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By Team Ace Investors

Company Overview

Megaport Limited (“MP1” or the “Company”) is a provider of on-demand elastic interconnection services and Internet exchange services. Megaport's principal activity is providing on-demand elastic interconnection services to its customers, internet exchange services, adding and integrating new service providers into the Ecosystem, and expanding the geographic footprint of its network and services fabric. Megaport's platform uses Software Defined Networking to enable customers to rapidly connect to more than 390 leading service providers in a flexible, on-demand, and cost-effective way. The first of its kind and the leader in the market, the Group's platform has changed how businesses consume connectivity services by creating a model that mirrors cloud-buying capabilities and is, therefore, more intuitive and customer-centric than the offerings from traditional telecommunications companies. To align its services closely with cloud computing and storage consumption models, the Group provides a self-serve environment for interconnection. Megaport enables customers to rapidly and flexibly connect to its partner data centres, cloud service providers, network service providers, and managed service providers, collectively known as the Ecosystem. Customers connect to the Ecosystem by acquiring 'Megaport' ("Ports") and building Virtual Cross Connects ("VXCs") to their chosen destinations or services across the Megaport Network. Connectivity Services can be directly controlled by customers via mobile devices and desktop environments through Megaport's portal, and its open Application Programming Interface ("API"). Further, Megaport Cloud Router (“MCR”) enables customers to instantly provision and control virtual routers through Megaport’s web-based portal. Megaport Virtual Edge (“MVE”) takes the platform beyond data centres and helps enterprises accelerate their journey into SD-WAN and Secure Access Service Edge (SASE). MVE enables customers to connect branch locations like office buildings, corporate campuses, and storefronts to the Megaport ecosystem of service providers. The Group's extensive and scalable global footprint across North America, Asia Pacific, and Europe offers customers a neutral platform that spans its 768 Enabled Data Centres in key global locations.

Investment Rationale

Launched several new services, invested in its go-to-market (GTM) engine to drive its topline growth

Megaport aims to be the global leader in Network as a Service ('NaaS') and enable customers with an agile networking methodology through its Megaport Connected Edge Strategy. During the half-year ending 31 December 2023, Megaport launched several new services, invested in its go-to-market (GTM) engine, and expanded into new locations to expand its serviceability and drive its topline growth.

• In 1H24, Megaport launched Megaport Reach as a rapid, cost-effective way for data centre operators to deploy to new locations, bringing the cloud to their facilities in less than 90 days. This edge deployment strategy is designed to be an attractive proposition to data centre operators looking to have quick and efficient cloud connectivity available to their customers.
• Megaport launched Global WAN as a Service, offering customers a holistic approach to networking. It combines three solutions: Hybrid Cloud Connectivity, Cross-Cloud Connectivity, and Virtual PoPs (Points of Presence) across the globe. This provides customers with an agile, secure network to meet the high-speed demands of the digital and AI age.
• Megaport delivered Project Centurion, providing customers with the ability to upgrade to 100G ports, enhancing their cloud connection capacity tenfold and catering to the growing AI connectivity.
• Megaport announced the availability of VXCs up to 25G across most major locations globally.
• Megaport launched its Megaport Enterprise Internet product, allowing customers to add enterprise Internet to their networks in less than 60 seconds.
• Megaport also invested in its go-to-market (GTM) engine to drive future top-line growth, which included more than 20 new sales and marketing roles, with more than half quota-bearing sales roles.
• Megaport announced a partnership with FibreConX. Australian CBD-based businesses can now connect directly to Megaport at speeds of up to 100G, with on-demand provisioning that equips customers with the connectivity they need to address their rapidly growing network requirements.
• Megaport announced IX expansion throughout the US and launched in five new locations Charlotte, New York, Atlanta, Miami, and Denver.

Closed the half-year with a 29% higher Annual Recurring Revenue (ARR) of $191.7M on 31 Dec'2023

Megaport demonstrated a turnaround in its financial performance driven by robust organic revenue growth, a substantial cost-out program, and improved operational efficiencies. For the half year ended 31 Dec'2023, Megaport delivered a record performance highlighted by revenue increasing 35% to $95.1M, EBITDA of $30.1M, and Net Cash Flow of $12.5M. MP1 delivered a 35% YoY growth in total revenue to $95.1M and closed the period with a 29% higher Annual Recurring Revenue (ARR) of $191.7M on 31 Dec'2023. Megaport delivered a solid 785% YoY growth in EBITDA to a record $30.1M in 1H FY24 vs $3.4M in 1H FY23 as a result of a robust 35%YoY growth in top-line revenue and a strong focus on cost control within the business. The company also improved its EBITDA margin to 32% in 1H FY24 compared to 5% in 1H FY23. MP1 reported a Net profit of $4.4M in 1H24, up $17.9M in 1H FY23. Megaport achieved four consecutive quarters of positive net operating cash flows and improved its net cash flow by $40.8M to $12.5M in 1H FY24 from the net cash outflow of $28.3M in 1H23, and closed the half with a 16% higher net cash position of $45.8M, enabling the company to make investments into its go-to-market engine while maintaining its robust financial position.

Set the stage to profitably invest in its GTM strategy, product, engineering, and its ecosystem.

For the financial year ended on 30 Jun’2024 (FY24), Megaport delivered a record performance highlighted by a 28% YoY growth in Revenue to $195.3M and a solid 182% YoY growth in EBITDA to $57.1M. For FY24, Megaport delivered a 28% YoY growth in Revenue to $195.3M, driven by growth in services delivered. While continuing to grow its global footprint and position as the world’s leading global Network as a Service provider, the company recorded an increase in its key metrics, with Total Services (comprising Ports, Virtual Cross Connections (VXCs), Megaport Cloud Router (MCR), and Internet Exchange (IX)) increased 11% YoY to 29,816. Megaport closed the year with a 14% higher ARR of $203.9M on 30 Jun’2024. In line with guidance, Megaport delivered an 182% YoY growth in EBITDA to a record $57.1M, reflecting the full-year impact of the pivot to profitable, efficient growth in FY24. The company also achieved its first-ever net profit after tax of $9.6M compared to a net loss of $19.4M in FY23. The company generated a positive net cash flow of $ 28.0M in FY24, a $62.5M improvement compared to FY23. This fiscal turnaround has set the stage for the company to profitably invest in its Go-To-Market(GTM) strategy, product, engineering, and ecosystem, building the platform for profitable growth over the next three years and beyond.

Outlook FY25: Megaport will continue to leverage and grow its high-speed global backbone and 100 G connectivity in FY25, expand into new markets and geographic locations, and prepare for additional capacity augmentations to meet the rising demand from AI. With updated speed and pricing to improve its competitiveness on a global scale, the company plans to rapidly expand its product sets, with a focus on low-touch, incremental, high-revenue products. Megaport expects to deliver revenue of $214M to $222M, and EBITDA of $57M and $65M respectively in FY25.

ACE’s Recommendation

Megaport aims to be the leading Network as a Service (“NaaS”) provider and enable customers with an agile networking methodology through the Megaport Connected Edge Strategy. During the half-year ended 31 Dec'2023, Megaport launched several new services, invested in its go-to-market (GTM) engine, and expanded into new locations to expand its serviceability and drive its topline growth. During the half year, Megaport launched Megaport Reach as a rapid, cost-effective way for data centre operators to deploy to new locations and also launched Global WAN as a Service to provide its customers with an agile, secure network to meet the high-speed demands of the digital and AI age. Megaport also invested in its go-to-market (GTM) engine to drive future top-line growth including more than 20 new sales and marketing roles. For the financial year ended on 30 Jun’2024 (FY24), Megaport delivered a record performance highlighted by a 28% YoY growth in Revenue to $195.3M, a 182% YoY growth in EBITDA to $57.1M, driven by growth in services delivered. The company recorded an increase in its key metrics with Total Services increasing 11% YoY to 29,816. In line with guidance, Megaport delivered an 182% YoY growth in EBITDA to a record $57.1M, reflecting the full-year impact of the pivot to profitable, efficient growth in FY24. This fiscal turnaround has set the stage for the company to profitably invest in its Go-To-Market strategy, product, engineering, and ecosystem, building the platform for profitable growth over the next three years and beyond. We believe that newly launched services and investments in its go-to-market (GTM) engine are expected to drive growth going forward with a foundation in place. The stock closed the day near its 52-week low at A$ 7.620/share and presents an investment case in our view. So, we would like to recommend a BUY rating on the stock.

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