over the next 2 quarters. I think that's the -- and that's a positive thing, by the way. Obviously, we have to grow -- keep growing our sales, and that's important from that point of view, and the consolidation and port has a big impact on our margins, right, and as we talked about that and how we consolidate our network. So I think that has a bigger impact for us, not just -- I mean, they're not -- it's not revenue impacting, that's poor consolidation. It's all internalized. But what it does have is it has a big impact on our gross margin and our operating costs. So I think you'll still see that probably as we finish that over the course of this financial year. Sorry, Tim, what was the last part?
Just a bit of an update in terms of SD-WAN partnership with Cisco sales pipeline within that part of the business, please?
Yes. So I had that chart there on Page 8 in the presentation, we talked about PartnerVantage. So we're continuing to build that out, and that's with our SD-WAN, not just SD-WAN partners, but resellers for all of our products, right, because that's important, like it's not just about MVE either it's also about selling more ports, more VCs, more connectivity across all our product portfolio. So that's continuing to grow. We expect that to continue going forward in sort of throughout the rest of this year and onwards. And we're -- like I said, we've got our team in place and we're building on those relationships every year to day of the week.
Next on the line, we have Bob Chen at JPMorgan.
Great. Just in terms of the sort of strategic review comments, can you provide a little bit more color on what you're potentially thinking about here? I see some words there around operational efficiency as well as maybe automation. Could we see maybe some changes to headcount across the business as well going forward?
Yes. Well, basically, I think there's enough information in there that we're looking at doing that. And I think it's more of a half year. We're going to -- we just want to give some -- be open about how we're doing that. Honestly, from our standpoint, we've done great work on reviewing the cost of goods sold in terms of network side of the business, the significant reduction in CapEx, increase in revenue. The one area that we really want to focus on is how do we make sure that we do a full cleanup of the legacy contracts, arrangements and things to make sure that they're fully automated and actually within the business and to make sure that as a business, we're operating as efficiently as we can.
Probably just to add to the automation component is really important to me, that's one of the key things that we see is really important to driving our financial outcomes and our margins, and that's optimizing and automating as much as we can, not just on the customer journey, but also internally in our -- in how we manage and run our business right and our support internally and how we do that and taking as many of those manual areas away and making it automated and streamlined as simply as possible, the same way we deliver our service to our customers. So 2 aspects to that automation piece that are really important.
Okay. Perfect. And then just one of the comments around Megaport ONE, the MRR driven there, sort of at the moment with another 10-K closed in January, and it looks like a pipeline of around $100,000. Like, how healthy is that pipeline? And how is that pipeline sort of growing as well?
So Megaport ONE or just in general, are you talking about the...
Just Megaport ONE.
Yes. so -- Well, we've only got 1 significant customer -- 2 customers, but 1 significant customer at the moment has continued to grow, and maybe Sean may want to jump here and numbers themselves for revenue. But -- we just came back from PTC with Pacific Telecom Conference, which we got over here and it's a huge event for us and a lot of partners. And we had whole demo room cell from Megaport ONE. It's not for every enterprise. It's mainly geared towards large resellers or a data center operator or a network service provider, et cetera, who have got many, many clients, and we're going to help them with a white label solution to actually optimize a resell our network and our IP that we've got to help them sell their own their product, right? So the case in point of out of Southeast Asia and Singapore, and they've adopted it, their in turn, they don't have a corporate portfolio, they don't have a corporate service offering that has a cloud service offering, and so they're using Megaport ONE to sell that. And it looks and feels like it's an product, but it's our services the same way we with Digital Realty and et cetera. So I think it's something that's going to continue to grow. Coming back from the conference, we have a strong pipeline there, at least there's half a dozen, at least, very strong prospects that we have that we're looking through that we need to refer to take a bit of time to -- takes a bit of work to deliver and get it all put together. But at the end of the day, meaningful deals. Sean, do you want to add to that?
There are -- That's pretty -- so that's pretty much the way it is. We have 2 active customers Megaport ONE that is very much concentrating on the 3 deployed element as they turn up and the other one is using kind of the 2 the cloud, the more traditional kind of white-label of Megaport portal. That bill was signed in Q2, and we're starting to see kind of the reselling of that coming through in the current quarter. We've seen the our -- RFPs out for their customers. They're winning deals and using Megaport ONE or using Megaport services as part of the overall solutions they're providing to our customers. And it seems to be very compelling proposals that they are winning business with, and they're extremely keen and they're working very closely with managers, and giving a good visibility of the kind of registration and the life cycles of those things that they're working on. And if it's an indicator of how versatile and how adaptable Megaport ONE is a customer as a product for these kind of resellers. I think it's a clear example, and I only have an businesses some of the reference Great.
Excellent. I might just ask 2, if that's okay. First one is just on MVEs. Obviously, you had a bit of a difficult quarter, both from MRR and new customers. Actually, interested in what's kind of changed in that quarter, whether it's less the sales focus or whether it's anything to do with the kind of partners that you sell through having less success?
MVEs, specifically, there's probably 2 aspects to it. One, we've had a good what we call proof of concepts or POCs, which were activated in first quarter or whatever end customers typically start them off, turn them on and then turn them off again. And then once the proof-of-concept project is completed, they reengaged with the service and build it out. And that's part of what we've seen a big uplift in services in MVE have come into January. We had that same scenario that happened back in June, July and August when we had -- we launched the product and services were turned up as proof concept. These are large Fortune 100, 200 companies. So they're not small, so they have of the things they want to do it in a sort of a nice way bring it all up. It hasn't been revenue impacting because of concepts we do have been more about here to take a try say it works. I mean they stand it down going to bring it back up. And that's kind of what we've seen on that. And I'd probably just couple that with, like I said earlier on, there has been a little bit of the end of the financial year ending December and also just with the overall macro economy at in some of the decision-making on certain things have slowed down a little bit. But these are big decisions they're making on MVE and where they want to locate in logistics and the size of them. So they're not small. They are big decisions. And that's been a contributing factor to what we saw at the end of quarter 2. The good news is to start the quarter 3 looks good and healthy from that perspective.
Great. And maybe just one more on the cloud VXC pricing changes. Maybe just interested if you guys can talk into a few more of your assumptions on kind of the spin down or churn you're expecting and the kind of net pricing increase would be great.
Yes. I don't want to go into a lot of detail, but we're generally comfortable in those numbers. Probably at the half year we might given a bit more analysis. But I think we've got an amount of that I think is a hope is conservative, but we'll wait and see.
Okay. Great. The first one is just in regards to our CapEx and the new markets CapEx. Are you able to just give us a bit more detail as to what that is? And do we have optionality to push that out into later periods if we feel that our cash balance is strong enough to implement that in the near term?
Yes. Well, okay, first of all, new markets for us is actually adding on a new country just to give that context for what that means, as opposed to adding on a new site, which is we kind of consider that as business as usual or how we're building out things. We're looking at -- we've obviously built into Mexico. We're looking at our business plans around Brazil and a couple of other countries that I've mentioned, which I can -- we can get into more detail and we were planning to get into more detail in our half year presentation. But that's what that relates to. Whether we want to push out or not, to be totally honest, it's not about the cash CapEx decision we're doing it. It's about whether we have the commercial circumstances and the deals and the partners sell in the country that we want to operate in. Because most of these countries that we're looking at from here on now are not complex, like the complex because we're getting different currencies, different tax regimes, ownership rules how to do business in all of these countries is not the same as it is necessary in the U.S. or the U.K. And so we have to make sure that we'll make a decision. We're not going to hire 400 people in Brazil. We're probably going 3 and they're going to manage relationships with people in sites that are in operating environments. And therefore, they take time. And until we were ready and we've got that commercial contract in place, and we're happy and comfortable with that situation we'll then invest, right? Right now, what you're seeing there on that new market piece is like a placeholder for us. If that slipped a quarter or whatever the case is, it's not because we didn't want to spend the money, it's because we want to make sure our centers look for We spend the money and we don't have any partners, how are we going to sell? So that's kind of how we're looking at it. If that answers your question.
Yes. No, that definitely makes sense. The other one is just in regards to -- I think Ben kind of touched on this, but just the and the MV decline, and you talked about some of the customers spinning up and spinning down the services. So would it be that in the past, if they had some, I guess, proof of concepts that would have been included in our operating metrics. Is that the way to think about why the numbers are...
Yes. And in fairness and in full transparency, everything we've built in on our platform when a service gets turned on life, it gets counted, right? That's the way we -- we've always reported it that way, no matter what the service is. Some of them are free and some of the proof of concepts and other ones are all billing, right? So we count them all as a service at that point in time.
Okay. Okay. And then just in terms of the cost out program, it was implemented in second quarter. So how much of that would have flown through in the second quarter? Or is that something that we should be expecting from third quarter onwards?
There've been kind of a few tens of thousands of dollars, but we might have realized in December -- in the month end. But you're going to see a little bit more of the impact of that through Q3, and you won't see the full impact until -- well, towards the end of Q4 and into next financial year.
And I think that's probably -- just an important part to come stepping through second the question about pushing out new markets and can and things like that. We certainly have options and levers to pull. And I think what we've done is, I think, to help people probably create the bridge. I mean all the data is there. But if there's a cash burn this quarter of if you're looking at reducing our cost of goods sold by roughly -- on a quarterly basis of $2 million, if you're potentially looking at increase in revenue of $2 million a quarter in terms of the VXC stuff, there's about about $1 million that was built like of the that hadn't paid in the quarter from a cash basis. So you kind of take that out that 5. CapEx reduction on a quarterly basis on average another 1 million, you're kind of getting to $6 million to $8 million of quarterly cash flow change just with the things that we've kind of done here. So a $2 million expansion into another market. We can absolutely push it out. But our focus has been saving that amount of money 3x to 4x that amount of money in a quarter. So once some of these levers are kind of pushed through, I think the decision of whether we go to a new market or not, it's going to be less of an issue for the group. So that's an option for us to do that. And if all these things don't come true. But if we are strict and diligent in what we're doing and very focused on it, once these cost efficiencies, price upgrades, we finished the reduction of those big CapEx programs, there's some onetime things that happened this quarter. There will always be onetime things, but when you want to normalize that, there's $1 million of one of our data center departments paid a bit late, sort of been paid, but it didn't happen in December happened in January. When you look at that kind of cash basis and you kind of -- when the full impact of that happens in, let's say, Q4 or Q1, I'd certainly expect that the numbers will reflect that material
Okay. Last question is just last quarter, we did say that we expected a bit more of a ramp-up in the channel partners in a couple of quarters. So I'm just -- would like to get an update as to our expectation as to whether we think that from third quarter onwards we're still expecting a bit more of a ramp-up in terms of that channel part of growth?
Yes, I think so, right? I mean like 40% in the quarters pretty significant, right? And it was the same, I think it was 50% -- just over 50% in the previous quarter, albeit from a lower basis, we're continuing to grow. So -- our intention is to continue to add partners on board and bring in proves that they can actually expand and help us to resell our products. So we expect that that's our endeavor is to make sure that we're bringing on the best partners in this space that range -- that have the capability of selling our products. So we don't see that slowing down. That's a key part of our sales strategy in terms of the channel itself. Yes, I don't see that slowing down. It's a focus area for us to continue to grow it.
Sorry, I was just going to say one of the things that we do here. And you can see on this graph as well, the number of partners that we have signed up and that are going through the education process before they start to transact. We have 50 on transacting as they at the end of the quarter and about the same again or yet transact. We do expect kind of the customer behavior through these partners to be -- to exhibit exactly the same way as a direct customer. So you'll see kind of the spend for each customer kind of grow over time. So while the MRR per partner is just currently low, you're going to see the number of partners transacting increasing and as we bring kind of the same partners through to be able to transit and the MRR for those that are transacting on start to see them with the same behavior that we're seeing for all of our customers within our customer base, it did.
A few questions. Can I just follow up on the MCR and MVE can performance in the second quarter. So with the MCR, the same issue with the pilots, the -- sorry, with the proof of concepts, the decline?
No, I think just with MCR, if you look back in the previous quarter, we had a spike on MCR. I think you just as more of a flattening out for that period. And I think a lot of the MCR is about hybrid and multi-cloud. And I think that was more in the bucket of just a general macro kind of decision-making coming to the end of the year scenario as opposed to the which is more of a proof-of concept, which is a different solution. It's more complex and obviously, logistically, it takes more time and effort to put that together.
Sure. So is there -- the fact that actually declined churn? Or is that a swap out? Because my understanding is functionality. So is that -- and Vinny, just on the MVE as well, is it like -- because you're adding like sort of 20 MVEs a quarter. is the proof of concept that meaningful, that more 20
Yes. Okay. Well, 2 parts of that sort of -- start with the proof of concept. Yes, it is very meaningful because they have to -- first of all, they have to order CPE equipment, right, to put in their premises or the building of their branch or whatever that location is, and they have to connect to Megaport on an MVE and then order VXCs and then get to a cloud provider. So I think I said this before, so there's a fair amount of upfront work that needs to be done by the enterprise customer before they even can connect to MVE. And so what they're doing is part of a proof of concept is that are doing that on a 1 to 2, 3 location sites standing MVE with VXC and then proving it out that actually was exactly what it's supposed to do. And then they switch it down and then they have to order a bunch of more stuff in more locations. And MCR is the very same thing as like a port or a VXC. It's instantaneous. You can stand up that service and you can stand it down and bring it back up again, right? I mean you can do that in minutes. That's the whole ID, it's multi-cloud. And I think that's just what we've seen over in quarter 2, particularly with MCRs as that was certain services were stood up and let up and running and operationalized and then some things that weren't used and customers whether they're trying to save money or whatnot, basically just held off on increasing. And that's what we -- that's our experience. We haven't lost customers as a result of it or any other services like that. It's just been more about their ability to use our platform and our services and our products the way it was in to be, which is consumed as you want.
Yes, I think to your point, really, what we mentioned in the deck was Lincoln decision cycles and some of the proof of concepts or people doing spun it down. already in terms of this quarter, whether or not we're kind of seeing people converting again. So at the moment, we're -- there's some positive numbers there. But it's January -- it's a few months ago, but people seem to be making decisions and turning their services on.
Also, Siraj it specifically. We're not seeing any significant uptick in. We're just seeing kind of a
Got it. just clarifying on the pricing uplift, right, my math could be wrong, but otherwise, all it would mean that your joint assumptions are quite high. But if you had 16,000 VXCs, it's increasing by $100 a month. Should like close to $20 million in additional revenue, isn't it?
But not all VXCs. This is just -- this is cloud, so and less than 1 gig. So it doesn't include long haul, those types of things. The numbers will -- I probably won't kind of go too far in terms of the numbers. But there are some where like 8,000 of those services somewhere around the network. So thereabout. So it will impact around 8,000 services. We'll be more clear in a half year yes. And you're right, there is an amount of in it that's probably. We did the 1 gig port there before. We don't necessarily think that there will be the correlation between the 1 gig, 10 gig, will be similar in terms of the churn. But we thought it best to probably use that as a for -- so there is a point even on that basis. There's a reasonable trend figure that's built into it. We're optimistic won't be that, but we know be cautious. To be clear, it's a subset of the VXCs on 1 product that we're readjusting and rebalancing to bring it in line with the rest of our VXCs pricing for for particularly 1 gig only, okay? So it's a subset.
Got it. Last question is 2 parts. Just following up on that on the churn. I mean, Bevan, where do you reckon the customers can go? I get the price increases there, but your pricing is quite attractive the churn, too? And just, I guess, a broader question is, there's been 2 quarters where has been quite weak. I understand the macro delaying impact, but there's no churn uptick. Just -- I mean do you think competition is a factor, what's impacting the whole growth in the KPIs, I guess?
Yes. Look, I think it's fair to say not having a focus here for the last pretty much 6 months up until Jeff started I think in May, we have the departure and then Jeff started in December. I think that's certainly a key part of it in terms of having that focus. So you're right. So it's actually gross adds, which is -- which has been the thing. The churn has been pretty much consistent all the way through. So as I said, our focus is on the profitability element be impacted by the CRO thing, which obviously, we've been fairly involved to sort out. And so once Jeffrey gets this under his belt, along with -- we want to get some external consultants in as well to get -- to work with Jeff and the Board and the executive team to make sure that our go-to-market is good to work on getting those gross adds up. We're not seeing people flight to another competitor. We just don't really see any other competitors out there to be counted. But it is the gross adds that's going to impact that. And again, part of that -- the second half of the year has been a lot different for everyone, I think. It's fair to say in terms of that side of it. But we're basically going to do some pretty in-depth analysis of how we improve that growth element of it. Possibly, we'll be looking at some significant expansions in -- not necessarily new markets, but just additional facilities around the world. There will be significant amount of analysis that goes into that and basically working with third parties as well as our data center partners as well as our sales team to actually sit there and say, what is the most efficient way that we can actually improve our sales pipeline and accessible to our products and other data centers around the world. So I think that's more of an FY '24 decision in terms of what the outcome of that is going to be. But I think that's very much going to be a focus on how we improve our go-to-market, but b, also increase our addressable market.
On the line we have, Paul Mason, Evans & Partners.
Just 2 for me. The first one, just -- last time guys, you guys are still considering maybe making targeted expansions to the sales team. But today, there's like a lot of cost-out discussion. And I was just wondering if you could sort of clarify like are you still thinking about like potentially expanding headcount in the sales team? Or is it like the how and why, is like just full volume cost control across every element. And the second question I have was just on this consolidation of services like what your thoughts are around how -- what we're seeing with port consolidation could play out with your other product lines over time as well, whether that's something you guys plan around and that we should sort of model to or whether you think it's so unique to the port on the generation upgrade there?
Yes. I mean I'll have the first stab at this and let me -- really important that people don't see full consolidation in terms of customer consolidation. The major part of that pool consolidation is us consolidating multiple, multiple 10 gig legacy cloud interconnections that restrict our scalability, but also significantly increases our cost to service that. The example being our average spend for cross connects -- physical cross connects in North America is around USD 375 a month. If we can use one cross-connect to connect to a 100-gig port versus 10 cross connects to connect to a -- to 10-gig ports, that's a $3,400 a month saving in terms of doing that. So when we talk about the kind of consolidation piece, that's really what kind of -- a big part of that is driving it. One is improving scalability and also we can offer bigger VXCs clouds for our customers, and we have to do less manual work just to get those ports set up. So don't infer that that's a customer thing that's actually an efficiency on our side. I think the second part is the full kind of blind out cost control. I don't think that's a really good -- it's nice to think that. Well, it's true that we're watching a lot of things, but we're not just cutting things for the sake of things. We've done this process for the last -- every 2, 3 years, we do this upgrade of infrastructure usually the core network or whatever, and we make decisions on how we architect that and how we architect it has a technical component of it, but a commercial component of it, right? So what we've been doing is we've been rearchitecting the network to be technical superior whilst at the same time, using that as an opportunity to to realign our commercial reality of that. Example being, while we put our locations in one of the most expensive data centers for cross connects and space and power. Let's see if this is an opportunity to put our core location in a partner-friendly data center like a Digital Realty Group. So that's an example of just us focusing on the cost of goods sold element of that. To your point about the sales team, it's not about we're going to cost control sales team. We've got a sales group, including our support people, leaders, whatever it might be, to get 90 people. We're not looking at doing any kind of drastic changes ourselves to the head count and sales. But what we are looking at doing is actually doing an analysis of where is the most efficient and best way for us to leverage that sales team. It's a level we're going to pull, but not the level we're going to pull to reduce our cost is actually going to pull them to make it more effective and efficient, making sure that they're going -- the partners are working are the right partners, making sure they fall under category or a partner advantage program that best suits it, make sure that when we sign a new contract second system, make sure that the billing part is automated, make sure these things happen. So we're going to make sure -- go-to-market motion much, much more focused and consistent amongst the group. The second part, we're going to make sure that our go-to-market motion is much more efficient in how we do it. And that we're not creating -- I mean we go on contracts that we work with our partners that are 7 years old. The market has changed a lot in 7 years, but also so is our billing capability. We've got some great automation in that, but we haven't transitioned some of these agreements to a more consistent platform. So we're not doing crazy cost out and crazy things like that at all. I don't think we're going to see any material change at all in the headcount, for example, on sales. But what you might see is we might focus some of the people on the partnership is to work with different partners. So I think that's probably the best answer.
Yes. I think that pretty soon. What we're doing is we're taking a good review of the organization. That's Jeff's job first 90 days, take a look at that. And like I said earlier on in the question is we retweaking it or repositioning some of the people that we already have to put them in the best place to get the best possible outcome from our sales and revenue generation point of view. And if that means more of a shift channel versus direct or account management at end of the day, we still have 2,740 customers. That revenue base is growing. The revenue per port per service per customers continue to go and will show us some of the information in our half year. So it is working. We just think that maybe it's fresh fresh when we look at it, you said maybe maybe we can be working even better again. And that's all -- that's what it is.
Yes. And this is -- this quarter, and it might even change for the next quarter. But the thing with this business has been a growth company. Our focus going is a profitable growth company. So for us, we want to make sure that our resources used efficiently, but we also absolutely keep the churn where it is, if not live, but the churn where it is. But we want to make sure we get all the things right to massively scale our people's capability. So we continue to be a growth company, for example, in FY '22, but we really added an element of profitable in every sense of work. So yes, we're in no way, looking at reducing our sales force.
The final question from the line of Lachlan Brown at Credit Suisse.
Most of my questions have been asked, so I'll just keep it to the singular question. Just on the Slide 15 of the slide deck, where you show the half yearly CapEx projections. Do you mind just going to, again, further detail on the BAU CapEx reset in the second half?
For FY '23 or '24.
On the half yearly, so must be the slide afterwards, just in the second half of this year, that BAU CapEx reset.
Sorry, I'm just referring to...
So the CapEx by half Yes. Page...
So in FY '23, the 2 half years, we're going to go from an estimate that we're going to spend roughly between -- around $33 million for the year under reduction that you're seeing from the first half, then the second half.
Yes. So it steps down obviously quite significantly in the second half and then it starts to up a little bit again. Do you mind just going through the detail of that again, please?
Sure, no problem. I think that's the point we were talking about earlier on where we said we just completed the 400-gig upgrade, right, which is a large chunk of that on the previous 2 bars to the left of that. So we've completed a lot of that work. That project is a one-off thing, took a lot of investment to do it and upgrade the network to allow us the capability for 100 gig, so that we can move forward. That's not business usual anymore because it's finished. And then, therefore, the back end of this year, we're just caring on normal.
Yes. Okay. So is there some -- because the 400G upgrade that sits separately in the last 2 halves to the BAU. Is that part of that, that sits within the BAU CapEx as well. Is that what you're saying?
Yes, there's part of that. And also don't -- remember, we did spend cash CapEx on our inventory over the last 18 months, and we've built that out because of the logistics and supply chain issues. And now we're starting to eat into our inventory and use that as normal. So we're not spending the cash because we've already got. So we already spent it. So as a result of that, we're not future spending cash because we're actually utilizing the inventory that we've built up as a result of those underlying supply chain issues and logistic issues that were there before.
Yes, some of the BAU that we're seeing as well is just the increase in customer whether it be for core capacity with an existing -- our existing footprint or the normal expansion of our footprint. And what you're going to see is as we kind of go through this cost optimization program, we're making sure we're in the right locations, there's going to be some instances where we're going to swap locations to make sure it will be our best located to service our customers. And you're going to see a redeployment of capital to spend in the second half is going to be down as we really utilize that has been deployed elsewhere.
Thank you very much. Look, I suppose just in closing, we're reporting on February 9, and we'll have the half year presentation, et cetera, and we'll be doing an in-person investor presentations and Q&A with everybody in a couple of days preceding that. So thanks very much for both of you here at Thank you. Thank you very much for joining us.