Megaport Ltd

ASX:MP1

Earnings Call Transcript 2021-Q3

[Steve Loxton]

Welcome, everybody, this morning to our update investor briefing following the release this morning of our third quarter global update and Appendix 4C as well as the shareholder letter.I'd like to introduce this morning the CEO of Megaport, Mr. Vincent English. He's going to be joined by Rodney Foreman, our recently appointed Chief Revenue Officer. Vinny, take it away.

[Vincent English, CEO & Director]

Good morning, everybody. Welcome to the quarter 3 global update. Joining me on the call today with Steve is Rodney Foreman, our new Chief Revenue Officer; Sean Cassidy, our Chief Financial Officer; and Eric Troyer, our Chief Marketing Officer.The purpose of today's call really is sort of a quick update on the quarter 3 update and the 4C. I'll just add a little bit extra color to what was released this morning; an introduction to Rodney and his first 75 days in Megaport; and some of the changes that we're seeing there in the market and some update on our sales strategy. There's been a huge amount of requests for updates on MVE and a bit more context and color on that, so we will deep dive into that further and then just an overall outlook for the -- where we are for quarter 4 going forward. And we will leave adequate time for questions and answers towards the second half of the call.Overall headlines. Our monthly recurring revenue was up 8% to $6.8 million for the quarter. The underlying run rate, including FX, it was up 10%, our second highest quarter ever at 631,000 MRR. In total, revenue was up to $19.6 million. It was up 5%. Our customers closed at 2,117, up 4%, adding 74. We had a very strong uptake in 3 particular verticals: financials, media and entertainment and network and IT managed services. Overall, our Ports and Services at -- Ports were at 7,037, up 5%, and our Services passed over 20,000, at 20,056, up 4%.Just in general, on the quarter, we've seen -- and I'll talk to this a little bit later, and Rodney will go into it in a bit more detail shortly, we've seen a slow start to Q3, but we've seen a tremendous uplift in -- at the end of the quarter 3 and, in particular, from the beginning of March onwards and has continued into the first 2 to 3 weeks of April, and we'll talk a little bit more of that in detail, and a lot more engagement in our pipeline with our highest pipeline build ever that we've seen in the business for Q4. So lots of opportunities and a lot of new customer as opposed to existing customer uplift coming through.In terms of the regions, on -- as you recall, our Q1, we had a slight dip in our European revenue, but we've seen 2 back-to-back quarters where the revenue in Europe has increased by 13% in the quarter. And in euro terms, it was up 18%. Our U.S. business was up 10%. And excluding FX, or just reported in U.S. dollars, it was up 12% for the quarter and continuing to build, which contributed to the uplift in MRR at $6.8 million for the end of June.In terms of MVE, as you recall from the announcement at the end of March, we launched MVE live. And it was hosted on Cisco Live!'s video conference, which had the highest -- their highest amount of resellers and partners attending. We had quite an amount of collaterals come out of that and goodwill. I'll talk a little bit in MVE in detail, but we already have quite a good few customers in proof of concept and in the pipeline already start to build for MVE.In terms of the 4C, in general, again, very strong collections coming from our customers, again, collecting over $20 million. And our debtor days are down to 25 given that our average customer credit terms is 30 days and, in some cases, our large ones are 60 days. So again, a lot of customers are valuing the services and continue to pay for them, which is a strong indicator for -- I suppose for what we would call very sticky customers continuing to use our Network as a Service platform as a key part of their infrastructure.In terms of momentum, as I said earlier on, Q3, a slow start to January but a very strong finish to March where we've seen most of the services and uplift that we report they come through from the last week of February into March. Again, there's an element of seasonality towards that depending on the region, coming out post-Christmas. The pipeline is very strong, as I said, with new customers in Ports and Services, and we're looking forward to a very healthy quarter 4, which I'll touch on a little bit later.Just with that then, in terms of where that's at, I'd like to introduce Rodney to the investor group for the first time since he joined in the beginning of February, just to take us through a little bit on what his background and then just more so on the sales strategy and pipeline of how we see things moving forward. Rodney, I leave it over to you.

[Rodney Foreman, Chief Revenue Officer]

Okay. Thank you very much, Vinny. As Vinny said, I'll take you through a little bit about myself and my thoughts after 75 days at Megaport and then talk a little bit about our pipeline and our plans to transform and scale the business globally.So I spent most of my career at IBM. I started as a large-scale network architect. I spent some time at Tivoli software after IBM acquired Tivoli as a product manager and led the product management team for the monitoring and performance products. I started the OEM business at Tivoli and formed relationships with Cisco, Toshiba, NEC and others and took that OEM business from $0 to $50 million in a year. I then was promoted to Senior VP in IBM to lead the middleware and cloud business. That was both the mid-market direct business and the channel business with a $1.2 billion target. It was the largest channel and mid-market business at IBM. I spent time recently in Nutanix, leading the sales team and global channel sales and now glad to be joining Megaport.My thoughts after 75 days, it's very clear to me that we are a leader in the market for a number of reasons. One is our diversity in terms of platform. And being in over 740 data centers and close to 250 cloud on-ramps really differentiates us clearly in the market. And now with MVE, everyone is really excited about the news that we've received, the exposure we've received in the market, partnering with Cisco and going beyond the data center to the branch location and increasing our footprint and existing customers and being able to address more of the market with SD-WAN providers. And I think that's going to propel us to grow our product footprint not only with MVE but VXCs and MCRs as well.Our pipeline looks strong, as Vinny said. The MVE announcements with Cisco is giving us a lot of customer interest in the market and on our platform. Our partnerships with data center operators like Digital Realty, CyrusOne, QTS, Cyxtera is growing our pipeline, growing our business. The multi-cloud opportunity, I see that growing, and that is increasing. Digital transformation projects are still happening with customers and accelerating, and that is also contributing to our pipeline growth. And as Vinny mentioned, we've got some really good momentum in EMEA and looking very strong in terms of our pipeline growth across EMEA, North America and also countries across Asia Pacific.In terms of our plans, I'm really excited about taking more advantage of the opportunity we have in the market by extending our market reach, leveraging the channel. We have an outstanding opportunity with some top partners in the market that we're developing now. And as we develop our new channel program and develop those key strategic partners, we'll have some announcements coming around that pretty shortly that will definitely change our trajectory and extend our reach into the market, as I mentioned. I think also as we grow our business across verticals and leverage the use cases and the customer base that we have, we have a lot of satisfied customers. And as a sales leader, there's nothing more that you like than happy customers to leverage outstanding customer stories to win more new customers, and we have some very happy customers across every industry vertical.Our overall strategy from a sales perspective is to continue to grow our direct business and, in harmony, grow our indirect business and extend our reach into the market across all countries globally that we cover today.So I appreciate the time, Vinny, and looking forward to a great fourth quarter. So thank you very much.

[Vincent English, CEO & Director]

Thanks, Rodney. I'm sure we'll get plenty of questions soon enough. Just an update on the innovation and MVE overall. So I suppose you would have all, at this stage, be aware that we had the MVE collaboration with Cisco at Cisco Live! that happened on the 30th and 31st of March. It's live now on the Megaport platform and available. We will get into a lot more detail around pricing and modeling with various people, but we're going to do that later in May in conjunction with the live demos as we finish off completing some work. It will be live completely through the Cisco vManage portal in mid-August. Their financial year starts in August. So we're in the process of doing all of the global training materials updates, et cetera, with their team at the moment. So that's an ongoing piece of work as we finish out this financial year.As I said, our pipeline is continuing to grow MVE, and the selling at the moment between now and August will be done through Megaport, so as we hand off leads to each other to make sure that we complete our customers' demand for -- instantly for MVE.We have large and global Fortune 500 companies at the moment going through proof of concepts. And as I said before, with Intercontinental Exchange in New York, the New York Stock Exchange, they did the same thing. Large companies tend to take up large amounts of services but initiate by taking off a proof of concept to ensure everything works properly before adding a lot more services. So the thing that we've seen here is that the fact that we've got a global network across 23 countries is something that's very important when you're building out a branch network, particularly for a global company. And that's exactly what we're seeing come through both in the pipeline and the collaboration with proof of concepts with some of these large organizations.We will be announcing a couple of other SD-WAN technology partners in the course of this quarter. So that's [ the same with ] what we've done with the CSPs or the cloud providers, we intend to bring on more partners to allow customers the choice for whichever vendor or technology partner they want to use in the same way.In terms of the next stage for MVE and where it's at, we're going into full commercial mode right now. And as I said earlier on, the full selling organization behind Cisco kicks in mid-August. In the meantime, some of the partners that Rodney referred to are also Cisco resellers. They sell a lot of other services. So we're signing onboard with those, so we can actually not just sell SD-WAN but actually continue to sell Ports and Services and cloud connectivity in general as part of a product portfolio for a lot of these large global resellers. And we will be announcing a couple of those as well in the not-too-distant future. And that's pretty much where it's at.The portal is live at the moment, as I said, with MVE. And as we're saying, we're working through opportunities there. We have a pipeline of 65 live at the moment for MVE as we're working through that, so very strong interest. We also won an award over in Tokyo at the Cisco -- in collaboration with Cisco on the SD-WAN product in MVE for best technology and innovation release at the event, which was just last week.And pretty much that's the update. I anticipate we'll go more deeper into this when the Q&A opens up. So I will just leave it -- I'll leave it at that for now.In terms of the outlook and where we're at, we're on track for 405 sites for the end of June. As I said, this quarter, it's the same as the previous quarter for us, we'll go back switching to -- once MVE was launched, we were going back into build mode, so that's on track. And with the momentum and everything that's on that, we're also on track for our EBITDA exit run rate on June. As I said before, the operating leverage in the business is there now. It's coming through. And so as a consequence of adding more sales, we naturally get to that outcome by the end of June.And the closing cash at the end of the period was $141.5 million. So notwithstanding that, the strong collections and the revenue coming through, we have the wherewithal in terms of the balance sheet and the cash to support the push-through for MVE but, mostly importantly, to support the sales strategy that we've got, which is actually an increased momentum going from a very low base in our indirect and channel sales by bringing on some of these partners to really push the growth from Q4 into FY '22 and beyond.And I suppose most importantly, to close out, we're really excited. We're finishing out FY '21 in terms of the pipeline, where it's at and the momentum that we're already seeing coming through in terms of new customers already in April and the opportunities that we're seeing and what we've closed so far in the first couple of weeks. So it's an extremely busy time.And overall, the momentum, as Rodney said, coming into the new financial year, our digital transformation products are accelerating, and we're seeing that. And I think a couple of analysts have already started to pick up and report on that coming out of the U.S., and those trends are continuing where business has to get on and move away from legacy architecture. And the increase in IT spend is what we're seeing as the #1 user case why people are trying to move forward quickly and move more of their infrastructure into the public cloud. So we're looking forward to finishing very strong in Q4 and into FY '22 with new products and new partners and customers.Okay, I think we'll leave it at that, and we'll open to Q&A.

[Operator]

[Operator Instructions] Tim from UBS, you can unmute yourself, you can ask your questions.

[Tim Plumbe, Research Analyst]

Can you hear me? Hello, can you hear me? Steve? Vincent? No?

[Vincent English, CEO & Director]

We can hear you. Yes.

[Tim Plumbe, Research Analyst]

Yes. Okay. Fantastic. Apologies. Just a couple of questions for me, and then I'll circle back around and give other people a chance to ask. But Vincent, just looking at those ports added, same store been bouncing around $350 million to $550 million. Any -- are there any observations that you can make when you look from going from a bit of a softer result to a stronger result? Are there any differences? Is that softness coming from the direct channel or the third-party channel?And then the second part to that question, just third quarter sounds like it was a bit of a tale of 2 halves. And from what you're saying, the second half was much stronger, the beginning of April was much stronger. Is there a way for us to think about what that quarter would have looked like if you'd extrapolated the back half of that rather than taking in the full amount?

[Vincent English, CEO & Director]

Well, okay, the first part, look, I think we're going -- without giving numbers, obviously, we're early into it, but we do have a pipe -- the way I would look at it, we have a pipeline that's 4x the coverage that we need to do what we would call a higher number, so we have a lot of opportunity. Even if half of that convert, it's still a hell of a lot more than what we've achieved before. And again, that's -- I think the underlying reason here is the slow start. There's a lot of businesses that were just slow getting in gear in January.In U.S. and Europe, as we mentioned, a strong quarter there. A lot of that's because their calendar year is their fiscal year. And a lot of budgets that were approved pre-Christmas -- and this is feedback we're picking up from customers. They're getting ahead with their IT spend, and it takes a couple of weeks to get going from the beginning of the year before you get vendors onboarded and then getting things tested themselves. And we certainly saw that pick up at the back end of February and into March and continue. And that's the #1 driver, is the actual increase or the willingness to increase more in IT spend and infrastructure, and we're a beneficiary of that.

[Tim Plumbe, Research Analyst]

Got it. And then just one other one, if I can. Just when you go onto your platform, very exciting to see that you've got MVE launched there. When I look at the pricing across the different geographies, when you think about your core product, a port is AUD 500 in Australia or USD 500 in United States. When I look at the mid-range MVE product, it's AUD 4,736 versus USD 2,640. Just wondering if you can touch a little bit in terms of what the core drivers are behind that difference and how we should think about it.

[Vincent English, CEO & Director]

Yes. So there's a transit cost or a transit element part of the bundled price, and it's different per region. So obviously, it costs more here in Australia than it does in the U.S. and Europe, and hence, that's the difference. But the actual MVE cost as part of that bundle and of the instance, depending on whether you want a small, medium or large -- so similar to the way we've done MCR, you can have 4 sizes. You can have less than 1 gig, 2.5, 5, up to 10. They're in different categories or there are different price brackets for each one.And MVE itself is the same. So you go from small, medium and large. And that basically is how much compute do you need, and it goes up in CPU usage sizes from 2, 4 and 8 is kind of the bundle, it's how we've done it. So the pricing for that is consistent across the market. It's just the transit element that goes along with it, which we don't really have a control of it. That's something we've bundled in as part of the price, and it's a pass-through. So happy to go through that in the modeling, but that's the reason for the way the price structure is set up.Those prices, obviously, in the port that you see, don't include VXCs. That's just for the MVE instance, depending on the size. And typically, for a small MVE instance, you need a minimum 2 VXCs so -- and it can be anywhere between 2 and 4, but the minimum is 2. And then as you move up in the number of MVEs required, it's just a multiplier effect. If you need 4, then it's 4 times all of that. So think of it -- the minimum instance is 1 MVE and 2 VXCs. And that will be the smallest MVE fit or deployment that a customer require. We've got some large customers who are looking at various different sizes but multiples of those.

[Tim Plumbe, Research Analyst]

Got it. And just very last part to that, the VXCs, pricing isn't up there. Presumably, it's not the same as the stock standard pricing.

[Vincent English, CEO & Director]

No. No, it's $200 for less than a 1-gig VXC, and it's $400 for greater than 1. The pricing, again, is different because you're solving a different problem and removing additional complexity. So the fact that we have a network there and it's a higher premium product because of the complexity of what we're trying to solve, that's the reason for the pricing change.

[Nick Harris, Senior Analyst]

Nick Harris here. Can you hear me?

[Vincent English, CEO & Director]

Nick, yes.

[Nick Harris, Senior Analyst]

Just really interested to have a bit of a chat to Rodney and understand a little bit about his plans around changing [ the targets of sales teams ], accelerating channel in North America. Maybe you could just elaborate a little bit on your plans to do that. Do you need to add a bunch of salespeople that will focus on particular partners and verticals? Or is it about getting your collateral right and your pricing points right and having sort of a unified channel partner wholesale price?

[Rodney Foreman, Chief Revenue Officer]

Yes. Thanks for the question, Nick. It's really about building out our partner ecosystem. And that ecosystem consists of MSPs, GSIs, resellers, agents and referral and our data center operators. So it's important for us to continue to build across the ecosystem. We have strong data center operators and strong agents and referrals and some good resellers that we don't have as strong a presence as I would like in GSIs, MSPs. And we also are talking to some VADs, value-add distributors, like [ Tech Data and Aero ], who can substantially increase our reach in the market with some top partners that are selling cloud and other solutions today and can add Megaport to those solutions. So we have a really good opportunity not just in North America but also EMEA and APAC by leveraging a broader ecosystem of partners that we don't have today.We will need to add channel managers for coverage, but we will work our direct sales and indirect sales in harmony, especially during the first year because I believe the channel will bring us a lot of opportunity, but we will need our solution architects and our direct salespeople to help those new partners that will be building skills to progress and close those deals. And already with our Cisco alignment, we're talking to some top Cisco partners who are already bringing us pipeline and opportunity. So hopefully, that addresses your question.

[Nick Harris, Senior Analyst]

Yes. Maybe just to elaborate on it a little, though. Obviously, you've got some existing channel partners, is it about spending more time with them? Or is it also adding new channel partners?

[Rodney Foreman, Chief Revenue Officer]

It's both. I think it's both. I think it's alignment of our marketing team and getting those partners to do more -- run more marketing campaigns and sales campaigns as well as extending our reach in the market with more partners and more partner sellers and making those partners productive.

[Vincent English, CEO & Director]

I think it's also worth pointing out, Rodney, that some of these global resellers or partners that are out there, they're very good at selling services and solutions in a cloud environment, like Azure and AWS, et cetera, but they're missing the network piece. And so bundling us with their solutions, selling in a cloud environment, is a natural complement to each other. And I think that's the part that we're working with them very closely because we actually offer that. And the reason -- and the feedback we've had so far from some of them is there's nothing like what we've got in their portfolio or in what they're trying to sell today to customers. So we're really encouraged by that. And the fact that a lot of these arrangements are being accelerated now during the course of the last couple of weeks, and we hope to get a lot of them complete over the course of the next 5 to 6 weeks.

[Rodney Foreman, Chief Revenue Officer]

Yes. Thanks, Vinny.

[Jonathan Atkin, MD & Senior Analyst]

It's Jon Atkin. If nobody else has a question, I'll chime in here. So I was interested in maybe hearing from Rodney, in your discussions with customers so far, any kind of takeaways as you've engaged with them a little bit in your first 75 days. And then similar question for what you're hearing from your key channel partners, what's going right and what have you kind of identified as areas for improvement within the existing distribution channels.

[Rodney Foreman, Chief Revenue Officer]

Yes. So the customers are doing more with cloud and cloud-to-cloud, so that means more business for us with existing customers. Overall, the customers I meet with are very happy with our products and are excited about our MVE offering and the fact that they have branch locations, and they have SD-WAN and now they can incorporate Megaport to connect those remote sites. So my read is that we have a tremendous opportunity to increase our footprint in existing customers. We have a lot of happy customers across all industries, which helps us to sell more. There's nothing better than a good customer use case or a positive customer story to go sell more into that industry. And we have that. So I'm very delighted with what I'm seeing from our customer base and what I've seen over the first 75 days, Jon.

[Jonathan Atkin, MD & Senior Analyst]

And then as you seek more GSIs and MSPs and value-added distributors, is it a matter of enhancing your own product set? Or what are the gating factors? Is it just simply engagement level that needs to happen with the existing Megaport set of products before that starts to kick in? What are some of the proof points that these potential partners are looking for?

[Rodney Foreman, Chief Revenue Officer]

Yes. So it's just a matter of making sure they understand our value proposition and how we can add value to what they sell today and improve their solutions and be a competitive differentiator for many of these partners. So really, it's mainly about leveraging the VADs to reach more partners simultaneously and scale much quicker. To date, we've been one by one with our own team, recruiting partners. VADs -- we'll be able to define a criteria and profile a partner we want to recruit and have the VADs give us scale much more quickly. So I think that's going to help us to reach more of the market and team with more GSIs, MSPs, resellers globally at a much faster rate.

[Jonathan Atkin, MD & Senior Analyst]

And then finally, perhaps for Vinny or Sean. If I understood correctly earlier in the call, March and April have kind of kicked in related to just customer budgeting and where they are in the process, starting the new fiscal year. Is there anything that you've taken on the sales side that's contributed to kind of the March-April momentum? And kind of maybe just lastly, the comfort level you have with sort of hitting the -- what I think is the $80 million consensus for FY '21.

[Vincent English, CEO & Director]

Yes. Well, I think as well -- I mean Rodney can jump in here too as well. I mean he talks to the customers, and he owns the pipeline effectively. What we have been seeing is -- to give you an example, it's different verticals. I called out 3 verticals, and one of them in particular was media and entertainment. I mean we signed on BBC and Fox, just to mention two. I mean in the financials, I suspect New York Stock Exchange with UBS, Reserve Bank of New Zealand, Soros, Bain Capital, Bloomberg. I mean we've had a lot of data services from financial services that have come in. And it's probably not a coincidence as we've been talking to them pre-Christmas and for probably 4 months, 5 months beforehand. And a lot of these have all just come in at the same time in the same quarter as a lot of their checkbooks have opened up from budgets, et cetera.But the one comment that I'm hearing is a lot of data services, a lot of media, a lot of entertainment has the use of, obviously, a lot of data. And so the use of that and having a network that's allowed to connect across many locations and data centers, it has been a key driver. So that's one instance, and I think the -- in terms of where we are with the pipeline, what we're looking at, we're not changing anything to do what our consensus or planning, we're still quite confident we're going to do that but, most importantly, put us on the right trajectory going into the beginning of the new financial year. So it's a bit of both. But Rodney, did you want to add anything more about what you're seeing and the difference between kind of February, March and April?

[Rodney Foreman, Chief Revenue Officer]

Yes. So coming in, in February and looking at January, we put in place a plan with the sales team to address pipeline shortage that we have and then also progress opportunities at a faster rate. And that plan has worked. We're now adding pipeline on a regular weekly basis and monitoring that and putting a focus on that from a sales perspective, while we continue to progress and close opportunities at a faster rate. So the increase that we've seen from February and now into April just is continuing, and the momentum is actually building. And even with MVE, even though we've only had the product out a very short time, we're building a pretty substantial pipeline already. So I think we just continued that discipline of focusing on pipeline build weekly and progressing and closing deals. And we'll continue to see the momentum that we saw in March and April.

[Jonathan Atkin, MD & Senior Analyst]

Does MVE contribute at all to the $80 million? Or whatever your full year number ends up being, does MVE contribute to that minimally or not at all?

[Vincent English, CEO & Director]

Well, we haven't factored it in, no, because it's like everything else, you -- we kind of want to bet everything in. In our forecast and our planning internally, we wanted to kind of bet everything in. And I think closing out on a few new customers, hopefully, in May will contribute something in June but not material enough -- not to have a material impact, I suppose, in the overall total revenue, but it's more getting it done and ready and having it -- it will be a component of our revenues in FY '22.

[Bob Chen, Research Analyst]

It's Bob here from JPMorgan. Just a couple of questions for me. You sort of mentioned earlier, Vinny, that sort of the pipeline for Q4 looks pretty strong, almost 4x larger than some of your previous quarters as well. Just in terms of converting that pipeline into actual sales and to revenue dollars, I mean, can you talk a little bit about how long it typically takes to sort of convert one of these pipeline opportunities?

[Vincent English, CEO & Director]

Yes, I can. Just to clarify what I meant by 4x, so what it means is whatever revenue we have or whatever ports and services that we plan to have for the quarter, we have 4x cover for this quarter. So the conversion rate, Rodney, is circa 40%?

[Rodney Foreman, Chief Revenue Officer]

Correct.

[Vincent English, CEO & Director]

Around that sort of a conversion number on what goes into the pipeline versus what gets converted in the same period. So that gives us a lot of confidence on what's going on. There is some customers that I have called out that do take a little longer, but they tend to be -- once they kind of have sized up their size of their footprint, they tend to be the larger ones. They tend to take a little bit longer, but then when they come on, they come all on. So you get all the services very quickly. It doesn't come in dribs and drabs, but it does take them a while to size it up. And some of them, like I said, do proof of concepts. But no, I think that's pretty much how it works in terms of -- our run rate around conversion is around 40% on our pipeline -- our qualified pipeline, sorry, not just the total pipeline.

[Bob Chen, Research Analyst]

Yes. Okay. Perfect. And then just in terms of sort of the MVE product. Obviously, you've got some sort of trials in place at the moment. I mean can you give any sense in terms of how large a typical sort of MVE customer could be compared to your sort of existing customer base?

[Vincent English, CEO & Director]

It's a mix, okay, right? So we've got -- some large customers will want small MVE instances in certain locations because they don't need to be big, but they need lots of them, so if that makes sense. And in certain cases, we have larger customers who need that higher element of compute. But maybe, Eric, did you want to kind of add a little color to that one?

[Eric Troyer, Chief Marketing Officer]

Yes. Sorry, just coming off mute there. In terms of the sizing for some of these MVE deployments, they're really going to vary based on the number of branch offices that need to connect into the MVE infrastructure. So initially, within the proof of concepts, we've seen a range of anywhere between 10 branch offices to get a general scheme for how the data flow works and the integration works, up into some of the pipeline that we're talking about now supporting numbers of 100-plus branch offices. So that's really going to impact the size of MVEs deployed and the number of MVEs deployed.And remember, the MVEs are deployed into metro areas that are designed to aggregate branch office connectivity very quickly, get traffic off the Internet and onto the Megaport private network. And depending on the aggregation level from the customer in terms of the number of branch offices that may be in a given metro area or a regional area, there's some flexibility in how they're going to design that interconnection back to MVE. So the reality is it's very flexible in terms of the service offering. And what we're seeing is that's coming out in some of the proposed point of proof-of-concept architectures that we're coming through now, right?I think the high level bit here, as we think through this, dominantly, it's driving -- the intention here as part of the architecture is to drive more cloud connectivity into more buildings. So ultimately, the VXCs in terms of number of VXCs and sizing of VXCs, what we suspect we'll see over time is larger VXCs in terms of consumption and more VXCs because, ultimately, you have more points across a network that are accessing cloud resources. And I think that's kind of the high level bit when we think about the sizing of the -- beyond just things like MVE sizing.

[Bob Chen, Research Analyst]

Okay. Great. And then maybe just a final question on how I should think about the total addressable market of the business now. MVE, obviously, a new product, and how that sort of might compare to your core services model as well.

[Vincent English, CEO & Director]

Well, okay, initially, it's not -- obviously, we're starting from ground zero, right? So it's going to take a little while for it to build up. But it's not inconceivable that it will be a larger market or addressable market for us than what we've seen or what we've built up to today. Don't forget, this is just -- MVE is really important. But what we've been talking about here is just our first technology partner, Cisco. And there's other ones, like I said, that will have to come on not just in the SD-WAN space but with SASE and security and IoT, et cetera. These are all areas that will sit across the platform as we work through the various partners that we have in those fields.So it's got the reach and the potential to grow further. And having buildings being able to connect it securely, having the 23 countries, over 700 enabled data centers and then, adding to that, over 200 -- close to 250 cloud on-ramps, you -- and we're not slowing down on that. Like I said, we're still adding sites, and we plan to add more next year as we work through our new budget for next year. But -- and I've been more conscious of the geographic footprint is going to continue the technology and the platform and the depth that that's going to continue.So look, there's some stuff we're doing here, we're pioneering it. So we're enabling third-party research to help us with sort of market sizes. It's not something that we can point to directly and say here's the size of the prize. It's going to take us a little while to -- but we do know about 2 things for certain. One, there's a pent-up demand; or two, more and more businesses want to get to the cloud. So the biggest user case for VME (sic) [ MVE ] right now is branch-to-cloud, right? It's also followed then by branch-to-branch. But that's the big one that's unanswered. And getting across, as Eric said, onto a private network, using our network to take customers securely with the right latency and network performance, et cetera, all the way into a cloud on-ramp so they can secure that building access there for cloud is really important. And that's a key problem that's not being solved properly today.And so that's why we're seeing that there's a lot of interest in -- and a lot of large organizations looking to do demos, do proof of concepts and see how they can architect their business using our network, which is really the platform we're after. So we're sort of pioneering in an area that hasn't been. So there's various analysts out there we can get research from on market size. And as Steve has kind of referenced before, we probably would be engaging with some of those market research analysts next year to do a report on the industry and where it's at. It's -- we should be able to talk to that a bit more effectively, probably over the course of the coming year.

[ZheWei Sim, Analyst]

It's Wei from Macquarie here. If I could just ask a few questions. The first one is just in regards to the pipeline that we've got overall, on average, about 4x. I'm just wondering if we might be able to get any color as for the different products. Which might have a longer versus a shorter pipeline?

[Vincent English, CEO & Director]

Yes. The pipeline I'm referring to is ports, right? So I don't necessarily track the number of VXCs that go on up because the port is pretty useless on its own unless you're actually add a VXC to it. So it's like, at minimum, it's 1:1, to start off. So the pipeline I'm referring to is for ports. And like I said, if you haven't got a port, you can't do anything. So that's the minimum, and that's what we track. And so customers, we're seeing more and more customers who are looking at not just 1 and 2 ports, but we're seeing multiple ports for customers who have large footprints, looking for 2, 3, 4. And now that conversation is switched to 8 and 10 ports per customer initiating, depending on the size of the customer.

[ZheWei Sim, Analyst]

Okay. Got it. And then the next one, perhaps a bit more for Rodney, is just in regards to kind of like how we think about the unit economics of indirect sales channel versus the direct that we've been doing in the past. From your experience, how should we think about how that impacts on the financials of the company going forward?

[Rodney Foreman, Chief Revenue Officer]

Well, a lot of our business already is coming from partners where we give some margin or a referral fee. So I don't see that affecting us too much because we already have a model by which a lot of partners we pay bring us opportunity. So it's well within our budget to pay margin. That's just part of our business model to partners and how we've been operating today. So that really doesn't change much.

[Vincent English, CEO & Director]

Just to add to that, we -- I mean, what will happen is you don't go hiring 200 direct salespeople in this particular case, what you do is you hire channel managers and people who are -- who sort of relationship or manage the sales process with the partner. And so what happens is you have less OpEx invested going forward, but you have the margin coming off the top. So that's typically how this works. And as that shifts over time, so if the volume goes from 70% direct, 30% indirect, and if that shifts the other way around, you'll see less OpEx, but you'll see more of the COGS line being impacted because of the cost of commissions or fees or whatever it is that are paid per the contract for bringing -- closing the sales. So it will be a dynamic between the gross margin and the EBITDA margin. But overall, the EBITDA won't change, it will just be where that line item sits, whether it's in OpEx or whether it's in the cost of sales.

[Rodney Foreman, Chief Revenue Officer]

Yes. That's a good point, Vinny, in that you can either hire hundreds of salespeople and take on that cost or you bring on partners and partner sellers where you only pay them when they sell. It's basically a 100% commission model. So it's -- in the long run, as we get more partners selling on their own, it definitely becomes more profitable.

[ZheWei Sim, Analyst]

Okay. If that's the case, if we're going to be doing more indirect sales channels going forward, would we look at lowering the amount of direct sales that we'd be doing going forward once that becomes more mature?

[Vincent English, CEO & Director]

So I think we're going to focus that -- like I said, we're not -- Rodney mentioned that earlier, we're doing this in harmony. We're not slowing down on the direct sales and enterprise sales. We've already got that momentum in the business, where it is today came from there, right? So we're not changing that for 1 minute. And we will enhance it as we have done every year incrementally as we see fit, and that's the best course of delivering return, which is effectively getting sales, right? And that's not going to slow down. We're going to continue to do that as we see bitten as we grow. I think what we're really saying is we're going to really go hard at investing in the indirect channel and how do we enable more -- it's better to have 5,000 people selling rather than 200 additional new direct people selling. And that's how we are looking at it.

[Rodney Foreman, Chief Revenue Officer]

Right. Yes. And our sales team -- look, there's nobody better to sell Megaport than our sales team. Our sales team is very good. Our solution architects are very, very good. So in terms of supporting these partners and making sure we're getting deals over the line and that we're getting the opportunity, there's nobody better than our sales team. They're really good. So I think having those teams work in harmony, the channel managers, working with the partners to make sure we're top of mind and we're getting pipeline, as well as our direct sellers and SAs supporting them to make sure they can progress and win opportunities, it's a winning combination.

[ZheWei Sim, Analyst]

Okay. Understood. Maybe one just final quick question for me is just in regards to Secure Access Service Edge architecture, I'm just wondering what the significance of this is versus what the competitors might be offering and what it means in terms of our, I guess, competitiveness overall.

[Vincent English, CEO & Director]

Sure, yes. Eric, did you want to take that one?

[Eric Troyer, Chief Marketing Officer]

Yes. At its core, Megaport Virtual Edge is a platform for hosting network functions virtually, right? So the first use case here is really around SD-WAN, getting branch offices connected through technology partners, like Cisco and their Viptela service offering, connected into our private network to modernize the network, orchestrate connections into the cloud. And that really talks about part of the access piece of SASE. So if you're looking at SASE, there's every model for secure access and edge networking coming together. What you're really doing is you're incorporating network capabilities and security capabilities into a cloud-hosted model. So MVE, in a lot of ways, is a cloud hosting platform, as I said, for network function virtualization. So SD-WAN is one component of a SASE architecture.Then you start to look at more of the security elements of SASE, things like firewall, DDOS services, authentication services, identity. Many of these services are actually incorporated into some of the technology partners we're working with today like Cisco. There are SASE elements to their SD-WAN service offering that are becoming available. And as Vinny indicated, we have a stable or a pipeline of additional technology partners. They will be integrating onto MVE as well so that our customers can then spin out these devices on MVE as a platform. So some of these security capabilities that are part of that tick box in the SASE architecture will actually be hosted on Megaport's platform as part of the integrations that we're doing with technology partners. So MVE has a role to play here.Additionally to that, when you look at SASE architectures, you can also connect into security service providers through the good, old school Megaport traditional way of getting a VXC across our network, having a port and connecting into a service end point. So the combination of MVE, with being able to host some of these functions, as well as connecting into service providers in our ecosystem that provides SASE functionality, provides enterprises the ability to address some of those SASE needs as they're evolving towards that sassy architecture. So we view MVE as a platform to get SASE done.

[ZheWei Sim, Analyst]

Okay. Understood. And so just in terms of -- does SASE actually cost more on MVE? Or is that just a bundled service?

[Eric Troyer, Chief Marketing Officer]

Yes. What -- just one quick element on that. Different types of virtual functions take up different processor resources, right? So MVE is sized based on compute some storage and then bandwidth that's part of that. Certain applications require more intensive compute to actually be done. And some of those are actually security-based. So really the change in the pricing will end up being a function of how big of an MVE do they need based on the tiers that we provided to support some of that functionality, right? So depending on the application, it might require a larger-sized MVE to support that. So initially, as we look at this, that will be the variable in terms of the pricing to support it on MVE. And sorry, Vinny, was there something else you wanted to add?

[Vincent English, CEO & Director]

No. That's -- perfectly, that's what it is. So in other words, if you're using MVE today and you want to add more additional services on it that are available on the platform, you will more than likely have to upsize your MVE from like a small to a medium or a medium to a large or you may have to augment it by adding an additional one. So it's a function of size. So do we need to do any extra? No, we try to make sure we bring the partners onboard. So the services are available on the platform through our integration work.But it doesn't -- that's what I'm talking about leveraging the network. I can't really strongly emphasize how important that is. It underpins everything that we've built and everything that we do. So we're layering services on that. Does it need extra money or cost to do it? No, it's mainly CapEx and hardware over time, right, and that's to allow for upsizing where we offer these services. And then it becomes more about the sales motion and go-to market as we talked about with Rodney. So that's how we're -- in addition, we're going to add more partners on. The cost of adding those partners on is just time and effort. And then it becomes -- over time, it becomes a function of network expense or network hardware that's needed to support the business as it continues to grow.

[Roger Samuel, Equity Analyst]

It's Roger here from Jefferies. I've got 2 questions. First one, just back to the result. So in Europe, you have experienced a very strong turnaround in growth in the last 2 quarters, and I'm wondering what has been driving that. Is it the growth in new customers or just existing customers taking in more products? I'm just wondering whether the IX business is still breaking down the revenue in Europe. Second question is on MVE. So just to clarify, is it right to say that MVE is a lower-margin product because even though the price is pretty high, but because you've got IP transit bundled into the product so, therefore, you've got to pay the cost of the transit to the telcos?

[Vincent English, CEO & Director]

Okay. I'll answer the last part first. So the MVE, yes, you're right, there's -- the MVE itself, excluding transit, is a very high-margin product. The transit piece is a pass-through. And in some cases, we may have a customer who will bring their own transit. So it's flexible in that regard. But we've made it available, assuming there is no transit available, so the customer can actually use it. So it's a mixture. But in itself, it's a high-margin product because effectively, it's just the IP that we've required to build it, some licensing, et cetera, that we need to cover off.But by and large, in itself, it's a high-margin product. Every VXC that attaches to it is a high-margin product because we've already built it. It's some cost in the network, we're carrying it already. There's no additional cost to support the VXC. So there's just that one component that -- sorry, that's inside the metro, I should say. But there's only that one component, which is effectively a pass-through. It's not our business, so we just add it on. Whether the customer brings it or we have it available for them to use it, it's a choice there, how it's consumed.In terms of -- but if you bundle everything together, yes, it sort of dilutes the margin a bit, but it's not substantial. And like I said, in Europe and America where we do see the bulk of all of our opportunities, the transit's not such a big issue in terms of the pricing. And in relation to Europe, in general, no, the IX is not having an impact. It's continuing to grow. It's a steady business. Like I said, that instance that we had back in late September was effectively a contract change-out over a 2- to 3-year period where terms are contracted in advance. So it's not like the flexible pricing that we do or dynamic pricing that we have in the Megaport product set.I think genuinely, some of the customers that I've called out are European-based BBC, for example. A lot of the services that we have are taken up by global companies, which are now expanding into their European footprint, where they may have initiated their business in Asia or in the U.S., so expanding those in different markets inside of Europe. So it's a pickup in growth in, let's call it, our traditional -- our main Megaport business as opposed to, say, traditional IX. So I wouldn't say it's dragging it down because it's not decreasing, it's improving.

[Roger Samuel, Equity Analyst]

Okay. Got you. And just a quick follow-up on MVE. I mean do you expect that, that will represent a larger proportion of your business going forward in the long-term versus the core business right now? Or is it too early to tell?

[Vincent English, CEO & Director]

It's probably too early to tell, but it will be just as big, if not bigger, is probably how I would view it, without having -- we obviously need to -- just we're 2 weeks in, right? So it's -- but I think we're very buoyed by the -- by what we're seeing and speaking to customers. We've prided ourselves on making sure that this works from the first time out the door, and that's exactly what that extra bit of time and effort that was taken working with our partners at Cisco to make sure we had a very viable and competent product at work day 1, and that's coming through in the proof of concepts and the testing that we had, that beta testing that we've done with customers. We've ironed out a few little wrinkles here and there in terms of operation and customer -- how the customer engages or uses the product but -- and that will always be a continuous improvement, just making sure that the point, click and consume model stays true in everything that we do while we're abstracting a lot more complexity for the customer.So other than that, I see that we've got a very strong, willing customer base that started out with this. And obviously, as we bring more resellers onboard, and particularly from the Cisco side and, in the future, with other ones, that they're -- we just widen out the base, that we get to sell not just the SD-WAN product but also the rest of the product portfolio. So we see -- it's an opportunity for both of them to increase. We're just -- we're putting the tools and the product suite into the hands of other people to sell it for us. So it will go -- they're complementary to each other. And if you think about what we built up to this point in time, it's been very much data center. This now increases our reach further outside of the data center footprint into locations, offices, branches, facilities, et cetera.Okay. Is there any other questions?

[Steve Loxton]

Operator, we had a few questions come through via the e-mail link. I might just start one for Eric. They're related to the contract. This is the case study with ICE. For those who don't know, that's the Intercontinental Exchange, which then operates the New York Stock Exchange. And the question was, can you expand a bit more on what exactly that involves? And in particular, is ICE white-labeling the Megaport product to deliver its services?

[Eric Troyer, Chief Marketing Officer]

Yes. And thanks to whoever that was for the question. Yes, the Intercontinental Exchange is actually using Megaport as a means of providing an on-ramp product to their customers. So they've got a number of asset managers, banks, retail trading routes, among others, that access their market data services. And many of their customers would like to access those services securely over our private network. And what compounded the complexity of that for ICE was many of these organizations have their proprietary trading infrastructure sitting inside cloud providers. So they're running in virtual machines, in Google Cloud or AWS or Microsoft.So because Megaport is already connected into these cloud providers, and we have the API integration to connect those virtual machines over a network to an end point, it became a very logical series of efforts to take that capability, commercialize it for ICE and allow them to sell it to their end customers directly. So they've launched the ICE Global Network, the IGN Cloud Connect product, which is effectively powered by Megaport. So now they can go to their customers and they can offer them direct access over a private network, so completely bypassing the Internet, from their proprietary services sitting in the cloud provider and can get access to ICE's data feed services, which ultimately provides the data that powers many of the decisions that they make in terms of trading, data analytics and generally getting business done on behalf of their customers. So yes, it is a white-label solution, and we did work in conjunction with ICE to get that deployed. Okay.

[Steve Loxton]

Okay. One other question just around EBITDA breakeven. There was a question around where we were at the end of Q3. I'm not sure we are going to provide a sort of a blow-by-blow update. But Vinny, do you want to just update on guidance for breakeven on a run rate basis by the end of -- by June '21?

[Vincent English, CEO & Director]

Yes. Look, I'm just going to reiterate, that's where we're tracking towards. So a natural progression from where we are in December, you're going from our EBITDA exit run rate position there to 0, effectively our breakeven. So I think I'd just be happy enough to comment on the fact that we're tracking there, and we're confident that we'll get it there.

[Steve Loxton]

Okay. And an additional question just in relation to MVE. Pricing is obviously available in the portal. So you can compare the MCR and MVE pricing depending on the size of the MVE instance. But the question related to what does a typical deployment look like for a customer that has branches across, say, 10 cities. And I think it's a question around how many MVEs, how many of VXCs and what does that spend look like.

[Vincent English, CEO & Director]

Eric, did you want to -- again, it depends on the size, right, whether you want, how much compute you want and what each branch or each location is going to do. But if you took the small instance and you took a minimum of 1 per city, that's 10. If it's 10 cities you're trying to connect as opposed to 10 branches, you could have 10 branches connecting into 1 MVE. So for example, we're in Brisbane -- or say just take Sydney, for example. You connect into Sydney, you could have 10 branches connecting into 1 MVE in Sydney. But if you're trying to connect multiple cities together, you will need more MVEs, and it could be up to anywhere between -- if it's 10 cities, it could be 10 MVEs. And the minimum, on a small basis, were 2 VXCs per each one. That would be the minimum. If you wanted to do it that way. It really depends on how much compute they want to use as part of that. But is it fair, Eric?

[Eric Troyer, Chief Marketing Officer]

Absolutely. It really boils down to the end architecture that the customer wants to enable in terms of how they want to aggregate the branches together. And then ultimately, the number of clouds that they want to connect into specific regions. There's a lot of variability into calling out the right tools from the toolbox of MVEs, the VXCs in order to create the architecture that they need to scale. So it's very difficult to come up with an average basis of what that looks like now. I think as adoption grows, we'll have better insights on what the typical deployment does look like.We have, in our global updates and our full year reviews, provided more color in terms of how customers are using Megaport, what some of the average usage looks like by cohorts over time. We'll have an opportunity as we get more of these services across our network to provide more of that color to give an indication of how customers are doing this. But at the moment, there's a lot of variability in terms of how customers are looking at using this service right now to give that level of detail on revenue.

[Rodney Foreman, Chief Revenue Officer]

It is probably worth just highlighting that we -- that you don't need a VXC for each branch, but rather each MVE instance that is connected to a cloud involves a VXC. Partly the reason why an MVE-VXC instance is more expensive than a regular one. It's worth possibly also calling out that there are quite a few different resources that we've added to our website in relation to MVE. There is an info paper that gives some kind of indication as to what a small, medium and large MVE instance looks like in terms of how many end points or branches each one can reach as well as pricing on our portal. If anyone is struggling to find those, please send them through, and we'll send those connections through. Cisco has also published quite a few publicly available sources, which look at the SD-WAN cloud interconnect offering that they're going to be pushing out to the customers.And Vinny, do you want to do an ad for the MVE update we're providing in a month's time or so?

[Vincent English, CEO & Director]

Yes. I mean, I think what we have envisaged the best it seems for what we've done for a lot of people is that we provide a demo and also allowing for some people to digest some of the material that's available there. And then so that will assist. And somewhere around mid-May, we can get into having some more group sessions about how it works, pricing and modeling, et cetera. So in conjunction with doing it with a demo, so it kind of really brings it home how the existing Megaport platform works and how it intertwines with MVE and then obviously with the branch location.I think at that, we'll wrap it up. We've gone over the time anyway. As usual, feel free to reach out to Steve or myself about any other questions you might want to follow up with. And thanks very much for joining us on the call this morning. Thank you.