Megaport Ltd
ASX:MP1
Earnings Call Analysis
Q2-2024 Analysis
Megaport Ltd
In efforts to drive growth and market penetration, the company has made significant investments in its go-to-market strategies. This included hiring over 20 new go-to-market roles, implementing advanced sales tools and platforms, re-launching MegaIX in North America, and rolling out various offerings such as Global WAN, 100-gig VXCs, and contracted VXCs for the first time in a decade. This comprehensive overhaul aimed at enhancing the company's presence and effectiveness in the highly competitive technology landscape also saw the introduction of the Chief Digital Officer to revamp digital marketing. The highlight of these strategic steps is the record-setting $4.2 million deal over three years due to the launch of Global WAN, demonstrating the large-scale potential of new customer acquisitions and expansion.
The forecast for FY 2024 projects revenues between $190 million to $195 million and an EBITDA range of $51 million to $57 million, both of which remain unchanged. However, there's been a positive adjustment in the capital expenditure (CapEx) expectations, now set between $20 million to $22 million, down from the previously expected $28 million to $30 million. Despite the spending increase on the sales team's compensation and sales-related activities like marketing and travel, the company urges investors to not project the EBITDA for the first half of the fiscal year across the entire year, due to these incremental expenses initiated to fuel growth.
In response to an investor query, the company discussed its sales team expansion, pointing out that the 20-plus hires mentioned earlier were to bring the team to baseline competence, and future hiring would be more controlled and organic. The current focus is on capitalizing on these hires to drive sales and effectiveness, rather than a significant increase in headcount going forward.
The company has recently introduced various products and enhancements, including 100-gig VXC pricing and their terms, as well as the Megaport Internet service which allows for simple and quick internet connectivity set-up. The contracted VXC option is designed to match current cloud consumption models and offers customers both cost certainty and potentially lower rates for longer-term commitments. The guidance in this area is dynamic, with changes linked to various factors such as connection distance and metro versus long-haul services.
An example of strategic growth is the partnership with Fiber Connects, which builds on already established infrastructure to provide direct connections to various end-points like office buildings. This exemplifies the company's larger strategy to expand its reach beyond traditional data centers and enhance its market offerings, potentially marking the beginning of a disruptive phase in the industry characterized by more accessibility and competitive pricing.
The reduction in the CapEx forecast is attributed to the more efficient use of inventory and a reduction in capitalized wages. Maintaining EBITDA guidance steady, the company clarified that it doesn't anticipate significant changes in this expenditure, as the lowered CapEx is not tied to any cutback in service levels or project delays but, rather, to more efficient asset management and purchasing processes.
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Today, we have Michael Reid, CEO; and Tish Dorman the CFO through the quarterly update. We'll have questions after the short presentation. [Operator Instructions]
Thank you, Steve, and welcome to the 2Q FY '24 investor presentation. And we've got some wonderful highlights to share. Revenue, $48.6 million, up 31% year-on-year. That's an $11.6 million up year-on-year. EBITDA, $15.1 million, up -- well, it's up 529%. It's up a lots, $12.7 million increase year-on-year. Total cash flow, $7.3 million, up $19.2 million year-on-year and just goes to show the significant turnaround in the business.
We've been talking about hiring direct sales roles in NAM, up 3.6x from where we were when I joined the role back in May, that's 18 year olds, up 13. We continued the strong cash flow turnaround. You can see the dramatic turnaround of the business on the rise if we look through that the graph there on the right. And if we go through the numbers, we look at net cash flow up $6.9 million, year-on-year comparison up $18 million. Operating cash flow, $15.2 million, up $15 million year-on-year. Cash at bank, $62.5 million, up $7.3 million quarter-on-quarter, putting us an incredibly healthy fiscal position.
The strong turnaround and profitability continues, but what we're pointing out here is that we are investing in growth. This is a growth business, ladies and gentlemen. You've seen us turn the fiscal position around. And from an EBITDA perspective, you can see what a dramatic turnaround that has been. And now as you start to see the investment in the go-to-market play out, and we'll talk more broadly about that throughout the session, the focus now is to go and pour gas on that fire that doesn't make sense in Australia pour fuel on that fire as we move forward.
Annual recurring revenue, it's $192 million of annual recurring revenue. Now as I reported in the Q1 session, we actually had a tailwind from an FX. For those of you who follow the FX, it does seem to be moving around fairly rapidly the AUD to USD. So we had a tailwind in Q1. In Q2, we had a headwind. And so if I give you some sort of insight into how that affected us, we had a net $2 million increase reported in ARR. But as you adjust for foreign exchange or an FX adjustment, the net ARR increase was $7.6 million in the quarter.
Now we're moving to revenue-generating KPIs. It's a slight change to the same KPIs that are reported. However, we are moving to revenue generating. These are the metrics that I look at when I report the business. Our Chairman made this announcement in the annual AGM and refer to the fact that we need to look at our KPIs and what's the appropriate -- provides the appropriate signal not only to our business but to shareholders. And I'm going to give you some examples and explain why this is important and why this is what matters to me. This is how I measure the business.
Now as you'll recall, we've had challenges with historically reported KPIs. In Q1, I gave examples of revenue-generating metrics compared to the traditional metrics. And the challenges that come forward are in the form of trials and proof of concepts. So a customer that can spin up a trial or a proof of concept or a vendor that like Cisco as an example or Palo Alto or a Ford, et cetera, could spin up a test account, and that would actually be counted inside the platform. Why? Because everything in Megaport's platform is live. We don't separate the platform for a test bed for someone or a proof of concept or a trial, et cetera. It's all live.
And so when we report all of those metrics come through, we saw challenges with cloud port consolidation, and I explained that when I first stepped into the role. And again, the reduction of the cloud ports was a good thing for our business we're starting to throw an incorrect signal. Promotions, demo services, DC partner inconsistencies, all of these movements, whilst over the long term, actually made very little difference at all when you sort of took it over a 10-quarter period. The movement in quarter, so net quarter-on-quarter numbers could throw an inappropriate signal. It could have been a positive signal, it could have been a detrimental signal. The reality was it wasn't the appropriate measurement for the business and it could throw you off.
So the move to revenue-generating metrics makes complete sense. It provides a more accurate quarter-on-quarter signal to how the business is performing because we only report the metrics that our customers are paying for. It's consistent, simple. It's recognizable point at when the services are counted. As I said, when the customer starts paying for the service that they've got. And for transparency, we've obviously been reporting these metrics for a long period of time.
On our website, we're going back 3 years to provide full revenue-generating KPIs and metrics all the way back for anyone who wants to look at that, and it's available on our website. 2Q FY '24 revenue-generating KPIs. Again, the KPIs and metrics stay the same down the left-hand side. The difference here is the net quarter-on-quarter growth is associated to revenue generating only. Total services, 748; customers, 39; ports, 155, up; VXCs and IX, 522, up. MCRs, this is our Megaport Cloud Routers, up 39%. And our Virtual Edge platform, which is our vendor partners, spinning up inside our compute platforms, is up 32%. And so you can see those metrics there.
Now I'm going to hand over to Tish who's going to run through our unaudited financial results.
Thank you, Michael. So the quarter revenue growth compared to the first quarter grew 5%, largely driven by the organic growth in recurring revenue across the business. EBITDA was in line quarter-on-quarter, which reflected the increase in the expenditure, as we've referenced before, to reignite the go-to-market engine at Megaport, which included additional costs for sales and marketing and customer success stuff as well as marketing and travel costs, which were offset the growth in revenue. Hence, why you see the EBITDA consistent quarter-on-quarter.
The net cash flow improved for the quarter, which continued our positive momentum from the first quarter, which was driven by the ongoing cost control and revenue growth. The gross margin percent has remained consistent quarter-on-quarter at 70%, driven by that revenue growth and associated costs. The employee expenses in the second quarter included the additional headcount for our sales, marketing and our customer success teams in building that go-to-market capability.
However, noting that a lot of the hiring did occur in the latter part of the year -- of the quarter. So we will see those full costs come into the third quarter. Marketing and travel expenses did increase from quite low levels in the first quarter of the year, and that does really reflect that investment in the go-to-market activity quarter-on-quarter. And these events will continue into the latter half of FY '24.
The consolidated cash flow, which you will be able to see the detailed analysis of for our lodged appendix 4C. The cash flow from operating activities was an inflow of $15.2 million, which is up $4.5 million on the first quarter of FY '24. This was largely due to the higher billing for that recurring revenue for the quarter. Cash used in the financing activities included that additional -- the additional borrowings under vendor financing facility and no employee share options were exercised during this quarter.
Overall, the total cash flow as at the end of December 2023 was up $7.3 million from the previous quarter, which takes us to a closing cash balance for Megaport of $62.5 million. This showcases the business efforts on ongoing cost control as well as revenue growth, which was offset by the hiring efforts as well as the return to advance marketing and travel. The closing net cash to highlight here is $45.8 million, which is up 18% on the previous quarter. And I'll hand back to Michael.
Thank you, Tish. So let's focus -- let's just zoom out for a second. We'll jump in a helicopter go up nice and high, and let's talk about the FY '24 progress. So Q1, we stepped in and we developed the strategy, and the focus is around world-class talent, our people, and there's a huge amount of work we're into getting the right folks inside this business and lifted into the appropriate roles product, the innovation in product, we are a tech business, and we are constantly innovating in our product and providing world-class tech to our customers and our future customers.
And a massive focus, if you remember from Q1 and across Q4 when I entered the business on profitability, and you saw how we performed. Q2 is around executing that strategy. And I'm going to go through what we've been doing on the next slide. Q3, which is where we're at right now, is around building the go-to-market momentum. We have to restart the marketing machine. We're fueling the new sales business. We're expanding the existing sales team. We talked about hiring where we're up to now. We will continue to hire in the appropriate places where it makes sense. Geographic expansion and continued product innovation. It's not a surprise. You see that in every single panel there.
Q4 is about the recovery and KPIs become evident. And this is where we doubled down on the proven successes in sales and marketing. We don't just stop. We keep going where it makes sense. We continue the market expansion. We refine and optimize where we're at and what we're doing, and we continue low and behold with the product innovation. Let's talk about the strategy execution to date. We've hired 20-plus go-to-market roles. We've implemented next-gen sales tools, a platform for training and execution. We've relaunched MegaIX in North America. This is a big deal. We've launched Global WAN, and I'm going to talk about that in a moment.
We launched Megaport Internet at the request of our customers. We launched 100-gig VXCs. Now these are numbers, but this is exciting, and I'm going to show you what that looks like soon. We launched contracted VXCs for the first time in 10 years. Would you believe we can contract VXCs? We launched Megaport Reach. We did 100-gig port availability across North America. That's the project ensuring that we talked about, and that is 80% deployed. In the U.S., we launched a 400-gig backbone upgrade underway, and that is for completion in Q3, and I'm going to talk about the significance of that shortly. There's lots and lots of interesting numbers. But what does it mean for the business and we'll go through it.
If you follow me on LinkedIn, you'll see that we've been hiring at a rate of knots. But what you'll see is we're hiring world-class talent experienced in the industry that we're in who can hit the ground running. And then if we look at the go-to-market transformation, we've been talking about that a lot on the last quarterly calls, we're in the next phase. We've landed the folks. The focus now is on improving the effectiveness of the go-to-market team, lead generation, nurturing pipeline. We've updated -- we've a huge process of updating sales messaging, moving towards a solutions approach. Now we've got a port in the VXC all these complex terms is Global WAN, hybrid cloud, connectivity to cloud, et cetera. We've improved reporting and commission structures for sales and leadership, one of the most biggest overhauls I've ever seen in the company in my experience.
We've enhanced go-to-market operating models and tools. You can see some of those images that sort of expand out there on the right. The partner program refresh is underway, and we're including a global partner roadshow and investing heavily into the channel and probably the most exciting announcement is a Chief Digital Office that we've instigated and underway. This is a significant piece of work to sort out our digital marketing revamp, get that underway so we can fire up the sales team moving forward and provide the that we need inside the business.
Now you probably heard me all launch this Global WAN and you're like, well, Michael is really excited about Global WAN. Why? This is why. The Global WAN launch has resulted in Megaport's largest deal in history. We're here for 10 years. This is the largest deal in history because we launched Global WAN. $1.4 million in annual recurring revenue contracted over 3 years. That's a total contract value of $4.2 million. If I draw your attention to this graph here, this is the average size deal at Megaport. $38,000 of annual recurring revenue. Grab a couple of ports connecting to the cloud.
What does this look like? 35x the size of an average deal at $1.4 million of ARR. This is an incredible opportunity to go back to our existing customers, of which we have 2,800 plus and take a new opportunity to them. It also gives us a great opportunity to attract incredible new customers to us. In this particular case, the client solution was a major U.S. health care provider with operations across multiple states, and they had presence in 8 data centers, hence, that Global WAN component. In this particular instance, it was 16 100-gig ports and over 50 VXCs.
So we talk about the outcome is the ports and the VXC show, but the story of what we're solving is the key for the customer. And it's such a great example of how we're pivoting the business to take advantage of higher revenue within our customers, helping them solve their challenges. Product expansion, Internet Exchange, and we talked, for those who followed us, we have gone hard and launched into the U.S. in a big way. We're now at 23 locations globally. We launched Charlotte, New York, Atlanta, Miami and Denver in the last quarter. We had IX customers. When we launched an IX, we have the traditional content distribution network providers turn up. We have the traditional content creators, and we're really excited to see even new logos that are coming to our IX platforms companies like TikTok, who some of you may be familiar with and
And in many cases, these 100-gig port wins as we start to expand the throughput that we're delivering to our customers. Now when we talked about new product launches, now these are numbers. 400-gig U.S. backbone, I'm really excited about it. Why is that interesting? Because that enables up to 100-gig VXCs, which again is just more numbers and letters. What does that mean? Incredibly fast connectivity that our customers can spin up across the U.S. and in many different global locations. That is 10x the sizes of any VXC or any connection Megaport has ever been able to do. That's why it's such a big deal. And so we're finalizing the 400-gig rollout in Q3, which means in the portal, and you'll see that in a second, up to 100 gig VXC connectivity.
We're moving well and truly beyond the data center. We answered -- we launched a partnership with fiber connects here in Australia for the CBD, so the major cities where fiber connects is available. You can actually get Megaport direct to the branch into the office tower, which is really exciting. And the last thing that we launched that I talked about was Megaport Internet. When I first stepped into the role, we asked our customers what they wanted from us and a huge amount of them said simple Internet that can be spun up in less than 60 seconds, and that's what we're good at.
And so let's just quickly move across to a demo. And let's just put that down. So I have to move my zoom things, so I could see, very good. All right. Is that coming through? Excellent. So here we go. You're used to -- hopefully, many of you are familiar with our very beautiful map here. So what we've got, these are really different locations. I've gone through this before. So if you want to look at some of the previous sessions. What I'm going to do is I'm going to zoom in here on a particular location.
This is an Ashburn focus. This is where the clouds live. We're going to go to CoreSite. So here's a data center CoreSite VA Reston. You can see that it's got 1-gig team, 100-gig ports available. MCRs. It has also got MVE. So we can spin up Cisco versus et cetera. What I'm going to do is I'm going to create a port. And you've seen me do this before, so it's nothing special. I'm going to do it fast. I'm going to give you 100-gig because we love 100-gig in done. 100-gig port deployed.
What I'm going to do with that? I'm going to say, "geez, I wish I could get to the Internet." Wouldn't it be great. Look at this, Megaport Internet. It's new. I'm going to click, and I've got a couple of options. I've got diversity designs for Internet. Let's choose Digital Realty, and we'll connect to that. Let's give it a right limit, 1,000, and then let's go next. Done. Did everyone see that? We have just deployed a port and connected to high-speed Internet and here we are in where the cloud's live.
Let's just go one step further. I'm going to go back to that port and do a private connection and I'm going to pick the United States. And I'm going to show you something really cool. I say it is Q2 demo that redeployed. This is going to be more core for technical people, but I'm going to show you anyway.
Right here, this is really exciting. See this rate limit. This is 100-gig, so 100, 1, 2, 3. And it just looks like numbers whoever on this call, but this is a massive deal. This is 10x the speed, and we've never been able to do that before. And the second thing, which is really exciting for the engineering team, is this minimum term. Megaport in the past 10 years has never put a term on a VXC. Now we have term, let's go 36 months, and it's as simple as this.
We've now got 100-gig termed VXC, look at that. We need fireworks and what have you. Thank you to the engineering and product team behind the scenes to make that work is a significant amount of work, and I just want to applaud the team to get that done so quickly. And to the -- deployment team is continuing to roll out all of our 100-gig and 400-gig backbone, just an outstanding achievement. All right. Let's get back on with the session.
Okay. Outlook. FY '24 guidance. FY '24 revenue, $190 million to $195 million, remains unchanged. FY '24 EBITDA, remains unchanged, $51 million to $57 million. FY '24 CapEx is expected to be $20 million to $22 million, revised down from $28 million to $30 million. The second half of FY '24 EBITDA and net cash flow to reflect the full impact of the increased headcount across the group, especially the higher salary of frontline quota-bearing sales team, plus increased expenditure on marketing, advertising, travel and entertainment and professional fees. What we're pointing out here folks is don't take the first half of EBITDA and multiply that by 2.
We've got a significant amount of spend that's coming in to actually go and drive this growth in the sales team, and we're really excited about that. The FY '24 CapEx is expected to be lower than originally communicated due to the use of existing inventory, a reduction in capitalized wages in a more efficient purchasing process. So this also, by the way, folks, includes the completion of all those projects that I referred to. Project Centurion, the 100-gig port rollout and that 400-gig backbone to give us the 100-gig VXC ability across North America.
Third quarter focus, as I've continued to reiterate, is around building the go-to-market momentum, pouring gas on the fire for the U.S. folks, pouring fuel on the fire for the Australians and driving that momentum. And we see -- expect to see the KPIs to be evident -- a recovery in KPI is evident in fourth quarter FY '24. All right, we did it, Steve. So I'm going to hand over to you, and I believe we'll open to questions. So thank you for those who joined us.
[Operator Instructions]
So our first question will come from Tim Plumbe.
Michael, it looks like you're maintaining guidance there, but some incremental reinvestment into the sales force in the third quarter versus what we were previously expecting. Can you give us any insights in terms of what sort of reinvestment or how many incremental heads you're planning to add in that third and fourth quarter, please?
So the hiring that we went through, the 20-plus heads that we exposed, I think when we called it out in July -- last 40, it was July 27, that hiring process went through and has been going on for a period of time. A lot of this -- a lot of the folks landed at the latter end of Q2. And so a huge amount of those folks came into the business. You'll see if you follow the LinkedIn, you'll sort of see when they came into the business. And so that cost doesn't get seen really until Q3. So it's not that we're hiring 20 more folks in Q3, and that's why we're going to see it. You're really going to see the hiring that we've done in the past 6 months come in to that period in Q3.
My statement around continuing to hire is that we are in a growth business. That initial hiring was just to get us back to table stakes, frankly. If you recall, we had 4 frontline sellers in North America. We had 1 customer success person. We have $100 million in ARR sitting, and we have 1,600 customers. We needed to get that back to what an appropriate business would service. And then the reality is we have so much opportunity, not only in North America, but globally to continue to invest for growth, and that's what this company is. We are a growth company, and we have incredible opportunities.
So what you'll see is continued, I would say, organic traditional investment that you would expect from any growth organization versus what was the dramatic increase that we had to get the company back from wherever it was to something that made more sense. So it's less -- I would say less dramatic, but just a continuation on investing where it makes sense. And so you'll see, if you follow us on LinkedIn, you'll see opening roles in the U.K., in Germany, in Spain, further roles in the U.S. We opened an additional role in Australia, for example, just what I would call traditional hiring processes that I wouldn't traditionally share on these sorts of calls constantly. I'd say it's more organic.
Okay. So just it's clear. Up to the second quarter, that was getting back to the previous stage, which is where the market -- told the market that you were getting to. Am I right in that there is incremental here in that now you're saying we're going beyond to that level and we're taking on incremental heads, but you're saying it's more along the organic rather than the rapid?
It's more organic. Look -- and here's the thing, Tim. So the -- you will have people move in roles like, I would say, just the traditional management of a business. Some folks move on, roles don't make sense, we reinvest that OpEx in appropriate areas to go and go after different opportunities. And we've still got headcount across the business moving. And when that moves, we take that OpEx and we invest it for growth wherever it makes sense. And that could be across the board. So it's -- I'd just say it's like the traditional how you run a business moving forward, a growth business, not a business that's trying to reduce or constrain itself.
We have a question from an investor in relation to the Global WAN client deal. And the question is what does the $1.4 million ARR deal replaced for the client?
So in effect, if you look at that customer, we might go back to the -- let's go back to it. So here's the deck of the -- am I still sharing? Yes. In this particular instance, the customer, think of it as a major health care provider, they have 8 data centers. They live inside physical data centers. Now traditionally, you would have some form of connectivity between those data centers. And that could be provided by carriers or in most cases, different carriers that will be trying to connect those different links.
They also will have connections to cloud providers and all the different ecosystem that we have. So if you look on our website, if you look at the ecosystem of partners that you can connect to, all of those connections could be delivered by traditional carriers potentially. And so if you look at in this case, where we've gone to all those data centers at 16 different 100-gig ports and then what you do is you mesh out a connection to all the different sites. So if you think of the 8 different locations, you run diverse connections to each one and you mesh them all up together. And that's a very cool option that Megaport can deliver.
What's really unique about us doing that is you can spin that up in 60 seconds, and you actually deliver it in a different way to traditional carriers. I won't go into the technical component of it. But basically, you're replacing all of that connectivity between those sites and you do it in a diverse way, so that each connection, let's say, for example, a [indiscernible] through a fiber cable, you have a diverse path that all the routes can continue to work down, so you build diversity for that customer. It can even be potentially more diversity than that. Hopefully, that answers the question.
Next up is I've got a question from Eric Choi.
Good result. I just had a really one to Tish. And Just on the CapEx, it looks like it's reduced by $8 million, and you guys have called out a reduction in capitalized wages. So essentially, I guess, CapEx has been put into OpEx. I was just wondering if you could help us quantify that amount because it sort of suggests underlying EBITDA -- there's probably an underlying EBITDA upgrade there, if not for that CapEx to OpEx transfer.
So the majority -- the large driver of the CapEx reduction is the use of the inventory stores that have been built up over the last couple of years. There is an element to wages, but don't forget some people have left the business. Hence, that will actually reduce the cost overall for Megaport. So that -- the reason we've kept EBITDA guidance study is because we don't anticipate significant change there at this point.
Thanks, Eric. I think our next question is from Kane Hannan at Goldmans.
I suppose to try to understand how you get back within that EBITDA guidance for the full year. I mean you previously disclosed an EBITDA margin for the last month of the period. Just given I suppose all the moving parts with that sales investment, can you talk to what the December EBITDA margin was for the business?
The overall piece or just in terms of consistency against the quarter?
Probably the overall piece. I mean, I suppose you're implying basically $8 million step-up in costs in the second half at the midpoint of guidance. I was trying to understand how much of an impact that sales investment had on, say, the December EBITDA margin when it was fully in the base.
So I guess one thing to be clear on is that these numbers, we're just talking about the quarterly movement at this point. We're still undergoing -- the auditors have arrived as of this week, so we're undergoing our half year results analysis at the moment. So we'll talk more to that at half year.
Okay. So we shouldn't be thinking top end of the guidance range for EBITDA where is it more where we could land or we're still sticking to the midpoint?
We'll probably -- we'll cover that more at the half year.
Okay. Next question we have from Siraj at Citi.
Just a two-part question. Just in terms of -- Michael, just in terms of the second quarter performance for KPIs, it's interesting that services actually were down quarter-on-quarter -- services net adds were down quarter-on-quarter, which is surprising given the launch of the IX and the fact that you had some reinvestment. And second part on that, I mean, you sort of sticking to that 4Q inflection point. You're sort of 2 months away from 3Q ending. What gives you confidence, right? What are you seeing in terms of the pipeline and activity that gives you confidence on that pickup?
Okay. First question is, I think one of the things I'm trying to showcase, particularly with the Global WAN example is that we -- and I think if you measure services, I'll give you an example. A 10-gig port or 100-gig port, there's a 10x difference in terms of throughput. There's a big difference in terms of pricing and yet they count as one service. For a VXC, which is a service, and as I showcased with that particular Global WAN data, which is why I think this is really important to understand, is that a single VXC could connect to the cloud for $200 a month or you could have a 100-gig VXC for 35x the size of that potentially as showcased with this deal and yet, it's still one service.
So the focus is around improving the services that we offer and actually the ARR you can get out of the services. So that's one piece. IX, as an example, is very heavy 100-gig because of its massive throughput. And so the launch of the IX is the first piece. And we only just launched them. And so now what you need to see is customers now turning up. The other thing that we're reporting on is revenue generating as opposed to what we had in the past, which was just anything that would turn up and even if it wasn't billing. And so what you'll see is a slight lag because we're actually showcasing what is billing. So there's a couple of factors there. The second question?
Total service is slightly down, which is our
I think that's answered in my first piece. So...
Just in terms of the inflection point into 4Q, the confidence on that, Michael, what are you seeing in terms of -- because -- I mean this quarter was another sort of, as I said, flattish quarter on additions, what gives you confidence in terms of that inflection in 4Q?
Well, the -- as we've shared, throughout the year and as you know, we have only just hired folks like if you -- that's why I suggest to take a look at LinkedIn. You can see when those folks were hired into the business. And so if we just go back to the front of this and to give you some perspective, we have 3.6x the size of a frontline sales force in North America as of the end of Q2 versus when I took over the role in May. And that's only just been instigated.
So if you remember the story that we went through, and if we go back to my little chart here, where is the here we go. We landed in the role in Q4. I understood the business. We talked about people, product and profitability. We started to execute in Q2, which was the hiring. And so that process has now been done. You can't fast forward or speed that up. There is just no way to hire someone and then go back in time, ramp them and somehow get a result from them sooner. And so all of those heads have come online in Q2. The ramping is continuing and then you would expect to see that result come through in -- we would see metrics in Q4.
Now as you know, the revenue won't come through until FY '25 because you'll see metrics, but you won't see revenue. If you even did a $1.4 million ARR business that you sign that in the last quarter of the financial year, right at the end, you've only billed for 1 month of that revenue, et cetera. So you won't see all of that until FY '25. So I think it's just the same message we've been sharing more broadly, and we're staying incredibly consistent with that.
I was just going to see, is there anything in terms of pipeline that you're seeing, Michael, that is giving you confidence on that, right? I understand the -- it's pretty early in that, but is the new sales team's pipeline or anything looking better?
So the other piece of it is we've -- and as you know, we rebuilt and then as I think I pointed out here, we've had to implement next-gen sales tools and actually a process. There was no process inside Megaport. So there's nothing to compare to say, hey, 1 year ago, this was the pipe gen and compare the two. We literally had to build this. So we've built it now. And so you can't sit there and say, this quarter compared to a previous year was better. So I'm not going to give you an insight and to say like, hey, we see that signal right now.
Remember, they've just landed, adjusting seat. So let's talk more broadly about that towards the end of Q4.
Thanks, Siraj. Just a quick call out for those that are looking for the KPIs. You'll find that in the footnotes to the presentation, there's a link through to our website under the business overview section and you'll see the revenue-generating KPIs over the last 12 quarters for those that were not following Siraj's question which said total services were slightly down quarter-on-quarter, which they were.
Next question we have Nick Harris from Morgans.
Congratulations. That was clearly a much better result than myself and others were thinking. So great quarter. I might be a bit cheeky in trying to squeeze to in, but they're pretty short ones. Just the first one was the revenue booked in this quarter was actually higher than the exit rate MRR x3. So I'm just wondering how come the revenue is stronger than the MRR? And then the second question, that Global WAN stuff looks really exciting. Just wondering where we'll see it in the KPIs? And is it a short sales cycle? It looks like it is given you just launched it and you've already sold one. So just trying to get a feel for that, please?
First one?
Yes, with regards to the revenue, Nick, there's a number of elements that can occur quarter-on-quarter rather than just straight MRR x3. So that will start to build throughout the quarter. That's generally what will happen with revenue. There are some nonrecurring revenue, but not significant.
Well, on Global WAN. So Global WAN, it depends. The sales cycle is obviously -- and as you saw, it's a lot more different sites coming together. So it can be a longer sales cycle. It depends on timing with customers and where they're at and the relationships we've had. I think one of the great things about Megaport is we're a trusted entity, got lots of customers that trust us and love us and love our simplicity, and they think of us as just a connection to the cloud.
And so when they realize that our -- particularly the investment in the customer success teams when we go back and actually talk to our customers and love them and find out that there's opportunities that we can provide services to all these different locations that they're currently using alternative vendors for all carriers, and that's a great opportunity for us to go and have that conversation.
The -- Is the sales cycle longer than a connection to a cloud? Yes, mainly because there's multiple sites and multiple -- you're stitching together multiple pieces. So it's more in line with when a customer is ready to go. But when a customer is ready to go, the sales cycle can be quick. So it's more of a timing on the customer side. Hopeful that makes sense.
Thanks, Nick. A question by the Q&A. Just around the investment in headcount and whether the Q2 employee costs included the full quarter of run rate and/or sort of what is -- where does that look to roll out in Q3? Tish, I might ask you to answer.
No, it didn't. As note previously. It's -- a number of those hires have been staggered and largely towards the end of the first half.
Okay. We might go through to Jonathan at RBC.
So I guess a follow-up to the Global WAN question, and then I have one of my own. But that -- was that contract for kind of like augmenting or are you the secondary provider? And if so, do you see any scenarios where that may end up producing even more ARR going forward? And then a follow-up to the last question about sales cycles. More generally, for new logos, I'm interested in whether you're seeing any elongation in sales cycles or a shortening of sales cycles or no particular trend to note?
Finally, my question then would be, you've had a lot of travel recently, touch points with customers, including last week. And I'm just interested in general kind of heading into calendar '24, what are the impressions that you're hearing from customers of Megaport? Are there particular types of products or use cases that you're hearing from your customers might show?
Thanks, John. I appreciate the questions. I've written them down. So first one, backup links. You're obviously well versed with Megaport. There are a lot of customers that just leverage Megaport as a backup link in many cases. And they're not always aware of the robust offerings that we have because they started with the viewpoint that I'll take a backup link and I'll put a small connection across that. And if something went wrong, because we're a network as a service provider, you could spin up high speed and just click all your traffic across to that.
The reality is we provide diverse services that could provide both the primary and backup so we can deliver both of those. So we have, as I've mentioned before, a tremendous opportunity to go back to our customers, understand what they're leveraging us for beyond just like, hey, yes, you've got this connection, but actually going a bit deeper and asking the next question, what are you doing with that? And what are you doing with other vendors or other partners or other carriers and how could we augment that?
So the discussion is basically, let me understand what you're currently doing and let me show you how we could overlay Megaport across that, save your money and increase your speed in connectivity and also a significant diversity. Our backbones are really phenomenal. And so when you look at how we built them out, you can actually get incredibly -- incredible diverse offerings without the need to just use us for a backup line. So yes, that's the first one.
Sales cycle, one of the core things we talked about rolling out is they implemented next-gen sales tools. One of the tools that we rolled out is a platform where we can actually understand how our customer engagements are going. Actually, records the video actually the customer engagement gives feedback guidance, shares out with the customer, so they've got all of their details around the demo, et cetera, et cetera.
Inside that, we get to see how our customers engage with us. Actually, you sort of see the black art of sales, I would say, and you get to see the speed at which the sales cycle can work. Now depending upon the type of product that Megaport offers, there is a really great example that I sent out just before Christmas, which was one of our top reps had a customer who started the call with hello, we've never heard of Megaport and he articulated who we were. This is a 30-minute call, did the demo of what we can solve, understood their problem. Their problem was connecting between 2 cloud providers, Azure and AWS, and they had latency issues that had all sorts of challenges.
The call went through to the customer saying, "I can't believe this exists." And then the end of the call was the customer sharing their screen, logging on and actually setting up their billing setup and actually provisioning in a 30-minute call. That was MCR. MCR is a fully virtual platform and provides a virtual router and then you point your 2 connections, and it was some incredibly fast latency that solve their problem and that was deployed. So why do I love that? The sales cycle was literally the second they found out about us, which is why you hear me say, our challenge is getting to customers and letting them know what Megaport can do.
And when we get there, customers love what we can do. The other piece was that was a sales cycle of 30 minutes. And I know that's extreme, but that is an example of what can happen. And the core part is the time to value for them isn't that same is actually that day because the connections are up and running. What was the last one, impressions I've written down your last questions.
Yes. Just the customer reaction that you've had during this kind of last meetings, yes.
I think it's more of the same. I think the -- there is a genuine sense that Megaport is back. I think is the appropriate statement we're showing up and supporting our partners and customers. We're turning up in a way that's meaningful. We're making the efforts to go and physically see the folks that matter. We're sharing that love. I think the world of COVID and sitting at home is painfully over. And it's important to get in front of our folks again, which is what we've enabled the team to do that's when you're a growth organization, you can actually go and focus around that, which is why that fiscal writing of the company at the start moving towards investing to growth but doing that in a sustainable way so that we drive profitable sustainable growth moving forward.
And so that outcome is basically the feedback is you're back, you're exciting. A lot of them do comment on the new imagery that we have. So they do love. If you follow us, there's some cool imagery. So that's also coming out. And for whatever reason, everyone loves a Megaport and we go through quite a lot of them. John, I heard you might have been wearing a Megaport T-shirt at a run recently, which we were very excited about sort of spotted you in the distance.
Okay. And we might go to the next question. Thanks, John. Bob Chen at Barrenjoey.
Just a quick one for me. Just in terms of the sales team, can you give a little bit of color on how the sales team is now structured now that the hires are in place? And I think you mentioned that you've brought in some more sales tools or platforms into that business as well. Can you give us some color on what you've brought into the team or how you've changed the sales motion?
Yes, there's a lot of work there. But if you look at it, the -- as I've mentioned sort of through, the sales team were very focused around a port and a VXC port, VXC port and VXC as opposed to stepping back and solving for solutions, what are the connections that we're trying to do, multi-cloud, hybrid cloud, Global WAN, how do you get faster connection to your cloud providers to solve for the applications that you're solving for? It's a different sort of discussion if you can think about it from that perspective.
And that's a fundamental cultural shift actually, and it starts at the top. It starts from me and it starts down. And you'll see my passion around demoing the product. And you can see -- part of that is to show you all what's happening, but a lot of that is to show the team, our team that this is where we're headed. This is what I expect from the team to show this incredible technology, and it is cool. And so that's a big pivot, I think, from where we were. Frankly, remember, it's been such a dramatic shift from that 4 frontline sales. We've had to literally rebuild the entire team.
I've never heard of a You've actually 3.6x the size of the team. And so it really is a massive move. We brought in some world-class talent to help us build out the sales tools and platforms, and we've rolled out very quickly a platform called which gives us the ability to go and -- it's a conversational intelligence platform, I think, is the appropriate term. But that ties in not only our forecasting platforms, it looks into all of our sales force. It gives us indication on the customers. It talks to us when we're not engaging appropriately, it looks into their e-mails and the communication, it looks in all of that.
So we actually get to see how our folks are going, which gives us an ability to fast coach and guide the team and also celebrate that example I gave you before. So the tools and the systems inside that, and there's a raft of RevOps tools that are going through some quite dramatic change inside there. The go-to-market team, as we've referred to by frontline sellers customer success folks, solutions architects sort of in a pod to support that and a big investment continued to grow our channel, which is our -- the areas that's helping us drive some new logos in the appropriate areas, I would say.
I mean, that's a long conversation, and it takes quite as an entire industry associated towards that. So it's not something I can simply respond to it. Suffice to say that it's been a massive turnaround, and I'm very happy with how it's progressing. I think the biggest one to focus on is actually marketing and actually the pivot towards solving that digital marketing piece, which is probably the most exciting piece that I had for Q2.
Thanks, Bob. Next question from Roger Samuel at Jefferies.
Very good result. I just ask you about the 100-gig VXC. It looks like the pricing uplift is double so from $200 from 10-gig exceed to $400 per 100-gig VXC. Are you pushing your customers to take out the 100-gig? And because be getting 10x more capacity, but this is paying you twice the price.
Yes. I wouldn't look at the -- this is welcome to pricing. When you get into this space, it gets tricky depending upon the distance, whether it's in the metro, out of the metro, is it crossing, where is it going? There are to arm our people that all they do is think about pricing for this to get this right. So the example I gave was a very short connection inside of metro from memory. And so the -- if you're looking at long-haul VXC connecting at 100 gig, for example, from East Coast to West Coast, it's a completely different story. So that -- I wouldn't say there's really any signal you can draw out of that.
Okay. Cool. And just ask you, why would someone take up the Megaport Internet instead of the VXC? Is it a lot cheaper to Internet? I mean, what's the use case for the internet product?
It's funny. I mean, Internet is just another VXC. Like if you look at the platform, it's just another connection to another location. So our Internet Exchange is a VXC to internet Exchange. Our connection to cloud is a VXC to cloud. Our connection to Internet is a VXC to Internet. A 100-gig is a VXC 100-gig component. Why would someone take out Internet if you saw how simple it was, instead of -- it's the same value proposition in comparison to going and trying to get a connection into a location from a carrier spending 4 weeks negotiating, locking in 12- to 24-month contracts, waiting 10 weeks for delivery it wasn't delivered or whatever that process or you jump online.
And as I showed you in 60 seconds, it's spun up. And so there's a raft of reasons why you would want that connectivity in those locations. We'll continue to innovate on that product as well. So it's more of the same value proposition that Megaport brings to market. Just adding another quiver to the another arrow to the quiver so arrow to the equipment, not quiver to the arrow. Imagine that adding a quiver to the arrow.
Thanks, Roger. Paul Mason from Evans & Partners.
So I just wanted to ask about the contracted VXC proposition you guys have launched. If you could tell us a little bit more about sort of what product market you're trying to go for there by offering fixed-term contracts instead of just having it variable like it's been historically?
And then maybe if you could also add some color on whether there's any significant discounting, say, for 3 years versus 1 year? Or is it more just like price certainty that's provided to the customer when they do that?
It's both. Yes. So great point. So if you're locked in for 3 years, you haven't got an increase in price. If there was a price increase, there would be a lower cost to go for 3 years, for example. Why would we do that? Megaport has evolved. And if you look -- and by the way, if you think of where we came from, the cloud markets have actually evolved. And so we were lining up against -- if you look at historically, lining up against how you would procure cloud. If you remember, AWS back in the day, they literature came out with pure consumption.
So it was basically like a month to month, if you use it, it doesn't matter. And what you'll see today is every cloud provider is locking in a minimum spend. So basically, they've gone to like a contracted arrangement. So that mindset of just month to month for every single thing has changed. And I think that the opportunity for us was to catch up to how people consume cloud. The second thing is, some customers do need that ability to just spin it up, spin it down for 1 month, 2 months, whatever. And we'll always offer that as the option.
But a huge portion of our customers, they don't need to spin up and spin it down. And so then what you've got is an opportunity to actually provide them certainly from a pricing perspective, give them a little bit of a discount, et cetera, and lock in for a longer-term contract, it's healthier for our business. And then what -- if you look at the Global WAN, Global WAN, the market that we're competing against, you do not spin up a Global WAN down tomorrow. You lock that, you want that stable for the next 3 years. And so it's an appropriate process for them to have that.
So adding that to the portfolio, it's just a natural evolution. But personally, I was surprised it was there. I put a fair amount of pressure I would say on Cam to get it sorted, Cam is Head of Engineering. And it's a huge change in terms of the back end. And so it's -- I'm happy that it's there. I think it's just a natural evolution of the business as the business has changed, but we're not moving away from month to month because customers love that as well. So you've got for courses.
All right. Great. And if I could ask as well just about fiber connects. Can you tell us a bit about sort of the reach of your partnership with them? Like has that given you mainly like Australian coverage to be able to reach enterprise? Or is that getting you across all continents, that sort of capability? And if not, like are you looking at any other partnerships in to make that a global capability?
You're asking the right questions, Paul. So firstly, Fiber Connects is a really fascinating company for those of you who don't know it. It's worth taking a look. What they've built is fiber to every building actually up to the rises in Sydney and Melbourne. And I think they're underway in Brisbane as well close nearly finished. And then they've brought all of that fiber back to a central point in the city and then they've gone in -- they dug tunnels to all the data centers and run fiber to all of those. And so what you have is glass last to the office. And what Megaport is glass.
So you can literally go into any office floor in those locations, get glass to Megaport. What does that mean? Really phones up or popping up on the screen sorry, folks. I'm just seeing myself getting a little thumbs up. It is worth a thumbs up by the way. And so if you look at this -- we can go to an office, take a major bank that has a small data center sitting inside an office in Sydney and you get a glass from there to Megaport. It's Megaport in the branch, you consider it like a cross-connect from a data center into that location. So it's really exciting.
And the cool thing is we're automating all of that. And so in a really fast time, you can deliver it. I've never seen anything quite like what Fiber Connects us to and it's quite fascinating. So we are doing that wherever they turn up, we will be. And particularly, if you think about it, you can grab that connection. You can grab all the connections that we have in our cloud provider or any other data center and Internet all across that same link. It's a really compelling offer and it's incredibly well priced. It will be very disruptive. That's the first thing.
The second thing is what do we do moving forward? So can we take that to other locations around the world? And the answer is this is a great example for us to test the edge, Megaport to the edge and then find partnerships globally that we can -- all the product side is going to be solved. So when we find other partners globally, like in New York City or in San Francisco or London, et cetera, where it makes sense, we could do something similar there. But that's a little bit further down the path. Nothing to announce as yet, but you as always, are on the right future track.
Okay. A quick question from the Q&A. Any trends we're seeing in customer churn and pricing trends in the market having any impact on the churn?
Any trends in customer churn? I wouldn't say there's any differences between our traditional churn inside the business, nothing of note. I would say, just consistent in how that business has been running.
Okay. Next question is from Siraj at Citi.
Michael, just on Global WAN. I mean -- I must say I'm a bit surprised that it's been -- it is done so quickly. Just in terms of other opportunities out there, was this -- do you reckon this is a one-off and take some time for the other deals to come through? Do you actually have quite a bit of pipeline here because now that you've upgraded the backbone, should we think there could be a few more deals in this half?
Not just one deal. We haven't just won one deal. There's multiple Global WAN deals actually that we've won. That was the largest, and so we obviously that. And the purpose of showcasing that was to give you a perspective of actually when we launch a product and the reasoning behind that and showcasing the difference that it makes and also hopefully giving some insight into the fact that we have such a tremendous opportunity to expand in the existing customer base. And a VXC like these port counts -- these services counts, we can increase services accounts, but we can also increase the revenue of those services counts.
And the outcome is an improvement in annual recurring revenue. And so that is a really good example of that coming through 35x the size of a traditional deal in WAN. Sure they take a little bit longer to but settling 35x the size. And that was just one example of a number of deals that we had come through
Yes. Great. Great. And secondly, in terms of CapEx, maybe one for Tish, on CapEx looking out maybe medium term, because you're now sweating the assets glass, as you say, a bit harder with these WAN deals. Do you reckon CapEx bill? It's good in terms of revenue and should be much stronger, but do you reckon CapEx also has to go up because you need to get better deals, upgrade your networks?
So we'll probably, if anything, we're still working through the half year and the future term forecast. At the moment, we've just upgraded CapEx for this year specifically. Don't forget the inventory stores that we did purchase over the last 2 years during COVID.
It's worth noting that those inventory stores, I think -- sorry, those inventory stores were not for the 100-gig upgrade and they went -- that's a project Centurion and also the 400-gig, we've been procuring infrastructure to deliver that. So it's not just like we're burning down existing stock.
Yes. Just a quick one. In terms of competition, anything you've seen because your former CEOs joined one of your key competitor, anything that you're seeing in market that's impacting you?
Nothing that we can -- that I see.
Thanks, Siraj. We might go to the last question from Andrew at Macquarie.
Guys, can you hear me?
Yes.
Yes.
Perfect. I just wanted to clarify, first off, that inventory, none of that's been reallocated at all from certain data centers to other. It's all just the inventory that's been purchased and they're not rolled out yet?
Yes.
Okay. And then with sort of incremental CapEx requirements from here, are they just driven by utilization? Or are there other products in the pipeline? What we should be thinking of there might be surplus to the backbone that you've built?
When we expand and add new data centers, when we add new markets, when we add new locations, that's where we are typically rolling out new infrastructure or refreshing all. But I mean, that's just -- it's like paying the Sydney and other regions they say, there's always a process of going through that, and that would be just business as usual. New locations obviously need new infrastructure. And -- but I think the point is, remember, we've done quite a significant upgrade this year. And that was not from the existing inventory to get that project Centurion, the 100-gig and 400-gig backbones.
So we'll come back, I think, at the first half results with some further commentary on CapEx. Thank you very much to everybody for attending today. Just a quick call out results due out on the 20th of Feb. We'll send around an ASX announcement with the webinar details. Thank you very much for your attendance. And for those in Sydney, we have a few group meetings tomorrow with Michael and Tish present, and we'll be doing a few other calls around that. So if you would like a call, please reach out investor@megaport.com. Thank you again for your attendance.
Thank you, team. Appreciate it.
Thanks.