Megaport Limited (MP1) Earnings Call Transcript & Summary

Thank you for joining today's session. We have today with us Megaport for their full year results release and investor briefing with CEO, Vincent English; and CFO, Sean Cassidy. Vincent, I'll pass it off to you.

Good morning. Thanks, Steve. Good morning, everybody, and welcome to the FY '21 Megaport earnings call and global update. I'd like to start with our FY '21 highlights, and most of which have been reported earlier, but earlier through our quarterly announcements, but just taking you through the key highlights. Monthly recurring revenue at $7.5 million, was up 32% on the same time last year. Also, our annualized run rate revenue now is running at just under $90 million, also up 32%. But the growth in our customers went up by 24% to 2,285, and we've seen our record growth in quarter -- at quarter 4 across a lot of our metrics, including customers. It bodes really well for FY '22. In terms of the total number of services that grew by 30% to 21,712, and also the number of ports live on the network was 7,689, up 33%. I'm most encouraged to me, again, we'll talk about this a little bit later on in cloud with hybrid cloud and being so prominent, and MCRs grew about up to 502, up 64% in the year. I suppose the other highlights -- the other major highlights on the financial basis, and Sean will touch on this in the financial section is that we reached the group EBITDA breakeven on an exit run rate in the month of June, which was anticipated, and we're expecting next year to be more of the same. We also achieved our ISO27001 accreditation earlier in the year, which was really important from a security information perspective, particularly as we go further to use managing data with customers. In terms of our continued focus on our strategic cloud partners, extending their reach and maintaining a global #1 position with the most on-ramps network, not only that -- have we done that, but with the launch of MVE back in March, we've added 4 partners onto our ecosystem from the SD-WAN space, they are Cisco, VMware ,Versa and Fortinet and we will continue to grow that ecosystem and SD-WAN providers over the course of the year. In terms of the cloud on-ramps, we added 36 in the year to a total of 233, up 18%. And in terms of the cloud regions, we added 12 up to 121, which is an increase of 12%. In terms of the installed data centers, we finished the year at 405 to extending our footprint up by 11% in the year, and then enabled data centers themselves at 761, grew by 14% in the year. Looking at the revenue performance for the full year. Starting at the right-hand side, total revenue $78.3 million, up $20.2 million or 35% in the year. Looking to APAC, revenue was $25.7 million, up 25%; and North America business of $38.7 million in revenue, up 47%; and our European business is $13.8 million up 24%. It's telling that with over 49% of our revenue now coming from North America that the growth in our North America business is now nearly at twice the growth of APAC and European regions. And in U.S. dollar terms, North America not only did it -- on a reported basis in the Australian dollars increased by 47%. In U.S. dollar terms, it grew by 65%. I'm going to hand it over to Sean Cassidy, our CFO, to take you through the annual results.

Good morning, everybody. Revenue for the year of $78.3 million is up 35% from FY '20. This is despite the FX headwinds we've experienced all year from the strengthening Australian dollar. Excluding the impact of this, the underlying revenue growth is around 44% of the business. Direct network costs grew $7.7 million, 27% to $36.2 million. With revenue growth outstripping this, profit after direct network costs, higher equivalent to gross profit grew $12.6 million to $42.1 million as we saw a 3 percentage point increase in margin in the year to 54%. OpEx grew 10% to $55.4 million, partly with increased staff costs as the business continues to expand. A quick summary of those points to the operating leverage coming through to narrow our EBITDA losses. $20.2 million additional revenue ended $12.6 million lower gross margin and added $7.7 million to our EBITDA. EBITDA losses represent 17% of revenue, an improvement of 19 percentage points over the previous year. Below EBITDA, the increase in depreciation and amortization, $6.2 million to $23.5 million reflects the network expansion that we've done especially the full year cost of our expansion in FY '20 and the investment in intellectual property over the last 2 years, delivering products such as MVE. Our net losses have widened slightly in the year to $55 million, principally because of the increased depreciation and amortization and also because of unrealized foreign exchange losses on intra group loans. These graphs represent the geographical split of our revenue as reported in Australian dollar. As can be seen all regions grew in absolute terms. Growth of $2.7 million in Europe was 25% in reported currency though the market grew 29% in local currency terms. APAC growth of $5.1 million to get 25% is primarily driven through growth in Australia, the $0.6 million of that growth comes from Japan. As Vinny mentioned, the North America region remains our main growth engine, with our investments and expansion into 86 [ methods ] really delivering. Now accounted for 49% of our group revenues in the year, up from 45% in FY '20. Our monthly recurring revenue in June of $7.5 million, up 32% year-on-year. These are exit run rate of the business is [ $190 million ] on an annualized basis. Next year, we will see strong growth across all our footprints with Japan being a growth engine for APAC, but now we'll continue to outperform and will constitute a majority of our growth in FY '22. We can expect North America to exceed 50% of group revenues next year. This may be further emphasized that the U.S. dollar recovers, growing against the Australian dollar, and there are happy some indicators in that regard [indiscernible]. On operating costs, direct network costs include partner commissions as well as the cost directly associated with owning our network. The $7.7 million increase year-on-year comes from both these elements. While we have traditionally shown a metric of average monthly cost per DC for our network, with increasing channel sales and increasing partner commissions are skewing this figure, so average monthly cost for FY '21 was $7,800, is up 10%, but that increase is wholly attributable to partner commissions, which grew 99% year-on-year. Excluding these, average network cost per DC actually came down 2% year-on-year. Going forward, we split out these partner commissions and network costs to allow better tracking of our increasing efficiency and network utilization. People costs increased 14% to $41.4 million as we continue to grow the business. A majority of this growth were in our commercial and operations areas, along with some hiring the product and engineering development. General and administration costs increased $1.7 million to $5.4 million for the year with significant increases in insurance costs, particularly D&O. This is related to the scale and the market capital of the business. Savings across other OpEx areas or other OpEx areas helped keep our costs under control and help deliver the EBITDA result, at [indiscernible] mentioned earlier. So obviously, we had savings on travel in some marketing, which were COVID-related. Nonoperating costs then, equity-settled employee and related costs have increased $2.9 million or 42% to $9.8 million. These costs now include some Australian state employer taxes on the exercise of options and included in the chart this year for $1.7 million of costs related to prior periods. Foreign exchange losses of $13.5 million, have increased $9.7 million year-on-year because of the strengthening of the Australian dollar. $7 million of this is unrealized and has arisen to the retranslation of Australian dollar-denominated intragroup loans . $4.6 million of realized losses come from the retranslation of cash deposits held in other currencies, principally in U.S. dollar. Interest expense of $1.5 million is imputed interest on the 0% vendor financing we have and also some certain capitalized -- certain leases capitalized under AASB 16. The credit of $6.6 million in income tax from the recognition of deferred tax assets, largely because of timing differences although $1.7 million is recognized in respect to tax losses carried forward as some of our subsidiaries approach net profitability. This graph I'd like to point out is the month of June and each year. It doesn't represent the full year. I'd like to point out about the end [indiscernible] as the group turned EBITDA positive as a whole in June. We've been showing this slide for a few years, tracking this momentum. And whether you look at monthly or whether you look at annual snapshots like this, we know this result be coming. Our margin after direct network cost is up 5 percentage points over the year to 60% in June as we appreciate the benefits of scale. This figure includes increasing commissions as our partners bring a greater percentage of our revenue. This year, we have saved on some travel and marketing goals, and going forward, we'll be investing a little more on our P&L in growth, but that's not going to change the dynamics that we see here. And I'd also like to point out a few regional highlights on to APAC first. APAC has shown solid growth, 25% to close with $2.4 million of monthly recurring revenue. In line with our other 2 regions, APAC saw a very strong record growth in Q4, with significant port divisions late in the quarter. This is the effect of temporarily diluting metrics such as our revenue per port, which is flat at $799 and our average services per port should down marginally at 3.0. APAC is a mature market, but it's still growing in absolute terms, with ports growing 21% to 2,977. It's also growing in efficiency, with profit after direct network gross margin increasing 1 percentage point to 73%. Services are up 19% to 8,937. I'd just like to point out, there always is a slight lag on additional services attached to ports, particularly in high acquisition months like we just had in June. And while portal utilization is not a metric we use much internally outside of capacity planning, it can be seen at 43% in such a mature market. There is still ample opportunity for revenue growth, without much additional CapEx or incremental OpEx costs to be incurred. Seeing a material market, it's easy to see the benefits of the operating leverage work. From June '20 to June '21, we added $0.4 million of monthly revenue, which brought in $0.3 million in additional [EBITDA]. I'd also like to point out the operating metrics of 73% gross margin to 47% EBITDA, closer to what we previously guided as our long-term margins. These results include Japan, which is still slightly gross margin and EBITDA negative. This shows that we now have the scale to absorb this type of expansion into new markets very significantly impacted results, even a market as big as Japan, which is the fifth biggest cloud market in the book. The European business next. Revenue per port has fallen 12% year-on-year to $1,144.This is impacted by FX, and the local terms, revenue per port has fallen 8% year-on-year. This is partially because of the dilution effect of strong port additions in late Q4, and partially because of the IX repricing we flied in Q2. Port numbers have increased 32% in the year to 1,137. This has driven MRR growth of 25% year-on-year to $1.3 million in June. As with APAC, port growth has not quite been matched with growth in additional services which have grown 23% to 3,044. The apparent drop in installed data centers from 105 to 102 was where we have removed some duplication on our network in multiple [paths] and account [indiscernible]. These DCs are simply transitioned from installed to enabled but they all remain in our networks. The slight drop in profit after direct network cost margin of 62% is related to an increase in partner commissions. We see Europe as a market that greatly benefits from the channel we are currently building, and we see strong pipeline growth, particularly in networking solutions to larger companies. The number of customers grew 21% in the year. We finished in June 430. We're starting to see a huge uptick in large European multinationals using the Megaport platform globally. Direct sales engine become more and more localized and started to build momentum. European EBITDA positive in Q4 of FY '20 and has been EBITDA positive for the year as a whole in FY '21. Notwithstanding the reduction in margin after direct costs, cost control has resulted in increase in profitability from our revenue growth. EBITDA margin of 43% is 19 percentage points up from June '20. Our EBITDA margins are fast approaching those of APAC, which is a mature business. Although here, we feel there's a lot more growth to come, especially through our channel. And last but certainly not the least, North America. All metrics for the North American region are showing exceptional growth. Ports up 44% to 3,575. Customers up 35% to 1,219 and that now represents more than half of our customer base. MRR in Australian dollars had increased 46% to $3.8 million. As Vinny mentioned, in local currency that has grown 64% year-on-year in line with the total revenues. The NAM region holds 50% of our assets and accounts for almost 50% of our revenues as reported in Australian dollar. The region accounts for 63%, 86 out of 136 of the [networks] we have a presence in, and we still see huge potential for growth in this, the biggest cloud market of the world. Our network reach, particularly in the United States, is a valuable office. It's becoming more so as we continue to roll out SD-WAN on MVE, bringing the edge closer to the branch. In fact, our expansion into Tier 2 enterprise-rich markets has allowed us to build a very granular [reach] to address branch connectivity. The North American region's March profitability has been very swift. From turning EBITDA positive in December '20. EBITDA margin in June of 22% is [indiscernible] results and is an improvement of 35 percentage points over June of last year. Now as an example of our operating model at large. In the North America region, we invested more capital in a shorter time, and we've accepted deeper EBITDA losses than any other region. The returns have been swifter and greater. In June '20 to June '21, in Australian dollar terms, we added $1.3 million in monthly recurring revenue and converted all of that EBITDA. This is done by achieving scale to cover the cost of the network and are directly attributable OpEx costs in the region. And we've done this with a port utilization of 32%, indicating the scope for a lot of additional revenue growth with little in the way of additional CapEx or incremental network costs. Proving out the model at this scale, at this speed gives us great confidence in achieving larger and quicker returns as we continue to invest in growth. And finally, I'd like to point out a few highlights on our financial position after the 30th of June. Included within current assets, trade receivables of $6.6 million, down 24% from June '20. This marked improvement in collections is also reflected in the greatly improved quality of our debt agent. Other current assets are included within the bonds are cash balances and some prepayments. The increase of $3.5 million in noncurrent assets is the additional deferred tax assets that I mentioned earlier as certain groups subsidiaries approach net profitability. The increase of $9.5 million in current liabilities represents the increasing scale of the business and the increase is largely coming from trade receivables -- sorry, trade payables and sales and employer tax liabilities. Our total net cash spend in 12 months to $30.5 million, with $8.3 million spent on operations and $22.1 million spent in CapEx. The significant reduction in cash spent in operations is reflective of the group edging closer to EBITDA breakeven throughout the year. Cash net of operating activities in Q4 was $0.6 million, and that reduction in cash burn affords us the opportunity to utilize some of the cash assets we have on hand to invest in growth, such as the buildout of the indirect channel, PartnerVantage program and the acquisition of InnovoEdge, which Vinny will talk about later on. And with that, I'd like to hand back to Vinny. Thank you.

Thanks, Sean. We'll just go through a few business updates and a few of our metrics. And the chart on your left-hand side, once again, is showing the significant uplift that we've seen towards -- the difference between FY '21 and FY '20 preceding year. The number of services continues to grow at a faster rate than the number of ports in the network. Total services, as I said, was at 21,712. On the chart in the right, a very strong correlation to mapping total services and uptake in ports and services actually correlates to $7.5 million in recurring revenue exiting in June. As we said on earlier on, installed data centers were up 11%. Our ports were up 33%. Total services were up 30% and our customers were up 24%. And if you look at the month of recurring revenue of $1.8 million, up an increase of 32%. And as we said earlier on, North America contributed 46% -- is growing at a rate of 46% year-on-year; Europe, 32%; and APAC, 20%. And the revenue per port, well, it dipped down slightly by $6 and that's really a direct relation to the very strong quarter we had in ports towards the end of Q4, which is at a slight dilutionary effect on the overall revenue per port in June, but we expect that to be fully billing and coming into effect in the start of this quarter in the new financial year FY '22. Switching to our strategic partners, and this is really around what's happening in the cloud space and some telling statistics on the right-hand side of your chart, 68% of all of Megaport connections terminate a public cloud provider, and 35% of Megaport's customers are using multi-cloud. And this number has significantly increased over the last year. As you may recall, we used to present the spirograph, but because of the density of the lines, the connectivity in there is no longer feasible, it's just a blob. But I think it's telling that it's a significant part of our business, having a network that's connecting so over 233 on-ramps, which increased by 8% during the year and also the number of cloud regions that were connected to across the 23 countries, up 12%. Switching to the customer cohort trends, which we presented this time every year. Looking at the chart on your left, starting with the number of average services per customer. We had 4 services per customer in FY '21, slightly down on the previous year. But as each of the other cohorts have moved from left to right in the dark bubble, they substantially increased over previous years in terms of the number of services uptake, including FY '14 increasing up to 25.7 services per customer. And some of this is reflective of the type, the profile of our customers, which are getting larger and obviously taking on more services. And with the advent of MVE coming on to our network, this will allow us to increase that even further as existing customers and new customers start to take on larger footprints and uptake of service. Looking at the chart on your right, where the average revenue per customer increase is around $3,300, increased by 7%. FY '21, 1,765. Again, slightly down on the 2,008 in the previous year, but has been impacted, as Sean said, 48% of our revenue coming from the U.S. has been impacted by the FX to a degree. But in all other cases, as we move from left to right, you can see in the dark bubbles that each of the numbers are increasing year-on-year as customers are actually using more services. An interesting -- 2 interesting pieces of information here. The number of customers that we added in FY '21 is now 5x what we added in FY '14 over the year. And then even looking at our FY '14 cohort, since they won up to [indiscernible] at the moment, 55% of all of those customers initially are now still on the network after 8 years. So again, some really sticky customers in the usage case, which proves out that cloud is no longer just seen as a potential to have business is actually becoming a very essential service, and actually, the network underneath that will allow for our connectivity is even more critical and important. Another last interesting statistic on our customer cohorts is that we've seen over the last 6 months, there is a bigger percentage of our customers now deciding not to take terms on our contracts. So it's no longer month-to-month, but it's a minimum of 12 months per term, which is -- which was really important for continuity in those larger organizations want to make sure that they have those contracts in place. So that's been a significant shift or change in the dynamic of customers purchasing and buying. Looking at Megaport Cloud Router. As I said earlier on, we ended up with 502 at the end of June. It was a 64% increase in the uplift and not really surprising when also we've got over 35% of our connections connecting to more than one cloud provider. The average monthly revenue per customer was $5,900 and has remained very consistent notwithstanding that we're adding more customers overtime. So we expect this number to tick up over in FY '22, particularly on the back of a very strong quarter 4 as those customers tend to -- will bill accordingly into FY '22. Looking at Megaport Virtual Edge. And bear in mind that this has only been live across Megaport for less than 90 days up to the end of June. We've been -- as of that point in time, we have 21 MVEs sold up to the end of June. We've built out across 20 metros with MVE covering the major markets and will continue to do so in FY '22. As I said earlier on, we've enabled 4 of the -- the top 4 of the SD-WAN partners onto the platform with the remaining coupled to come on this quarter by the end of September, which will cover over 50% of the SD-WAN market. And looking forward for this first half of FY '22, we have 129 customer opportunities in our pipeline that we're currently working through. So again, I think the education piece that we had from back in early April around SD-WAN with the launch of the global price list with Cisco happening at the end of this month. We anticipate that to continue to grow into FY '22 and beyond. And just touching on this slide from that last presentation, and just illustrating the customer use case here with the customers based on the West Coast and was connecting or standing up MVEs on the East Coast. So it could connect its locations together. I'm just looking at the map in this particular case in the U.S. were all the dots, which represent where the customer has locations. This spend in this use case started over proof of concept has now turned live around $15,200 for this solution just initially. But all of those locations have to be connected at some point in time, and that's going to be built out over the next FY '22 and beyond. And this is typical of some of the large customers that we're seeing opportunities with who have large footprints either regionally or globally, and they're looking to connect their locations as branches back to services such as cloud. So we expect this to develop further, particularly with our large customers in the network. Looking at the network footprint as itself, we continue to expand. As I said, we had 405 installed data centers at the end of the year, but as Sean said, we're in 86 metros now in North America, up 8%. And in terms of the installed increased by 14% in North America, which is still, as we said, is our largest market with over half our network and half of our revenue attributed to it. Europe is continuing to grow. We've added an extra city -- 33 cities into Europe. Well, installed point slightly down, and enabled went up by 15% as we leveraged campuses in locations that we're in. And then in the APAC region, we added, again, similarly, we installed new locations there up 21% and enabled up 19%. So again, I suppose they continue to expand into FY '22 into new metros and in new countries going forward. Next, I'd like to switch our attention to recent news or PR that we announced around scaling through the channel with Rodney Foreman, our Chief Revenue Officer, at the last presentation, we talked a lot about how we pivot from direct selling and the percentage of direct sales that we have today into more indirect sales, which allows us to scale through enabling partners access to our services so they can sell more of Megaport services. So this is PartnerVantage. We introduced -- it was launched on 3rd of August, and it's really about enabling partners to sell. I just like to take you through a couple of components of what actually is. Well, it's a world-class channel program that allows customers to sell our services and enable our network as a service to be bundled with other services, cloud solutions as part of what the enterprise customers are looking for. It's really 3 pillars to this business, really about the ease of doing business, how are the partners able to easy provision, easy to order, easy to manage and get paid essentially for doing that. If we make the sales process and the provisioning process very simple for the partner, the partner can sell more to the end customer, and that's really what this is about. It also is about making sure we provide comprehensive materials sales, technical and marketing to allow them to accelerate with that and actually they'll be more self-sufficient in their selling process. But ultimately, this is all about growing revenue and having hundreds and thousands of other partners out there selling Megaport's services and having a platform where it enables them to do that. So who are we targeting? Mainly the providers in this particular case are cloud service providers, network service providers, data center operators, managed service providers global system integrators, value-added resellers and value-added distributors and using agents as well who will help us to aggregate solutions and work with Megaport to do so. Like any program that's out there, we've enabled 2 tiers to compensate and expertise -- the expertise and performance for the partner, which is the prestige and obviously the preferred space. There's various elements that are part of the PartnerVantage program. There is the PRM, which is the partner relationships, so effectively a CRM for partners, allows them to have that one stop to -- for a partner to actually be in and manage the entire Megaport process in this business. The single pane of glass, which we'll talk about more a little later on, allowing for the partner to actually go in and provision services for on behalf of the customer. We also have financial incentives in place and a program so they can track how their sales are tracking and commissions, et cetera. There is also a learning component where we have a lot of materials, both sales and technical for -- to help the partners and their staff to actually sell. Not to mention there's also the resources that are needed for the sales and sales toolkits as well as the marketing capability and the presentations and toolkits to allow them to use Megaport. So we're very excited about PartnerVantage, and it's a key component in Rodney's strategy and our overall strategy for FY '22 and beyond. So we're really good. As Sean said, we're going to be investing in that and supporting that as we pivot from 30% indirect sales today into over 70% over the coming 2 years. Next, I'd like to switch very excited to announce the acquisition of InnovoEdge, Inc., which we announced this morning. This is a very synergistic acquisition, and it's also very strategic to Megaport. It's an AI-powered multicloud and edge application orchestration company. It allows us to add more capabilities on a couple of fronts: One, in terms of people capabilities; and it also allows us to step up the stack in terms of the services and what we can offer to a single pane of glass with customers. So we're very excited about this. It's very strategic to us, it aligns very easily across what we've already built is in our network. And you've heard me talk about this on a couple of occasions where the next thing after MVE will be allowing more and more services to be built on a network that already has a lot of leverage to scale. In terms of the market drivers and why this, and apart from having a very principal view, which is very much aligned to us about automation in terms of making everything very simple for the customer and how they want to manage their services and being very agile and simple to use. Now all services are all together in one place or converged and convened, so they're all very much isolated or siloed. And it allows us to actually build more solutions our partner solutions to allow them to manage public and private cloud. It also brings us into the AI and machine learning space and how we manage that consumption of the compute that's used for that and managing the network, which underlying is Megaport. And again, it allows the enterprises using their partners to focus on the simplicity and agility of managing their IT infrastructure and network. An example of the orchestration is, as you see on the slide, when you add innovation -- sorry, InnovoEdge to Megaport, what we're effectively done, as you can see on the left-hand side, is the orchestration allows us to get to the cloud with Megaport. And with the combination of InnovoEdge, allows us to go through the cloud. And effectively, what that means is that customers -- our enterprise customers can be in a branch, can be in a data center in many different locations on our network today not only now do we hand off the customer at the doorway or the gateway of the cloud service provider that truly on-ramp. This now gives us the ability for the customer to manage all of its cloud infrastructure and its compute right down to the application level where the data resides. So this brings us deeper and deeper into the customer's actual infrastructure and what they're using their data for. Added to that, the simplicity of a single pane of glass, which again, as you can see from the diagram on your left. Customers, as I said earlier, 35% of our customers are using multicloud. So you could have 1 cloud provider, a second cloud provider. You also have a porta or access through a data center provider, and you may also have an SD-WAN providers that you're using. With Megaport and InnovoEdge, we create a single pane of glass where the enterprise customers is able to manage all of that through one log on or one portal. Main cloud instances for containers and applications allows them to manage that and create them. It gives them access to visibility and reporting, deep learning analytics. And the benefits are reduced complexity, rapid service turn-up gives agility to the customer and allows them to provision real time with their network and compute and really it bridges the network and the DevOps function for the physical network to code, to manage infrastructure and data. It allows us to do a lot more white-label portal benefits for providers that we would be working with and also facilitate a real end-to-end solution. So again, it's all about simplicity and removing complexity on behalf of the customer. There are several main drivers of [indiscernible]. We linked up with the InnovoEdge. We started working with InnovoEdge a couple of months back, and that was really to work together for solutions for customers, and it became fairly apparent between both of us there was a lot of synergies in terms of being acquired and being one company together. The -- and it happened very quickly, and as you recall, when we were doing the earnings call over a year ago, we talked about capability on some M&A activity in the [indiscernible] really about technology. It was about people and talent and taking us to the next stage in terms of our development in the space that we wanted to go into, and it was highly complementary or adjacent to what we were already doing. So looking at the main drivers, the partner enablement is really important given the fact that we're over 200 data center operators that we're working with today. It's really about driving revenue and service adoption across our products and allowing us to get further deeper and access to more customers. The innovation is really important, as we've been talking about for the last 18 months about how we continue to innovate and add more relevance to a customer and what they're using their data for in the future. And MVE was the first step of that. And then just the agility. And this is like we're effectively acquiring a dev team and allows us to rapidly develop going forward, not just our products but combined products to -- for customers. And that allows us to stay ahead. It gives us competitive advantage. It also brings us into the AI space, which is something that we've said would sit across our MVE platform and allow us to integrate and work with other -- far more providers. It allows us to expand our channel and addressable market and effectively future proofs us going forward. And they're the real rational as to why we're doing that today. And in InnovoEdge will continue to operate as a separate entity in our business. We will integrate fully with Megaport and their [ Innovo studio ], which allows us to provide solutions for our partners, while at the same time, our core business is still what we've been to how we presented to you earlier on say in terms of how it's performing up to FY '21 and beyond. In terms of the innovation road map, really looking at our logo in the center of the diagram here, we're effectively the foundation underneath this, and what we're really doing is plugging other technologies into our network foundation. And really, this is about bridging the gap between network operations and development operations, and the capability that it gives us is quite substantial. The initial 6 months in our business, we'll be working on the integrations and getting that up and running. And then we'll eventually, coming out of the second half year, we'll be productizing a lot of this. It would [indiscernible] a go-to-market strategy to enable that, and that's reflected in the milestone in the terms of the acquisition, which brings us to the consideration, which is in total USD 15 million, $7.5 million of that is a cash consideration with the remaining $7.5 million in equivalent in Megaport shares. And these will be in 3 tranches over the next 3 years and subject to achievement of specified product development and revenue milestones. And the team are fully committed to being honest, over that term for the 3 years as we have both worked towards really building a future road map for Megaport. And that's the end of that section. And then I'd like to move on with the next phase of our growth and continuing on the same theme, it's both scaling up and scaling out. And as Sean said, a lot of our -- we've spent the last couple of years to this point in time where we've been proving out what the leverage in our network and the capability we have, and we can see from our margins, and we can see from the utilization that we have in our network that we've got plenty of headroom to continue to grow. And what Rodney and his team and [indiscernible] and the PartnerVantage and continue to invest in that in the channel and unlocking those other providers to really sell more of our existing products is really important, and it's a treat. So we're continuing to invest in that. Obviously, on the product, more MVE integrations will continue. And like I said, we just started with SD-WAN, and we've got the first couple of providers on that, will continue through FY '22. And as you saw with the investment with InnovoEdge, it allows us to create more platform innovation and orchestration and ease of use and actually add more services to the network. On top of that, we're going to continue to invest in the growth and some resources in hiring on people and talent, both in commercial and operations teams because as we scale up and scale out, we actually need to be able to manage that, we'll deal with it. And lastly, network growth. As we double our customers and continue to grow into the future and have way more services and transactions across the network, we also need to make sure that our operations and our capability are in lockstep as we manage that. And on that note, I'll just wrap it up. Before we go to Q&A, I'm really -- just say that we're really excited with where we are in terms of the business, and I thank the team. We had an amazing strong year, despite everything in the world -- that's on in the world. And really looking forward to FY '22. Okay. I'll hand it over for Q&A.

[Operator Instructions] And we have the first question from Tim Plumbe at UBS.

Look, I'll just ask 2 questions and then jump back into the queue in the interest of giving everyone else a go. But 650 ports added which was a pretty solid improvement from the previous quarters. Can you talk a little bit about some of the changes across the platform that helped drive that uplift? And how are you thinking about the cadence of incremental ports going into -- or in FY '22 as we start to see some of the initiatives from this Vantage Partner program flowing through?

Yes. So we're starting with the 660 that we had at the end of the quarter. I think a lot of that, as I said earlier, I think with Rodney coming on board at the beginning of February, it gave us an opportunity to realign our resources and our teams and put a fair degree of rigor and discipline around our sales process. And that was one of the key elements that was being met, and part of that also was actually we talked about before was the pipeline build. It was growing at a faster rate than we ever had before. So the conversion allowed for -- there was more conversion on a bigger pipeline, which allowed for the higher ports number, but not just the number of ports on the record as well, it's also a number of new customers that we added at the end of quarter 4. So there was a lot about that. We put an incentive program, we tightened it up, made it easier, and so that's contributed a lot towards what we've done. I think the next phase is, as you mentioned, as we bring on more partners who are starting to sign contracts with some of these partners. And that's, hence, the urgency to launch PartnerVantage and have the program not just in place, but actually have it integrated so that we could use it. And I think that will bode us well, probably more into quarter 2 of this financial year and beyond as we're betting it all in this quarter. We expect a kind of similar momentum to come through from quarter 4 into quarter 1. And the benefit of adding lots of new customers and lots of ports towards the back end of quarter 4, means the VXC's and the services tend to follow. So we see more of an impact of that coming through into July. Whereas, a lot of the ports and [indiscernible] of original services ended in June, hence, that dilution we talked about revenue per port. So we expect that to bounce back in quarter 1.

Great. And just the other question around reinvesting for growth. Just wondering if you're able to give us any more color around how you're thinking about that OpEx uplift compared to this year? And with that incremental spend, how are you thinking about the impact that, that has on the cadence of your topline going forward?

Yes. I think initially in this first half of the year, we're obviously investing around PartnerVantage and a lot of it has been investing around sales and getting that set up. Obviously, we're still sort in a lockdown by country, if you -- so traveling is a little bit prohibitive, but we've got a strong team in each of the regions. And so that allows us to keep selling going on in the U.S. We have to build a structure around the indirect team, and we're also building small teams around each of the SD-WAN providers, the same as we did with the cloud providers to make sure that we have a contact that works specifically with, for example, is Cisco and Fortinet. So there's a lot that's going on at the moment, and it will keep us a little bit lower. I flip back into the red during the second half of the year -- sorry, the first half of this year and pop-up, it will probably be 3 or 4 months during this first half year, and we pop out the other slide when we finished with the investment. The other half of the investment is really related to CapEx which is in building out and supporting the network, the infrastructure as well as the IP and products that we talked about get having new products ready for FY -- calendar year '22, sorry.

No problem. Just answer that a little. In terms of kind of the revenue momentum, the indirect sales channel is going to take a little while. So we incur the expense before we get the benefit of this. So you'll really see the revenue momentum coming through and in the second half of the year, particularly in Q4, as it builds momentum. And in terms of ports adds and the momentum we're seeing there, Q4 was a record quarter, and that was done through our existing kind of direct sales and the indirect channel that we have. And we see that momentum continuing on. It might not be quite as record making as Q4 of last year, every quarter because it should be there [indiscernible].

We have the next question from Jonathan Atkin.

So on costs, I was interested in understanding a little bit more about the items where you feel like you can get some operating leverage whether it's bandwidth, data center rent, data center power, the items that make up cost of goods served, sold and SG&A. As you look forward, where are the opportunities and where are there perhaps some challenges?

Jonathan I'll answer of that and maybe, Sean, you want to jump in as well. One of the things that -- as we built out the cost structure on how we roll out into DCs, the costs are -- they're based on the number of services or ports per data center that we use based on the rollout of the equipment. And it's reasonably, as Sean mentioned in the thing, it's reasonably fixed in terms of what it is. We need 15 ports effectively in a data center to breakeven, roughly between 15 and 18 ports to breakeven in the data center, and the minimum build has 40-odd ports. So we got -- again, that goes back to the utilization that we talked about ports. And I know it's done by country or region there, but that can be right down into first site. So as you add more ports in each site, actually create that margin or that gross margin that we're seeing on the network. So even if some costs were to increase, it's really additional an extra port or 2 per month is really what we'll cover it off. There is some capacity that we need to look at as we build out 400 gig on the backbone, but again, that's part of that, that will be a minor part of an uplift that we would have to do as we substitute other parts of connectivity and upgrade them into 400. Sean, did you want to add anything to that?

Yes, absolutely. Like you say, the kind of network costs are stepped in relation to the number of DCs, not particularly -- the bigger steps are when you move into a new metro, for example. The densification that we see sometimes get a small incremental cost, but it is not quite as much as you had every time you add in new metro. We're at quite some scale now, and we're not doing the kind of land grab that we did in FY '19 and FY '20. And so we're able to do -- go about this in a much more measured and controlled fashion. We spent quite a lot of effort in last year, looking at a direct network costs and combining it rationalize and putting a lot of control there. And that's why you see kind of the average cost per DC, excluding partner commissions, come down year-on-year. And that kind of dynamic where we're holding a good growth [cost control] network as a scale and will continue going forward.

You talked about locking in -- you locked in some duration with your customers talking about year -- annual rather than month-to-month. So on the cost side, I'm kind of curious whether it's data center costs or bandwidth or [indiscernible] of getting any kind of discount that way? Or is there some vulnerability around maybe the [indiscernible] nature of some of your costs?

No, most of the costs are turned from our -- in our COGS. So whether it's colocation, power, cross connects, dark fiber, et cetera, all of those are turned. What we've been able to do is, as we've been expanding and growing our network over time is that we've been able to get better purchasing power, particularly on network. And as we're adding more, the unit cost comes down over time and as we go to renew it. So in general, that's -- as Sean said, it's reasonably a fixed cost, and we tend to -- when renewals tend to come up, we tend to bundle a lot of things where we have the opportunity to do it so we have to renegotiate that better. It doesn't happen at all costs, but for the most part. That's how it works. We tend to have very small -- in our COGS, it's very small month-to-month costs as part of the overall COGS, it's mainly turned. And the only other thing that we will be, I suppose [ spending ], and Sean mentioned earlier on, the other thing we will be spending more on is actually the GS&A and the marketing as well, right, because that's really important to support the revenue generation with what we're doing. So we will see a pickup on that. Whereas, last year, with COVID and less travel and less conferences, that -- we're expecting that to pick back up and we're going to invest in that going forward.

And then lastly, from my side, and I'll jump back in the queue. You -- there was a slight miss on gross margin you called out because of indirect commissions, but I think you beat on EBITDA. So what's the simple or sort of intuitive way to understand that? Was it headcount, travel? What were the items that led you to kind of exceed on EBITDA, despite the miss on gross margins?

A lot of movements going either way. So yes, we did see it on travel. And we did see it on certain marketing expense as well [indiscernible] actually a lot of the marketing face-to-face. And whether there's a cause or effect on kind of slightly flatter revenue we have seen in the middle part of the year, it's a little unclear. So we have those types of savings, but there were other costs went against us as you may or may not be aware of the accounting policy change, where we accounted for network -- sorry, Software as a Service arrangements, and that caused us to your expense quite a lot of cost. I mean would normally capitalize, not something a lot of [business] were going through this reporting season. We're going to be significant P&L hedge some businesses for stuff that would only be capitalized. So there has been a little bit of give and take, but we will certainly be earning a lot more to support the channel build that we're currently building going forward. There were both gives and takes in the last year.

We have the next question from Nick Harris at Morgans.

Congratulations. Great year. Three for me. Just the first one, if you look at sort of the segment level OpEx across all 3 regions, it declined. I'm just trying to understand, is that largely FX? Can you give us an idea of what was happening on a sort of constant currency underlying basis?

There will be FX impacts, particularly in the United States. But there's been no change in kind of the operational setup before we have specifically moved expenditure to sample from region. That's not the case at all. So there will have been FX impacts. Yes, you could probably back out deliver from the quarterly report and the FX report that we've published quarterly, but I could probably count it out it for you.

That's okay. I can -- but I just wanted to understand if you take sort of headcount out or it was really currently [ related ].

It's mostly currency. We haven't taken headcount or we have [indiscernible].

The other thing, Nick, just bear in mind that we didn't have the same travel as previous years in each region, right, because of COVID and marketing as well. So [indiscernible] to each of the region on OpEx, as you said, that would have been depressed. And you can see that in the total numbers and some of the line items for OpEx that are well down on the previous year. So the same impact would flow through into the regions.

Just next 2 questions. Megaport, the virtual edge. Obviously, you had a great fourth quarter. You've given us a pipeline which looks really good. I'm not trying to hold you to a number. I'm just trying to get a vague idea of conversion rates. Would I be crazy to think it's reasonable that you might convert 1/3 of those or something?

Look, the 2021 customers so far that was reported at the end of June, but the pipeline going forward has certainly picked up. And that's also attributed to the fact that we started out with one service provider, and now we've got 4. So naturally, we'd expect it to increase. And there is some though that pipeline will convert quicker because there is an immediate solution and immediate need there, and that's part of that proof of concept that we're working through with some new customers that seems to be working really well. So it's probably early days, but it's probably not unrealistic. We -- our conversion rate on our existing products outside MVE is circa 40%. So probably, somewhere between 30 and 40 would seem reasonable.

And just my last question. Jonathan mentioned it as well, the nearly half of your ports in the fourth quarter were customers on 12- to 36-month terms, which is obviously great for you. A bit of a change in the business model given it's normally sort of consumption as a service. So I'm just trying to understand, for you, what's driving the customer, the end customer to sign a 12-month or 36-month agreement?

I think the underlying feedback that we're getting is some of the companies that we've seen taking up our larger companies. And as obviously, they're more comfortable with signing terms as per their procurement policies or as they're buying policies are in place. And it's just easier for them to do it that way, and the solutions are bigger and the footprints are bigger and their spend is bigger. So as a result, they're just locking in terms the same way they've bought. That seems to be the underlying theme that we're picking up from customers as opposed to anything else that's happened. Honestly, we do -- when we do talk to customers, we do let now, yes, you could -- it's a consumption as a service, as you said, but we also make them aware of that there's a slight discount if they take a term as opposed to go on month-to-month. So -- but that's the main reason so far.

And it doesn't really take away from the flexibility that our service offers because the VXCs are still flexible in terms of capacity and whether they turn on. In many ways, you can think of this kind of as a mobile phone. And you don't change your mobile phone every time you credit necessarily our motion there and the credit to it. In the same way, the port itself, well, we did offer the flexibility at month-to-month. Now if people want to turn up a new port, it's not quite as straightforward as turning over VXC, for example. So signing a port on terms is not as inconvenient it might look.

We have the next question coming from Bob Chen at JPMorgan.

Just one for me. Just revisiting that sort of reinvestment into FY '22. I think you mentioned earlier that, obviously, FY '22 -- FY '21, some of the cost categories is a little bit depressed because of lack of traveling, and now you're sort of talking about a bit more of an investment in '22. Can you talk a little bit about what that quantum might look like into '22? And what the impact would be on your margin expansion between first half and second half?

And -- yes, I mean, there's -- we're looking to hire about, I think, in this first half of the year, next -- between this quarter and next quarter, between now and sort of October, November time, we're looking hiring 40-odd people. So that will be the biggest uplift in terms of our OpEx and then obviously, followed by marketing spend to support the PartnerVantage and the partners as we get that up and rolled out plus supporting the SD-WAN capability on MV edge. So that's the shift change we just launched it, and as if things start to open up within each of the regions, like in the United States and in parts of Europe, where people can get out and travel within the region, with the exception of Australia, of course. But once you've been allowed to do that, it then means that we can actually now actively grow and pursue more aggressively the revenue. And part of that is obviously the investment back into it, but they are the 2 constituent components from an OpEx point of view that we'll be focusing on over the next 3 to 4 months. And then once that's done, that's effectively the heavy lifting done that will springboard us on into the next -- the rest of the year. And it's not too dissimilar from something we did 2 years ago with our direct sales team, if you recall, that where we did reinvest back into hiring more people and [indiscernible], et cetera. And then subsequently, quarter or 2 quarters later, we actually got the bounce from that once it's all got bedded in. So it's the similar type process of what we're doing here.

Okay. Brilliant. And then obviously, launching more into that indirect channel with PartnerVantage, and you've also got more customers buying term contracts. Can you talk a little bit about what the longer-term impacts that will have on your gross margins going forward?

They'll increase. And no, there's 2 elements to that, right? So partner commissions is a line item that we include as part of our COGS for the want of a better word, which then affects your margin, your gross margin or your margin after network costs. And whereas, that may flatten out based on where we're at, and particularly, as we switch to more 70%, 2 years down the road as that switches to more of an indirect, it will have more of an impact on your gross margin, but there'll be a negligible impact. Most of the rest of it will flow through to your EBITDA. So your EBITDA margin, if the gross margin flattens out, your EBITDA margin goes up because we're not finished with that heavy lifting and hiring. So your cost base is going to be more around the commissions that you need to pay to support large volumes of sales as opposed to hiring more and more salespeople, if you understand I'm trying to say, the dynamic between the 2 margin profiles. But in general, the way we see it is the more products we add to the platform. That's the second thing. That has a bigger influence. The more products we add, they are layering up on top as we talked about the foundation of our network that we've already built and the capability within the network to support more. And as we layer more products on it, those products have much higher margin. Once you get the sales engine and the sales machinery in place, all you're doing is selling more products that layer over the existing network, which then contribute to a higher gross margin and ultimately, EBITDA overtime.

Okay. Great. And just a final one for me. Obviously, you provided some details on the innovation pathway with InnovoEdge. Can you talk a little bit -- it's obviously early days, but can you talk a little bit about how we should think about it from potential revenue opportunity perspective in the future?

Yes. Well, initially -- yes, there is a kind of a business model behind InnovoEdge, which is one of the milestones that we have as part of the 3-year, and the guys will be working towards driving a revenue outcome as part of the milestones. But more importantly, this is how we see this as an avenue, as I said earlier, to help us build more products that we can sell across the entire company with then having the sales engine in place. So -- but it's allowing us to get deeper people with the enterprise customer into what they're actually using their network for to connect to and into their infrastructure and managing all of that. So that -- it steps into the world of effectively like licensing as a service effective to what they use inside of this. So the VXCs and the network and everything you see that connects the customer to that endpoint, and as they pass through that endpoint, then it would be effectively on a licensing model based on usage and consumption.

We have the next question coming from Roger Samuel at Jefferies.