Megaport Limited (MP1) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Megaport's Global Update and FY '20 Full Year Results Call this morning. I'm Vincent English, Chief Executive Officer of Megaport. Joining me on the call this morning is Steve Loxton, Head of Investor Relations; and also our new Chief Financial Officer, Sean Cassidy, who has just joined us at the beginning of April. We will now proceed to go through the presentation, and then we will take questions and answers once the presentation is concluded. And I'd like to start with the company highlights for FY '20. There are some key milestones. Most of this has been public information. But just to call it out, in terms of our monthly recurring revenue, closed at $5.7 million at the end of June, an increase of 57% year-on-year. Our annualized revenue is the same, an increase of 57% is now on a run rate of $67.8 million for the year. Total number of customers, 1,842, up 24% in the quarter. And the total number of services consumed by the customers was 16,712, up 45% in the year. The total number of ports on the network, customer ports on the network, was 5,767, up 42%. And the total number of installed data centers in our footprint at the end of June was 366, up 22% for the year. As of today's call, there's 380 installed sites on the network, slight delay due to COVID-19 in terms of connectivity. Multiple sites got connected during the first month of this financial year. Moving on and continuing the highlights. One of the big callouts that we had during FY '20 was our continued growth and our expansion of our partners' footprint with our leading cloud partners. Over the course of FY '20, we added Rackspace Technology and their on-ramp capability to our network. The total number of on-ramps at the end of June was 197, up 49% in the year. And the total number of cloud regions where our customers can access was at 109, also up 49% in the year. The total enabled data centers was 669 at the end of June, up 27%. But similarly, just with that slight delay at the end of June, we are now over 700 as of the time of this call this morning. And our marketplace now stands at over 360 service providers, managed service providers, that customers now can connect to on the Megaport platform. And having a look at the revenue performance for FY '20, starting on the left-hand side, looking at the Asia Pacific region. Total revenue for the financial year was $20.6 million, up 54% or $7.3 million in the year. Switching to North America, the revenue was $26.3 million, up 94% or $12.7 million in the year, our fastest-growing region in the business. And our European business ended up with $11.1 million, up 36% for the financial year. Overall, total revenue was $58 million, up 66% or $22.9 million for the full year. Switching to a snapshot on the annual results for FY '20, of which the annual report was also released to the ASX this morning with the full financial statements and audit IR report. In summary, total revenue for the financial year was $58 million, as I said, up 66%. The profit after direct network costs was at $29.5 million, up from $11.9 million previous year, 140% increase. The profit after direct network cost margin was 51% for the full year compared to 34% from the previous year. Operating expenses were higher as we continue to invest in growing our business. As we mentioned during our capital raise calls during the financial year as we continue to invest in the growth and scaling of our business. And normalized EBITDA for the full financial year was $19.9 million versus $24.7 million the previous year, an improvement of 19%. Overall, after depreciation and other cost, total loss for the year was 47.6% compared to 33% from the prior year. Having a regional look, again, and just to drill down on the revenue for FY '20, I draw your attention to the pie chart on the left-hand side. North America now accounts for 45% of our total revenue, $26.3 million compared to 39% the previous year. And as I mentioned earlier, a lot of that has been driven by a 94% growth in the revenue in our fastest-growing region in North America. Our APAC business accounts for 36% of our total revenue compared to 38% from the prior year, and our European business, notwithstanding continues to grow, is at 19% compared to 23% the prior year. Overall, revenue up 66% and monthly recurring revenue up 57% for the full year. Having a look at the operating costs in a little bit more detail. As I mentioned, total direct network costs of $28.5 million, up on the previous years. We continue to expand our network in a number of sites in the regions. Also, with the growth in the revenue, our gross margin also increased. Our profit after direct network costs increased, up $17 million in the period. As I mentioned, our OpEx increased. Largest impact of that has been on employee costs where we continue to invest in our teams, both on innovation and sales and support roles as we continue to grow our business and regions, scaling it ready for FY '21. So it puts us in a position to do that as outlined in the previous capital calls. Other cost, professional fees increased, and a lot of that is stuff to do with regulatory new regions. We brought on 4 new countries to market, Spain, France, Denmark and Japan. During the course of the financial year, most of those costs were pretty much one-off for the year compared to going forward. And then we've also seen a reduction, obviously, in travel with COVID-19 and some of our marketing spend as a result of, obviously, COVID-19 and conferences. Overall, total OpEx was $49 million compared to $36 million for the prior year. Having a quick look back on the historical financial performance on the exit run rate at the end of June for the business. And you can see FY '20 compared to prior years, June and the normalized gross profit or profit after direct network cost margin was 55% exiting June, and our normalized EBITDA margin at the end of June was negative 29% compared to a negative 49% the prior year. So continuing to improve. And I will touch on this a little bit later as we're continuing to grow towards an exit run rate EBITDA breakeven point for June '21. In terms of the financial position and the balance sheet, the main callouts, I suppose, the most material component is the total cash at the end -- in the bank at the end of June was $166.9 million, mainly driven by the recent capital raise. But also just to draw attention in our total liabilities, we do have the extent of some vendor financing on very favorable terms to the tune of $8.8 million in our total liabilities. Other than that, the financial position is in a very healthy state. It puts us in good stead to continue into FY '21 with our plans and our growth strategy. Switching now to just a quick update overall on the business, starting with some of the main growth KPIs in the business. As I mentioned, installed data centers, up 22% or 366, currently at 380 as of today. Customers were up 24% at 1,842. Notwithstanding that growth in customers, the number of ports grew by 42%. So a lot of that growth came from existing customers as well as new customers, standing at 5,767. And similarly, the total services were up 45%, again, driven by both existing customers and new customers coming on board with 16,712 live services at the end of June. The average revenue, as I mentioned, is up 57% at $5.7 million and the average revenue ports is up 10% at $980 across the group. In terms of the growth in ports and services, just an illustrative, a look back on where we are quarter-on-quarter in our growth, both and a strong correlation between our monthly recurring revenue and our KPIs in terms of ports and services, and the underlying fundamental growth rates that we're seeing, notwithstanding some COVID-19 our FX in recent quarters has continued to grow at double-digit rate. And in the quarter and in quarter 4, we've seen a typical 15% quarter-on-quarter growth in underlying KPIs and local currency revenues. And we continue to see that grow and continue as we are today. Having a look at the network effect, and this is possibly the last time we'll present this chart, drawing your attention to the spiral graph in the top right-hand corner. It's getting quite dense at this stage, as an illustrative for the number of ports and in the outer ring that you see our customers on. And obviously, the number of connections on the inner side where they're connecting to. And I draw your attention to 1 or 2 columns. The 5 o'clock position down on the bottom right hand corner spiral graph, that dense thing is Microsoft Azure, which continues to grow at a much faster rate. The 2 o'clock position in the green that you see at the top corner there is AWS, and the 3 o'clock position is Google. And then on the 4 o'clock position is Oracle. So we'll continue -- we've seen now recently a big uptake in more and more cloud providers rather than [ traditionally ]. We've seen a very strong growth in the predominant 2 players with AWS and Azure in previous periods. Looking at the pie graph -- pie chart down in the bottom right-hand corner, you can see, notwithstanding the growth in services of 45% in the year, a larger portion, another 68% of our total connections across our network are now terminating on either or one or more direct cloud -- public cloud providers. And so again, it's still the main draw for why customers are using Megaport platform, and we're seeing an increase in activity where customers are looking to connect to more cloud providers as they move their infrastructure more and more so into public cloud and into more than one public cloud provider. We don't see that trend slowing down any time soon. Switching to -- speaking of public cloud and switching to our footprint. And as I mentioned at the top of the presentation, very strategic components on our partners is continuing to work with them and extending our reach of customers can connect to them more locally and more regionally. The total number of on-ramps on the network connected today, 197, an increase of 65 or 49% in the year. And also in terms of number of regions, we have 109 regions now also up 36% and 49% in the year. Drawing your attention to the chart on the left-hand side, you can see we have Microsoft Azure with 47 on-ramps globally, followed by AWS of 45 and Google at 32. And now we will see more of this come through in FY '21 as they continue to reach more and more regions and more and more diversity with their cloud on-ramps. Having a look at the customer cohort trends, this is something we introduced 2 years ago. And again, no different this year. Looking at the left-hand side, where we focus on the average services per customer and focusing on the FY '20 cohort, we see that 4.6 services -- average services per customer, for new customers coming on to the network compared to 4.4 the previous year and 4 year before that. So as customers are coming on to our network for the first time, they're taking up more services initially. If we look at the cohort in FY '19, where they had 4.4, they had increased to 6.6 this financial year. So existing customers in prior years are now continuing to use more of the Megaport services. And we saw that from some of our KPIs earlier on, where we saw that the number of services in ports, both increased by over 40% compared to new customers coming on to network at 24%. So we're seeing growth come from existing customers on our network, and we're also seeing growth come from new customers coming on to our network. So the average service per customer in FY '20 was 9.1, and it's an uplift of 17% compared to this time last year. Similar trend, if you look at the chart on your right and you look at the revenue -- average revenue per customer in FY '20 has now jumped up to over $2,000 compared to $1,257 in the cohort in the prior year. So again, same trend where we're actually taking more services, but they're actually spending more. In the -- if you look at the FY '19 cohort, where they spent $1,257 this time last year, they are now spending $2,700 on average this year. So the average revenue per customer overall has now jumped up to over $3,000 or an increase of 27% coming from the existing customers on our network. So we continue to see that. That's an important part of our strategy for the network going forward with 1,800 customers and making sure that we're looking after them and their needs and their service, not just from existing products, but also from innovation in new products, in new ways that they're continuing to look to how to use the data and how the platform can serve them going forward into the future. A quick update on MCR. During the year, the average monthly revenue per customer for MCR now is at $5,157 for an MCR customer compared to a non-MCR, which is $2,809. This time last year, the MCR customers were spending $3,967. So that growth in MCR customers has grown by 30% alone this financial year. Similarly, the average services per customer for an MCR customer was 13.9 versus a non-MCR customer at 8.6. The MCR customers last year were using an average of 11.9. So we've seen a 17% increase in the number of services. Total number of MCR on the slide on the network at the end of June was 307. And I'm going to switch now to a little bit of a deep dive into the regions. And just everything to this point in time has been very much specific to the whole group. Starting with on the left-hand side, in terms of our growth in our total network, North America, made up of the U.S. and Canada, 2 countries. We are now live in 80 metros across that region and a growth of 25% in the year. The number of installed data centers, 174, up 19%, and the total enabled are 374 or 23%. Looking to Europe, added 3 new countries with Spain, France and Denmark. Total countries now 16, 32 metros, up 39%. The installed data centers that are 105, up 27% and total enabled of 181, up 27%. And looking -- finally looking at APAC, we added Japan in, so bringing the total to 5 countries. Number of cities now stands at 16, up 45%; installed at 87, up 23%; and then enabled at 114, up 41% for the region. So we've invested quite a lot in FY '20, and these are the figures as of at the end of June, and total installed are 366 and enabled at 669. And as I called out earlier, we are now at 380 installed sites and over 700 enabled. Moving on to have a look at the regions separately. The Asia Pacific region, which is fully EBITDA positive. These numbers, I will call out, including Japan, which we launched at the end of November, early December. So these take in the network and the costs associated with bringing the market live onto the network and for the trading for the last 6 months of the financial year. Total installed data centers 87, up 23%. Total number of ports at 2,452 is up 32%. The monthly recurring revenue at $2 million is up 43% in the region. The total number of customers are up 16% at 783. And total number of services are up 36% at 7,480. And overall, the profit after direct network cost or the gross margin, for want of a better word, has increased by 10 points up to 72% margin, including the new market, Japan, which is not yet gross margin profitable. Just a couple of stats on the right-hand side. Average revenue port is now at $800, and number of services per customers increased, it's up at 9.6. And the total port utilization, which is the amount of ports that are available to sell is only at 41%. So plenty of headroom for future growth without the necessity for further CapEx or investments. Looking to North America. The North America business is gross margin profitable, but not yet EBITDA positive. Overall, total installed data centers up 19% at 174. The number of ports are up 54% at 2,453. Monthly recurring revenue at $2.6 million is up 73% in the year. The total number of customers at 903 million is up 38%. The number of services is up 58% at 6,762. And the gross margin or profit after direct network cost increased from 22% to 38% in the year. A couple of callouts on the right-hand side, average revenue per port increased now over $1,048. Average revenue -- average service per customer is now at 7.5 and port utilization is only 34% in this region. So again, plenty of headroom for further growth and scaling the business in North America during FY '21. And finally, just looking to Europe, where we've invested quite a bit with 3 new markets. 105 data centers, up 26%. Number of ports at 862 is up 40%. Monthly recurring revenue at $1.1 million is up 38%. The number of customers at 355 is up 20%. And the total number of services at 2,470 is up 38%. And the gross margin or profit after direct network cost margin has gone from 40% up to 64%. And the European region is now EBITDA positive for Q4 exiting FY '20. So that brings us 2 regions going into FY '21 who are now EBITDA positive, notwithstanding, there's plenty of headroom and new markets in there to grow during FY '21 and beyond. 1 or 2 callouts, average revenue per port now is $1,298 in Europe. The service per customer is at 7, port utilization is at 26%. I'm just going to talk a little bit now about Megaport in terms of the industry and just the space we're in, a bit of a refresher on that. The latest report from Gartner 2019, currently in FY '20, saying that the enterprise cloud spend or the industry we're in is a $266 billion industry, of which connectivity in the space that we're in, we're part of that. Forecasted to grow to $354 billion over the next 2 years, in 2022. And then looking at the Flexera 2020 updated cloud report, which was previously RightScale, and their enterprise cloud strategy customers are over 1,000 employees. And now 93% of those, during that survey, are now actively looking and using multicloud as part of their business needs. And out of that, hybrid cloud accounts for 87%, which means that customers are using some private infrastructure that they may have in their -- I mean building on-prem in their data center, supplemented by either 1 or 2 public cloud providers where they're using that to augment what they've already gotten in our private infrastructure. So it's clearly becoming a key focus for large companies and large enterprises, whether they are domestic or international in terms of supplementing and increasing their -- improving their infrastructure needs. Just a quick look back in terms of our value proposition. And I think it's important just to refresh this. That it's more evident than ever with COVID-19 over the last -- particularly over the last 2 quarters, notwithstanding the traditional way of connecting with the ease of use and the speed of connecting has become -- and the flexibility for that has become a key trait in terms of the Megaport platform. And we believe the as-a-service consumption model will only continue to grow moving forward, particularly in a dynamic and in an agile world that we live in today that businesses need to be able to react and have the flexibility and have the wherewithal to connect and keep their business sustained and future-proof going forward. So being able to rightsize real-time provisioning, pay for what you're consuming and how that one-stop shop or that one platform, where you can connect to services intuitively, becomes really mission-critical going forward. And I suppose tying it all together, what does it mean? Well, 1,842 customers, as I said, as of today, we have over 700 enabled data centers, but we're working with 102 unique data center operators across 24 countries. And when you add across that the Megaport value proposition of scalable on-demand multicloud connectivity, being private and secure and flexible terms and you're connecting your end point of connectivity or for work enterprises are looking to connect to with over 360 service providers, including the top cloud providers, with a footprint that we have, with the cloud reach that we've got is a very important ecosystem, which is going to continue to drive our growth going forward into FY '21. Okay. I'd like to spend a little bit of time talking about innovation. Just as of yesterday, we announced the Megaport Connected Edge platform, and we had a collaboration that we're working with Cisco for an SD-WAN capability or technology that we're going to enable as part of our first step with the Megaport Connected Edge. We're very excited about that. And I'll touch on that a little bit later in a couple of slides time. But I'd like to start by just talking about the evolution of the platform in Megaport, and I think this is important for us all to understand, a, where we've come from; and, b, where we're heading in terms of our direction and our strategy. First of all, Elastic Interconnection, we started it in 2014, was predominantly about a main use case of how do you connect customers or enterprises who are already inside in the data center, a private secure location, who are looking to direct connect into a public cloud service provider instead of using the Internet. And this allowed for a scale-up usage, dedicated network, ease of use, et cetera. Over the course of time, that was a Layer 2 product, and we've built that platform, built our growth in our network on that basis, and that still continues to be a bedrock and continues to grow versus part of our as-a-service customer need. We've overlaid that -- transitioned that as-a-service more to a Network-as-a-Service where we now brought MCR, which is Layer 3 product into the mix, which not only allows us to connect to customers within a data center, it also accesses customers who are born in the cloud, who may not be inside the data center and may not have physical equipment, but may want to consume virtually in a cloud environment, and that allows us to do that. It also allows us, as we said before, for customers to connect to multicloud and have connectivity between 2 cloud providers where they can move their data set and their usage between them in a seamless fashion and manage that accordingly. With the -- moving on to 2020 with the Megaport Connected Edge. The new dimension now is that we step outside of the data center footprint with the technologies that we're able to enable on the connected edge platforms, such as SD-WAN being an example, where we are able to connect campuses, we're able to connect headquarters, branches, offices, et cetera, where they can now connect via an SD-WAN connection securely to connect into the Megaport platform onto our SD-WAN and end up with an end point either in a public cloud environment directly and securely or through a data center or through any of the access points across in our network. So in real terms, this is another evolution step on our platform where we increase the addressable market, the reach that we can get to and now bring or break out that ability for more and more customers, particularly multinational customers, our large customers with large footprints, whether in banking, retail, financial services, et cetera, where they can connect off-prem or locations or offices to a secure network to use public cloud or any other service on our platform. Having said all that, moving on to what it means, again, just illustratively, starting from the left on Cloud Connect, which is our predominant use case where we have enterprises who are inside the data centers using our software-defined network to connect to a public cloud provider of choice. We then moved on in the evolution where multicloud and cloud-to-cloud became really important, where our customers could connect from a data center or those who are born in the cloud connect through our Megaport Cloud Router with or without hardware or services and can connect virtually in through our network and on to multi -- multiple cloud or actually connect cloud-to-cloud together. And also, we have a lot of customers out there who are using our Network-as-a-Service, where they're literally connecting locations together and using the Megaport network as their backbone to connect regions or data centers together that are in multiple regions so they can manage their infrastructure. And the evolution of that, now what that means is that with the branch enablement component, we're now able through Megaport's Virtual Edge during this year, we will be able to bring branches and other offices and locations, as I said earlier on, to connect to a data center footprint securely or to a public cloud provider or, in fact, any other end point, including other branches or other technology end points that we have on the platform. So what we're really trying to say is we're trying to create this agile networking methodology, so enabling end-to-end and on-demand connectivity. And a lot of this is going to be done and driven virtually across the Megaport platform. In a little bit more detail, the Megaport Virtual Edge overview, and we announced that we're extending the reach of the Megaport platform. Our first Megaport Virtual Edge user case is we're working very closely with Cisco and have been for a while now in terms of integrating into their vManage so that their Viptela SD-WAN technology solution can be fully integrated into the Megaport platform, which means that customers later in this year, enterprise customers, can use through their Cisco platform or vManage platform connect, and we bring the reach and the extensibility of our network across 700 locations in 24 countries, multiple cloud regions and zones become now part of the network solution to allow customers to virtually use services and connecting via SD-WAN to their end points. It's important to point out, if you look at the diagram on the left-hand side, where the Cisco SD-WAN service is one of our main API integrations for this year. Well, just like our cloud partners, we're opening neutral independent, and we will continue to bring other service providers and other SD-WAN providers onto our team. So the customer, again, has this platform of choice where they can use what service provider they deem suitable for them in terms of what -- how they want to connect and use those services. I suppose the other couple of callouts on this, this is all API-driven. It's all automated. It's seamless. And again, it has all of the functionality that's needed for customers to use and manage their technologies and their data across the network. And customers can now take advantage of Megaport's platform to create on-demand virtual devices like SD-WAN and other virtual routers across the network. So there's no need necessary for hardware. They are able to use and manage the existing network that we have in place through our platform to stand on virtual services or their own customer services. And so I guess the first step here is with Cisco, and we're really excited about that, and it brings us on both sides. It opens up the market in terms of addressable market for both ourselves and more importantly, for our customers, particularly in the world that we live in today, with security and the ability to manage data and have a secure, fast and agile network to allow our platform to manage that. Okay. I'm getting towards the end. I just want to probably just summarize up, a quick wrap-up on the focus for FY '21. Notwithstanding COVID in '21. We've had -- we have not had a significant impact on our business with COVID-19. We are a very agile company in general, as we've outlined a couple of times publicly in terms of how we're set up as a business. And most important is the well-being of our staff and being able to continue to work and deliver customer service and manage the network and continue to innovate has been a key component of what we've been doing. We've been doing it all remotely. And we haven't really been disrupted to any large extent. I suppose, again, financially, we're very strong as we saw in the financial position in the balance sheet, closing cash of $167 million at the end of June, plus it's in good stead for FY '21 to continue on our road map and continuing our growth strategy during the year. A second tranche of the focus for FY '21 is to continue as I just outlined with Megaport Virtual Edge as the platform innovation and product focus, further API integrations, SD-WAN platforms and more network function virtualization are going to be key components of that. And then obviously, the last part, as I called out, is we're very focused on the output on our exit run rate for FY '21 to be EBITDA breakeven. I think that's pretty much the last slide of the presentation. There is a little bit of an appendix there for annotation around AASB 16 leases, if anybody really wants to get that. There is a detailed presentation in the annual report in terms of the information. Okay. I think we'll take Q&A now.

Operator, if you don't mind opening the lines for Q&A, that would be great.

Should I go first? It's Sameer Chopra from Bank of America. Really, just a couple of questions. One, how should we think about the pricing for Virtual Edge? How does that sort of compare with how you price MCR? How do customers sort of buy this product compared to some of your legacy sort of products? And when you start to think about take-up rates, how quickly does this product ramp up? Do you see it as being something that will get offered in North America first? Or do you think early parts of the product get released in Australia as well?

Okay. Thanks, Sameer. So maybe I'll answer the second one first. We're starting with 10 metros before Christmas. And in the second half of the year, we'll be extending that to 25 metros in total for FY '21. So that will include Australia, Southeast Asia, Europe and North America. And that will enable most of the connectivity where we are. Most of the infrastructure is already in place. It's really about the integration and the software component. So a lot of heavy lifting in terms of that infrastructure is already done. It's just leveraging what we've already got to increase our capability. So yes, it will be global initially. And we have beta work with our customers and with Cisco, we would complete most of that before the end of the second quarter and then go live in the second half of the financial year. In terms of the pricing, we are working -- still working through all that. It's quite confidential at the moment, as you can appreciate. But the methodology will be where a customer will subscribe on a periodic basis for the services, whether it's for licensing or for instances of the take-up of the service. So it probably won't be too different from an MCR methodology price, and there'll be a series of -- or flavors of pricing that a customer can choose from, depending on what they're looking to do and where.

And maybe underlying network that you -- let's say, you've got a branch sitting out in Parramatta, for example, or Liverpool in Sydney, how do you get access to the underlying network to connect between a data center that's maybe sitting and right with a branch in Parramatta, like how do you buy that piece of link?

Yes. It's no different from existing network that we buy today. We buy it on a lease basis with various different providers that we have depending on the metro or the region. And then that scales the same way. So we augment what we already have. And if we've got gaps in between, we just build it the same way. That way, we're not changing anything or doing anything different. It's a consumption-based, scalable-based network.

And -- but you're buying lots of these spokes, right, which is a branch network would just mean that you're trying to connect up with thousands of branches, compared to, say, hundreds of data centers. So do you need to actually go out and acquire that much capacity? Is it quite complicated? I'm trying to figure out like how quickly can this get rolled out? And does the economic look similar gross margins?

Okay. Yes. Look, maybe, Sameer, the easy thing is, the speed of what it's going to get done is the services will be live in the second half of the financial year. So that's the speed component, right? And I just mentioned it's going to be in 25 metros across the globe. So that's the speed, that's the time. And then the connectivity is not anything like the connectivity volumes that are needed for -- that we currently have. So -- and some of these [ actions ] are much smaller in terms of what's been done. But yes, it will be a lease-based model and consumption-based model that we're working with our partners on delivery. So as we scale, it scales, its cost scales with the revenue.

And just a very different question, and then I'll pass it across, is just in terms of your cost trajectory in FY '21, could you walk us through which elements of the cost structure do you think grow next year? Because you've spent quite a lot on employees and marketing in the current year as you launched in Japan. How do you see that sort of changing next year? Like, where is the big...

Yes. I think it will be reasonably -- I won't say steady, there'll be slight increments here and there. I think we've done most of the heavy lifting that was part of the outlying reason we said we needed the capital raise in the second half of FY '20. Part of that was future-proofing for the next -- for next year, but also allows us to pull forward some of that investment into this year that we probably ordinarily wouldn't have done. And now that puts us in a position that we can push forward into FY '21. So there will be some incremental cost, but nothing to the same extent as the prior year, or as in FY '20.

Yes, it's Jon Atkin with RBC. I wondered if you could talk a little bit about the MCR slide, which is pretty impressive. And can you quantify in any way the penetration that you're seeing from MCR as a percentage of current customers that are taking it? And then on the innovation side, if you could talk a little bit more about NFV and maybe give some examples of customer use cases. I think you talked about branch office connectivity with respect to SD-WAN. But NFV SD-WAN is kind of the focus areas for 2021. How -- by how much does that increase your addressable market? And can you give a couple of use cases on the NFV side?

Sure. And to a degree, I can. I'll be general on that one, Jon, because some of it is a little bit sensitive at the moment, just given the ongoing conversations. But starting with MCR, yes, look, it's about 10% penetration right now. It's increasing. It's picked up quite a lot in the last 2 quarters and particularly in quarter 4. And we're seeing MCR mainly a user case for some of the larger enterprises as opposed to smaller enterprises. And I think that's reflective in the average usage and the more of the spend component per service is much higher because they're taking up higher speeds on those services, which draw -- have a higher revenue component to them in terms of revenue per customer. So again, I think with some of the larger organizations out there that are starting, particularly with, as I mentioned, with multicloud, that seems to be the biggest driver right now. And it's continuing to grow. So we expect that to be -- continue on into FY '21 and beyond. In terms of the SD-WAN, the addressable market, there's been a couple of reports out there in terms of market share, in terms of the capability of SD-WAN and the size of that market. The top 4 SD-WAN providers out there today are effectively Cisco, VMware, Silver Peak and Fortinet are kind of -- those folks are kind of at the top end or the top 5 in terms of market share, depending on the markets that they're in. So we will continue to work with that the same way as we have with our public cloud and to continue to have more and more service providers or that technology on the platform. Sort of, again, a bit like originally, some customers were in AWS shop or a Microsoft shop, some people are Cisco, some people are a different provider. So we want to be able to have that capability. And that, in turn, increases our addressable market in terms of where and how customers can connect. And the NVF is the next evolution or the next stage evolution, is the next kind of wave that comes. And it just so happens SD-WAN is the first place we started. And probably, Jon, I'll probably have a little bit more color on that over the course of the next couple of weeks or by the next quarter in terms of advanced conversations that we'll been having.

And then lastly, from my side, on the cost side of the equation, renewal discussions, how many data center contracts are you now renewing per year and is there any trend to call out in terms of rent per data center that you're seeing, whether it's upward pressure, downward pressure or whether it's kind of steady state?

I mean, Jon, we've added most of our data centers, which tend to be 5-year contracts. We've added a fair hefty lifting of those in the last 2 years. So some of the original contracts we would have came from the APAC region. But most contracts with data center providers tend to have an annual increment in there for inflation or whatever they call it. And so the renewals have been reasonably straightforward in terms of the rates that we're seeing. We're not seeing anything untoward, either upward pressure or downward pressure. We do have conversations in terms of the more network we have, the more sites that we have, the more cross-connects we have, it helps with the conversation because we end up being kind of an important customer for a data center operator.

It's Ash Chandra here from Goldman Sachs. Can you hear me?

Yes.

Just a couple ones for me, if I could. With respect to this platform evolution that you're referring to, is there anything that's going to be materially different with respect to OpEx and CapEx associated with this? And just sort of trying to understand whether your comments on exiting fiscal '21 breakeven are ex this development? Or within the context of this development?

It's within the context of this development. If you would recall -- yes, it is. If you recall -- so there is some CapEx that's required, which again, we outlined in our -- we're calling out in detail specifically because of the early stages of this project. When we did the capital raise, we did talk about innovation and product development being a key focus for our use of capital. And so we will be spending some CapEx of that, that we allocate for the last use of funds that will be used for this. There is a large amount of our existing network that's being leveraged in terms of both footprint and equipment and hardware. And most of the work has been done on the software side, which is part of our IP. So there is an element of -- there is a slight increase in some networking costs as we augment a few things but, by and large, most of this is contained in our annual plan for this financial year and for the outcome that we -- that I've outlined just to break even the exit run rate.

Okay. And can I ask just with respect to the going forward of network expansion versus focusing on density of use of your existing network, how do you think about that runway from here? I mean you almost had 400 data centers. Yet your sort of port utilization is not really rising because you'll continue to expand that network. So how do you think about the trade-off of a mature reach and then really optimizing density of use of that network?

Yes. I did think I've -- I kind of sort of flagged this at the half year results last February as well that in certain conversations that I think FY '21 is going to be a little bit less on network expansion and more focused on product and customer utilization, and obviously, the usage component. So we've spent -- if you could argue, we've spent the last 3 years doing a pretty good job in building a 700 enabled data center footprint across 24 countries. And this year is not about adding another 70 or 80 or 100 sites, it's more about how do we how do we manage our 1,800 customers and grow our customer base and drive utilization, while at the same time augmenting so many air gaps that we have in our network to expand some sites into regions that we think is important. Again, working closely with our partners in that, both on the data center side and also on the cloud side. So it's a balance this year. It's not an all-in build out mode this year. This is a little bit of a transition from one to another, where we're more focused on utilization, customer usage, more customers and obviously then more focused on how do we bring more relevance and more products and building out our platform and bringing more partners on. That's the shift. And if you recall as well, I did mention it was always 3 axises. There was one, which was the global footprint, which is a network reach. #2 is the ecosystem and partners and what our customers are connecting to and how they connect to them. And what are you using data for NFV system and partners and bringing them on. And the third one was very much focused on the technology and the product. And what else can we address? What other customers can we bring on that we currently are not targeting today? And then how it is to bring it all together.

In that context, if I could just squeeze in one last question and then I'll jump off, is in your Q4 update, your kind of customer additions number was relatively soft versus the trends that you've otherwise been very consistent on for the last couple of years. I think net new customers was like 65. Is there anything that sort of caused that to be a bit weaker than recent history? And then do you expect to step back up to the 100-ish run rate?

Yes. Yes. No, it's a very valid point. Yes, we did. I think what's happened is we, at the end of our quarter 3, we saw, like most businesses, we're fortunate to be in a position where we're able to augment or help enterprises. We see sort of a pull forward of a lot of businesses to try and get their connectivity, whatever that's got to do with the remote working and/or the communication needs that we needed for our businesses today. And so we had a pull forward and then thinking that Q4, what we saw was a slight switch. We had less new customers, but we had more consumption from existing customers. That kind of plays out as well in some of the charts that I talked about, how customer usage in revenues just increased from existing customers and taking up more services or augmenting more services on the network to support what their needs are. So we did see a little bit of an easing off. And I suppose the transition between having to work with customers the whole time and an element of some customers wait to hold off spend that would get spent initially, there is that a little bit of a transition. I think a lot of people have seen that. And it's changed -- like, again, we're in this new quarter or first year, and we have seen a significant uptick in terms of the first half of this quarter in terms of new customer logos and new customers coming on to the network. So I think that was just a sort of a little bit of a fade off between quarter 3 and quarter 4 in terms of the pull forward versus where it's at. And then existing customers spending more, but we're seeing that come right back already this quarter.

It's Bob here from JPMorgan. Just a few from me. Just following on in terms of sort of the customer additions that you guys have added sort of over FY '20. Can you talk a little bit about the types of customers that you're adding now compared to maybe a year ago? Do they have more sophisticated needs or understanding of the network platform and is that what's driving the faster adoption of your services?

Yes. It's a good question. And I would say that just on, again, there's probably 2 verticals where we've seen -- maybe 3 really strong verticals. And I don't know some of this may be related to COVID 19. I think some of it is also related to a very strong funnel of conversations we've been having probably over a 2- year or 18-month period despite the size and the nature of some of the businesses. So financial services and banking has been -- has come to the fore this year towards -- particularly towards the second half of FY '20 and continues into this year. We had some of that the previous year, but nothing to the same extent. So again, some of that's more MCR. Some of it's more public cloud and ports and services that we're seeing. And I think, again, the SD-WAN capability will certainly play a lot more stronger into that area where you've got a lot more buildings and branches and capability where we're trying to connect securely to our network. That's certainly been one vertical. Another vertical has been health care and pharmaceutical, I suppose not combining the 2 of them together, but there's been a lot of activity around that, particularly on manufacturing logistics. Those areas have seen a lot of service to take up. And then I suppose, media entertainment has been very strong and has been reasonably steady from year-on-year and coming into pre-COVID-19 probably was one of our top performers, but has flatted out just a little bit because of COVID-19 and in terms of what's going on there, less sports, less rendering, less content that's being produced as a result of what's happened and being on shutdown, but still has been a very strong contributor towards our services on our network.

Okay. Great. And then in terms of that, I mean, obviously, you had sort of 1,800 sort of customers now and you have had a much more mature sort of network now. I mean do you sort of get any stats on customer churn coming through across your network? Or is there more sort of churn that you're sort of seeing now that you set a larger base of customers?

No, I'd say the percentages are a little -- are very similar. I mean albeit off a larger base. I think with COVID 19, we did see something, right? So we've got -- we've seen both sides of that. And in terms of what you're looking at as the net position, we've seen both sides of that. So we've had some large airlines, which are customers of ours. And as you know, they're all not flying, particularly international. And so we have them in across all 3 regions. And we've got [ American Air, ] we've got some U.S. airlines. We've got some in Southeast Asia. And we've also got some in Australia. And so they're not internationally flying. So about 30% to 40% of a lot of their services are around scheduling, logistics, et cetera, et cetera, that they use the public cloud for. And so when that switches off, that piece comes down a bit. But then on the flip side of it is we're seeing financial services, health care, pharmaceutical, manufacturing, logistics all go the opposite way because they're in demand and they're trying to scale up to meet and cope with the demand that they have in their businesses with the environment that you're in. So we've seen a kind of a balancing overall to get to that net position. So it's been very much driven by some vertical concentration given the environment that we're in as opposed to just natural churn or not because of the service, it's because it can't afford it or they're shutting down or whatever the case is.

Okay. Perfect. And then a final one for me. Just in terms of the overall competitive environment. I mean it looks like you guys have much more scale compared to people like console and packet fabric. Do you think that you can sort of maintain that level of scale advantage of your competitors? And have you seen any sort of movement from your competitors in terms of aggressively expanding as well?

Well, I'll answer the first part of that question. I mean, I think our job, and we've been saying this for a long time now is that it's to build in a highly scalable global network that we can leverage, right? And it's a low-CapEx model, and it's flexible. We're driving automation to make sure that we can get as much connectivity and usage from it as we can using the economic model that we've built. So I think nothing has changed in my regard -- in my opinion in that regard. I think we're going to continue to drive that, and we've built it so that it does scale. Our job is to continue to make sure we execute on that and work with our customers and our partners to make sure that we stay relevant in that space and to drive that. So that's not going to change. And that's what we've been striving for, and we're going to continue to do that. As for the competition side of things, I don't really comment too much on it in terms of what they're doing. I mean, I guess they're all trying to grow their own business. But we were the first ones to really go hard at this. And as you recall, a few capital raises we had over the last couple of years was to take advantage of first mover and drive forward and be aggressive in what we're doing and stay relevant. So I think that hasn't changed and I think what we're going to do is just keep focusing on what we do and the rest will take care of itself.

It's Paul Mason here. Can you hear me?

Paul, yes.

Great. Good. Just a couple of me. First one is just a follow-up to Sameer's question from earlier. So with SD-WAN in connecting branches, you sort of got the choice of doing a private circuit back to the central orchestrator in the data center or else connecting via broadband and so I was just wondering, it sounded like from the answers that you gave that you're actually intending on doing last mile connectivity and that, that will sit in your financials. So first, is that the case? And then second of all, have you sort of done all the peering that you need to do in those 10 metros in order to facilitate broadband connections as well?

No, we're not intending to do the last move. No, that's not what I meant. We're basically going to work with the providers that they've already got, so they can connect using the software we have to connect into the services that we have. And the -- I mean in terms of the metros that we have that we've identified, which we're already peering in, and we've already got services in, there is a few more we need to augment in terms of the providers that we want to do that with. So that's underway. That's part of this build-out that we're doing at the moment. So the plan is to have the first 10 metros complete by November and then the remaining total of 25 by the end of Q3.

Okay. Great. And then just on the partnership with Cisco, it might be too early on this front to even discuss, but sort of it -- it sort of read from their press release and your press release like you might actually be on their internal sales incentive list. I don't know if you can make any comments on that. I can understand if it's commercially sensitive, but if you're able to talk that will be great.

I'll talk generally to it. And so yes is the short answer. So a customer will be able to come on the Megaport platform and connect to services and the provider of choice to connect to where it wants to do. And the customer will then become a Megaport customer, the same as they do anywhere today, they would just be using the Cisco service to do that. But on the flip side of it, if an enterprise is already a Cisco shop, and it's using its services and is using the vManage platform, it can seamlessly connect across our services. And again, I suppose the short answer to that is that what we're trying to do is enable the Cisco sales force to sell and increase their reach and depth with their product, and they're using our platform to do it. So that that's the base of the commercial model. So you get both sides. You have Cisco selling from their point of view, and we were -- our own team selling from our point of view. And so as always. That answers the question?

Yes. So just maybe just to clarify. More simply, so basically like Cisco, to a degree, might look a little bit like Digital Realty as a partner for you going forward. Not -- obviously, not the same type of business, but their sales team is going to actually be selling Megaport.

Well, yes, it will be a choice, they'll call it off a product list effectively and use it as part of the consumption of what the customer wants to use it for. Yes. We're the underlying component of beneath that sort of delivery of it.

Okay. Great. And I know you've named the sort of the top 5 SD-WAN providers. So just in general, terms, given a lot of this is confidential, but you're basically targeting a significant expansion in the number of SD-WAN providers, like are there any criteria that would preclude any of the major ones from also becoming partners or any color there?

No. No, we're open neutral independent in that regard. So I don't think -- that's been our stance from day 1. So I don't think we're going to change on that. We are very much an advocate of partnerships and of enabling as many customer interactions as possible. And typically, partnerships like that tend to be very much a win-win scenario. So we're advocates of that, so we don't see a change in that stance. Is there anybody else?

It's Sameer. Can I ask you one more question, please?

Sure. Go ahead, Sameer.

Yes. So I think you called out that there's 15% growth in underlying KPIs. Can I just understand, is that 15% growth that you're seeing in the first part of this quarter in revenues per port and also number of services? Is that 15% year-on-year or 15% sequentially? Just so I get my...

Yes, I'll probably draw -- yes, Sameer. No. I'll draw your attention to the Q4 release back in -- I think it was July. And we did mention that the underlying growth rate in revenues and in local currency was 15%. So the fundamentals are strong, just that we had some FX headwinds in the quarter 4, just as soon as we had tailwinds in quarter 3. But the underlying growth rate in local currency in the U.S. and in Europe were in around the region -- the exact numbers and it's specific in the release, which means that, that was my point, the fundamentals were strong just because we've had a flip around in the FX, it didn't necessarily show right through towards MRR in Australian dollar terms. Steve, maybe if -- we'd kind of bear at the moment, we're now at the top of the hour, I think so. I know we have a lot of sessions that are set up for some one-on-ones and also some group calls. So if there's nothing else, I'd like to bring the call to an end. And thank you, everybody, for participating, and looking forward to catching up with you all over the course of the next couple of days. Operator?

Thanks, everyone.

Thank you.

Goodbye.