Megaport Limited (MP1) Earnings Call Transcript & Summary

Thank you for joining the Megaport 2022 Full Year Investor Briefing and Q&A. We will begin with a presentation by the Megaport management team followed by a 45-minute Q&A. [Operator Instructions]. Now over to the CEO of Megaport, Vincent English. Thank you.

Thank you, Kier. Welcome, everybody, and good afternoon to Megaport Global Update for our FY '22 highlights. I'd like to start to take you through some of those key things. With me here today is our Chief Financial Officer, Sean Cassidy, and our Chief Marketing Officer, Eric Troyer and between the 3 of us, we'll be going through a section of the slides today in the presentation. To start off, just to talk high level on our revenue, $109.7 million of revenue, up 40% from the previous year, most particular about that, 49% growth in our North America business, which now accounts for 51% of our exiting revenue globally for our business at $57.8 million. Our Asia Pacific business has a $33.5 million is up 30%. And then our European business is up 33% at $18.4 million overall -- 40% overall growth in the business. Similar highlights to run through. Monthly recurring revenue exiting and some of this information would have been available at the end of our quarter 4, up 43% to $10.7 million exit run rate. And as you all probably be aware, all of our revenue is monthly recurring revenue at this stage. So it's $128.3 million of an exiting annualized revenue basis. Our customers grew by 16% to 2,643. And more importantly, the total number of services, and I'll touch on this a little bit later in the presentation, grew by 26%, which has obviously contributed substantially to our overall monthly recurring revenue, up 26% at 27,383. And a total number of ports on the network, is at 9,545 up 24%. MCR is another key leading indicator for us in the business where we see a larger adoption of more hybrid cloud and multi-cloud up 46% at 731. And we'll talk a little bit more about that again in the presentation when Eric goes through the stats on the industry. As I said, customers are up at 2,643. All of our key metrics have all increased, and the average revenue per port is up from $974 to $1,120. But more importantly, as we discussed at this time last year and also as we walked in through our financial year, we talked about our network and the importance of the network in the gross margin or profit after network costs. APAC is accelerating at 79% gross margin. European business at 71% and North America is at 54%. And this is like the exit run rate for the end of June. Notwithstanding, we added 14 sites, the majority of which were in the U.S. Total gross margin or network profit after direct network costs for exit run rate is 65%. We also achieved some major milestones in terms of our Japan business, notwithstanding COVID and not being able to travel to Japan for the last 2.5 years is EBITDA breakeven and similarly as is our Canadian business. Overall, the group was EBITDA positive for the entire Q4. In terms of our EBITDA, APAC is running at a run rate -- exit run rate of 64%. Europe at 45% North America at 23%. Overall, for the full quarter, we were EBITDA positive. And overall, it is 5% and will continue to grow from here on forward. One of our key strategic metrics that we always look at is we've continue to be the market leader in having 278 cloud onramps where we are actually the largest and the market leader in terms of connecting cloud, not just through software integration and what we've done, but also physically and geographically across the globe, across 25 countries. And also similarly with 142 adding another 21 cloud regions, which is extremely important for SLAs and for cloud partners who are using our services. With that, I'm going to hand it over to our Chief Financial Officer, Sean Cassidy, who's going to take you through the annual results for the year.

Thanks, Vinny. As Vinny mentioned, revenue for the 12 months ended 30th of June at $109.7 million, it's up 40% year-on-year. Our revenue growth is compounding. We're seeing growth in customer numbers. We're seeing growth in average ports per customer. We're seeing growth in average number of services per port and this growth behavior we're seeing across all 3 regions globally. APAC revenue for the year of $33.5 million or 30% up from FY '21. Growth in Europe was higher at 33%, giving revenues for the year of $18.4 million. But as we have seen, our biggest growth market continues to be North -- our North American market, which grew 49% to finish with revenues of $57.8 million. North America accounted for 53% of revenues in the year. And the United States is the single biggest contributor to that. And the United States alone contributed to 51% of group revenues in the month of June. That fact, along with the fact that 63% of our [ network ] footprint and half of our assets are located within the United States, a majority of our major contracts are denominated in U.S. dollar. It shows that we have become a U.S. dollar-driven company. The group functional currently has become U.S. dollar from the 1st of July, just passed. Monthly recurring revenue, MRR is $10.7 million at the end of -- that's up 43% from the same time last year. MRR growth outstripping total revenue growth is a strong indicator of increasing momentum throughout the period. This has given us very strong momentum going into FY '23. Turning to our profit and loss. We have broken out our cost of goods sold between the 2 major elements because they exhibit different cost behavior. Direct network costs, which are driven by our data center and our cloud onramp footprint has increased $2.1 million or 8% to $29.7 million. During the year, we added 26 additional data centers to our network, and we continue to upgrade capacity within metros and between metros. Partner commissions at $11.7 million are up $3.1 million or 36%, in line with revenue growth. Partner Commissions as a percentage of net revenue at 11% are in line with FY '21. This number we will expect to grow in future periods as we start to see momentum build in the indirect sales channel. Profit after direct network costs and partner commissions is our gross profit and was $68.3 million for the year. That's an improvement of 62% on FY '21. That improvement or that growth outstrips our revenue growth as our operating leverage built into our business model starts to come through. Gross margin of 62% for the year is 8 percentage points up on FY '21. Operating expenses of $78.5 million, an increase of 42% on FY '21. As we increased -- as we invested in ourselves as part of the Scale Up, Scale Out project that we announced last yea, that investment is now complete. And you will note that our H2 operating expenses are broadly in line with H1. EBITDA losses of $10.2 million, an improvement of $3.1 million from FY '21, an improvement of 23%. EBITDA margin at 9% of revenue is an improvement of 8 percentage points over FY '21. And EBITDA for Q4 was positive as we're seeing the operating leverage come through to the bottom line. Direct network costs increased with increased scale in our network. We maintained good control over those costs and our average cost per data center per month has improved year-on-year for the second year running. Employee costs at $57.8 million, up 40% from FY '21 as a consequence of us investing in growth. I will point out that employee cost as a percentage of revenue at 53% is in line with previous year. Professional fees of $5.9 million, up $1.3 million, 28% up from FY '21. As we incur costs relating to the expansion into a new market in Mexico and the build-out of the indirect sales channel. Marketing and travel costs combined have increased $3.2 million to $4.9 million as activity in these areas is returning to pre-pandemic levels. This is particularly noticeable in the second half of the year. IT costs and other operating costs have grown in line with business growth. Cash flow used in operations has increased $1.2 million to $9.8 million for the year, a 14% increase. You all know that in Q4, we were cash generative from operating activities and was largely because of a consequence of some seasonality in our operating cash outflows. Cash flow from investing activities of $50.2 million is an increase of $28.1 million over FY '21. $10.4 million of that increase relates to the cash element of the InnovoEdge acquisition, which we completed in August of last year. The contingent consideration part of that acquisition cost which is related to the achievement of certain technical and commercial milestones is equity settled. The second set of those milestones has just been achieved. CapEx including IP of $39.9 million in the year has increased $17.5 million over FY '21. This is because we have accelerated the purchase of assets to stay ahead of silicon supply chain issues. We continue to buy on a 9-month horizon. And as of the 30th of June, we had approximately $10 million in work in progress or assets under construction on our balance sheet. Cash flow from financing activities is 18% up at $5.8 million in the year. Cash inflows from our 0% finance facility have increased with the accelerated purchase of CapEx, and this is compensated for reduced cash inflows from the issuance of equity. Net cash outflow for the year of $54.2 million is $28.4 million more than FY '21. This is wholly attributable to the acquisition of the InnovoEdge and the accelerated purchasing of CapEx noted earlier. Our balance sheet remains strong. Notwithstanding the increase in our total debtors balance, our debtors stays remains unchanged at 25 days, substantially below our standard credit terms. Total liabilities in the business include the 0% vendor finance I talked about earlier, it also includes payments in future periods under operating leases that we have capitalized under IFRS 16. We have $82.5 million in cash on hand. And we have just agreed a revolving credit facility with our banking partner for $25 million. As the company moved to EBITDA profitability in Q4, and with the operating leverage continuing to come through, we have a clear pathway to free cash flow generation with $82.5 million cash on hand and the flexibility afforded by that revolving credit facility, we do not see that we will need to raise funds in order to get there. And finally, I'd just like to show a reminder of our operating leverage and our expansion in operating margins over the years. This graph shows consolidated revenue, consolidated gross profit and EBITDA for the month of June for the group. Our gross margin for the group in June at 65% is very strong and has grown 5 percentage points over the same period last year. We still see there is scope for additional growth in this area. And I will point to APAC, our most mature market, where now we are profitable -- our Japan market is profitable itself, we have achieved gross profit of 79% in the month of June. Last year, the group achieved EBITDA breakeven for the month of June before we invested in ourselves. To be EBITDA positive for the full quarter in Q4 this year marks remarkable progress, and it shows the investment that we completed in ourselves in the first half of this year is now starting to deliver. You will remember this graph from the individual regions, which we have posted separately. The operating margins that we have seen in a mature market, such as APAC are very strong, and we've seen this pattern being replicated in Europe and replicated again in North America. There's no reason for that change in behavior to be any different for the consolidated part which I'm showing you now, and we expect these margins to grow in the future periods. And with that, I'm going to hand you over to Eric who will talk through a number of market elements for business update.

Thank you, Sean. As a network as a service provider, Megaport solves for a variety of networking use cases. All of those use cases are underlined by the ability to provision capacity in real time and right-size connectivity. One of those leading use cases since the inception of Megaport has been around cloud connectivity, getting businesses connected into cloud onramps and into the cloud regions that are powering their business. Gartner estimates that in 2026, the worldwide spend for Cloud Connect will reach $3.8 billion. As I mentioned, Megaport is highly attuned and in line with this Cloud Connect business. In fact, nearly 3/4 of the connections on Megaport's network are connecting a business into a cloud provider. On top of that, the ability of Megaport to provide our Megaport Cloud Router service to allow customers to connect clouds directly together to enable cloud-to-connections really keeps us focused within this particular space. Now that said, there are a variety of additional things that customers do on our backbone, after all. We have built a global network that reaches 25 countries around the world. Additional connectivities -- use cases like data center to data center and even branch to data center or branch to branch are highly aligned towards subsegments like IP MPLS and Ethernet WAN services in the traditional Telco model. Gartner again estimates that for the IP MPLS subsegment, by 2026, the worldwide spend will be $29.2 billion and for Ethernet WAN $13.9 billion. Our ability to have 787 enabled data centers on our footprint and working with over 100 data center operators, again, aligns towards supporting this type of connectivity model of getting businesses connected to the locations that are powering their architecture. And then finally, with the launch of the Megaport Virtual Edge, which is our solution that allows customers to connect their branch locations with their choice of SD-WAN technology partner into our connectivity fabric. That ultimately unlocks the ability to connect to branch locations into cloud, branch to branch and branch to data center. So these are some of the principal areas where our service offering are aligning more from a traditional telecommunications standpoint. Speaking a bit more about some trends, so Megaport recently facilitated a survey in conjunction with Enterprise Strategy Group, where we surveyed 300 IT leaders within the industry to glean some insights about what some of the forward-looking trends are and also get a better understanding for our own product positioning. Not surprisingly, multi-cloud continues to be a big growing trend here. In the survey, 52% of organizations said that today, they use 3 or more cloud providers. Fast forward to 24 months, they are projecting that 84% of them will be using 3 or more cloud providers. So approximately 1/3 of respondents will be using 3 or more clouds. And you can see in the data there, the dark blue bars represent the percentage of respondents and their cloud mix today, the light blue indicate 24 months from now. And you can see a clear shift towards 3, 4 or 5 or more clouds being consumed by IT services shops. Additionally, some additional points that we gleaned are around branch as well. 66% of branch locations were identified as needing cloud connectivity. So this goes beyond your traditional on-prem and data center footprint and also looks towards the need to have actual cloud connectivity, delivering services into remote and branch locations. One additional stat as well here is that Cloud is business-critical. 63% of respondents said that rather -- I'm sorry, respondents identified that 63% of applications going into IaanS or cloud services are deemed business critical. So many of the applications that we've seen growing over time on our network, are ultimately the applications that are being relied on business for critical applications, day-to-day operations. So again, that focus on the cloud connectivity piece of what we do really comes through in these stats. And then one final data point here. Respondents did indicate that their network budget for the coming years is actually outpacing their general IT budget. And they're seeing a 5.59% increase in network investments over the next 12 years ( sic) [ months ] whereas their general IT budget is seeing a 4.87%. So network is becoming more and more by the indications of the survey. We're seeing an ever-increasing part of the importance in building IT architectures here. Again, rounding back out the cloud conversation here. Cloud continues to be a major force and our leading ecosystem of cloud providers is a clear point of differentiation for us. 77% of connections on our platform actually terminate into a cloud provider. 40% of the customers on our form that consume cloud are actually consuming multi-cloud. So they're connecting to more than 1 cloud provider many times beyond 2, 3 cloud providers on our platform. In fact, the number of multi-cloud providers, rather, multi-cloud customers on our platform grew by 32% in this last fiscal year. And interestingly, half of our multi-cloud customers have adopted the Megaport Cloud Router. And just as a quick reminder, Megaport Cloud Router is a virtual router that customers use and spin up across our platform to control traffic across the Megaport platform. And the predominant use case here is cloud-to-cloud connectivity being able to connect an AWS to a Microsoft directly across the Megaport platform provides significant value in terms of additional security, better performance across their cloud applications and reduced operating cost and operating time frames. And then lastly, Megaport supporting 100 gigabit per second interconnection into cloud onramp points. Now we did increase not only the number of onramps that we connect into, which are effectively the doors that allow us to get into the network onramps for cloud providers, but also additional cloud regions. And these are kind of the super-regional infrastructure nodes that provide cloud support into specific markets. A great example of new regions that we brought on are by virtue of the fact we've expanded into Mexico. So having those localized Mexico cloud regions available for businesses in Mexico to consume services within market is all about adding value to our cloud ecosystem. And as Megaport has grown over time in terms of size, scope and capabilities, we've seen a significant growth in terms of the types of customers that are consuming Megaport. Larger multinational customers are coming to Megaport to service their multinational global IT service needs. So looking just purely here from a measure of against the Fortune list, our combination of customers and partners break down to about 20% of Fortune 100 doing business with Megaport today, 16% of Fortune 500 and 14% of Fortune 1000. So with that, I'm going to hand it back over to Vinny to talk through some of our revenue and growth trends.

Thanks, Eric. I think just that last slide, I just wanted to probably add a point to it, it adds a huge amount of credibility to our business that mission-critical applications as we've gone through and the way that the industry is evolving and the way how important Megaport is to providing a network solution to allow customers to use those services is becoming more and more critical as we go -- as time goes on. And drawing your attention to the chart on the left, you can see the dark blue bar, 9,545 ports is we've grown. But more importantly, we are seeing an acceleration of the number of services that are being adopted on top of our ports and the access points in our network, which is, in turn, gone to the chart on your right, which is driving our monthly recurring revenue up to 10.7% on an exit run rate at the end of June. Turning to our customer cohort trends. And again, we've been showing this chart for a few years now at this point in time of the year. Average services per customer up 9% at 10.4%. And I'll talk about the revenue in a minute as it relates to that. But if I -- if you look at the chart on the right-hand side of the scale and looking at FY '14 as it grows up, continuing each year to add more and more services per customer at 30.6% on an average. But more importantly, each year, as we go from left to right, we're adding more services per customer. And I think this is a testament to the last statistics that we just brought up where Fortune 500 customers, Fortune 100 customers, we're seeing larger, more important global customers using Megaport's global network services, which in turn is driving the revenue. As we look at the average monthly revenue per customer, again, the same statistic is coming through that every trend for every year is continuing to grow again, starting on the left-hand side -- or sorry, the right-hand side, FY '14 as it continues to grow year in, year out. And as you start off your first cohort customers in FY '22 is continuing to increase as we add on more customers. One additional piece of information that we want to share with everybody today is our customer cohort survival. So notwithstanding what I've just shown you in the last 2 slides is not only the services customer continues to grow but our revenue per customer continues to grow. Notwithstanding that and as we have some churn as customers in the cohort each year, you can see from the right-hand side, FY '14 from 94% going down to 53%. But that 53% of customers from 9 years ago is generating more revenue now today than it did back in FY '14 or FY [indiscernible]. And if you look at the consistency of the stats, once we get past 2 years, our customer being with Megaport is extremely sticky. And so it adds to a lot more value for what we're doing and our continued growth in monthly recurring revenue and in our revenue base going forward. With that, I'm going to hand you over to Sean just for -- to learn through some more.

Thanks again, Vinny. Just to reiterate a little bit what Vinny was talking about there. So this graph points out our June of every year. I'm very excited the contribution of each cohorts to the MRR. We've also plotted a few milestones on the time line to show how network expansion and expansion of the complexity in our network even more notably is adding to the flavor and the revenue growth within that. So while we've previously shown that those customers who survive, grow their spend with us annually, and this is true for every cohort and every year. What hasn't been a part in our presentations tonight is that, that growth individually customer MRR, outstrips any MRR that's lost to churn within any cohort, that is true. Now what this means is that the total revenue generated by any cohort in any year, just grows. And this is true for every cohort, and it's true for every single year. So for example, the FY '14 cohort that Vinny just named checked, revenue generated in FY '22 from that cohort grew 6% from FY '21. That is despite the survivorship within that cohort dropping from 55% to 53%, although 53% survivorship is still very strong after 9 years. In addition, increasingly we are selling more global solutions to global enterprises. So what that means is later cohorts are contributing more and more to the group MRR. The last 5 cohorts combined account for almost 80% of our MRR at June '22. Both these facts combined, both of them combined together to give the real steep increase you can see an MRR growth from this graph. As we started to grow our scale, the registered lower gross margins always kind of impacted any LTV calculations that we could bring out. So talking about lifetime value to customer acquisition costs. But we always knew with the survivorship enhanced in the customer base that this would be a strong metric for us. Our average LTV to CAC for FY '22 of 6.3% is slightly down from FY '21 as we invested in additional sales as we build out the indirect sales channel this year. However, the LTV to CAC for FY '21 is slightly skewed by the record number of new customers we brought on in Q4 of that year. And that exaggerates the kind of drop in efficiency that we're seeing in the current year. So breaking out that figure by quarter over the last 2 years, you can see the trend of continuing growth in LTV to CAC over that time period is still happening over the 2 years, record Q4 and FY '21 notwithstanding. Also, even with the drop in inefficiency in Q1 of this year from the investment in additional sales, you can see that, that efficiency is returning throughout the rest of this financial year. Furthermore, with compound annual churn rates continuing to drop, the LTV to CAC ratios will continue to grow going forward. And with that, I'm going to hand back to Vinny, who will talk a little bit more detail about individual products.

Thanks, Sean. With that in mind, I'd like to talk about Megaport Cloud Router now, given the fact that the market that we're in, we're seeing the adoption of more than 1 cloud and the growth in it, we turn our attention to the revenue per customer, a non-MCR customer or a port-only customer generates around $3,600 per month compared to a $6,400 customer that uses MCR and a number of services that are attached to that grows from 9.5% up to 14.9%. At the end of June, we had 731 MCRs on the network. Turning to Megaport Virtual Edge or MVE. Similar statistics of a port-only customer [ 3,600 ] is now nearly 4x higher at $12,000 we get per customer. And obviously, the number of services that jumped up from 9.5% up to 17.9%, and we have 73% on the network. Now it's important to point out these -- as we continue to layer more services on our network, some of them are highly more margin-intensive because we've actually built the network, and we're layering over on that, so we don't have to create extra cost in the network because we've actually got the capability or the technology to do that. The second part of it is with Megaport MVE, it is a different sales cycle. So just again to remind everybody, it does take a little bit longer to build that up, but they are higher quality, higher customers, bigger customers and bigger use cases. And then just to touch on a use case like we did last year. This one, again, is a global energy company that's using Megaport roughly averaging $100,000 a month. And it's a complexity that they're solving in the network that's not -- it's hybrid cloud, so as can AWS and Microsoft. It's using ports, it's using VXCs, it's using MCRs and it's using MVEs and it's global. So these are the types of customers that are using MVE. And again, just to point out that they are a little bit more complex and they do have a longer sales cycle, but they are big -- large companies that are using these type of services. And finally, just to point out, I suppose, just the magnitude, 25 countries just recently launched in April in Mexico, 145 cities, over 200,000 kilometers of network connectivity were installed in 423 data centers and enabled in 787, and we are the market leader in network as a service. Okay. So I'm going to switch to -- just a little bit of an update on the channel. And it's less financial driven, but more -- just an update for everybody. I draw your attention to the chart on the screen starting from the left side to the right back when we started our business in FY '13 and continue to do today as well. We've been -- we have very much a direct sales force, which focuses on working with enterprise customers. And I think we've illustrated that through, not just our server -- our survey, our customers, our base and the products that we're selling. And over time, as you will be aware, we have worked very closely with a lot of data center operators being in 787 data centers and a lot of strategic partners in that. We've moved from more of a sell-with and sell-through with our data center partners for driving interconnectivity inside in the data center and more importantly, 77% of our connections are connecting to a cloud provider, which we've got the largest footprint for. So that's been fine. And over the last 12 months, as we've said this time last year, -- we spent a lot of time investing into the channel or indirect selling. So what does that mean? We've integrated with Cisco and other SD-WAN providers. And we're using those integrations and the value-added distributors through global system integrators, managed service providers and resellers to sell to the enterprise customer to broaden our reach and access to customers. And that's the path that we have done. We are selling all of our products through that way, not just MVE. And so it's really important that we just kind of want to illustrate that for a point of clarity for everybody. So we're not slowing down anything that we've done before. We're just expanding our reach. In terms of the PartnerVantage, and this is partners, not -- not customers. And on the graph, just to explain the different stage gates that we have to go through to understand so everybody understands what the process is. We have the light blue bar down on the chart indicates where we were at the 31st of March. So for example, at the 30th of June, we have 78 partners globally signed up and 22 of them are now transacting and actually helping to sell to customers through their clients and their client base. So this is the funnel that we have to work through, so that we go to each one of these stages, and that's why it's a little bit different than turning up a port in the VXC. We have to help them to sell and that's the whole part of the program. And as the whole -- all the stages that we need to go through is training, mentoring, and there's coaching and then it's looking after and going forward there, but that's when they help to sell and increase our revenue reach. Some of the logos, I won't delay too long on this. But again, these are some of the global logos that we are working on. It's part of that 78 customers that are signed on today that have their own client base, that are actually using Megaport for the first time as a network as a service as they don't have it as part of their toolbox or as part of their sales as they're selling to IT solutions and into cloud. Okay. So just getting to the last part of the presentation here, the last slide before we go into Q&A. Just a couple of points. I want to probably just mention, I think, we've demonstrated today that the operating leverage is solid, and it's sound in our business. We have the right business model. We know that anywhere between 75% to 78% of our revenue that we get today drops to the bottom line in terms of EBITDA which talks to our profitability. Sean's talked a fair bit about our financials, but also not just our financials, but our capital management and the fact that we're capable of managing our own cash flow and the capability of making sure that we sustain that. We've got a very competitive differentiation in terms of our business. We've talked today about the industry that we're in and how highly aligned we are to cloud adaptivity and mission-critical usage of cloud and how Megaport can facilitate that. And also, we're actually very focused on the innovation component of our business. So we're going to continue to roll out more products, more applications that are highly accretive to our business, so that we can actually help our customers move forward over the next 10 years. So with that, I probably will point out there is 5 or 6 slides in the appendix that have the regional analysis and breakdown that we've provided every other year for everybody to digest and go through, but I'm not proposing to do that today on the call. So with that, Kiara, I'll hand it back to you for Q&A. Thank you.

[Operator Instructions] So we'll begin with a question from Nick Harris from Morgans.

Fabulous to see those CAC numbers coming through that's really obviously showing you're spending very widely. So thank you for sharing that. Just obviously, you demonstrated some pretty impressive fixed cost leverage in the business. I think looking from the first half to the second half, you added something like $7.4 million of revenue and about $6.5 million gross profit. So that's pretty impressive. I'm just wondering, could you give us a bit of a guide going forward or some kind of rough estimates in terms of what we should think about the fixed cost leverage going forward or the costs or whatever you're comfortable talking to?

Nick, well, I did try to talk about how the direct network costs are very closely tied with our data center footprint and the cloud onramp density that we have in the network and why we will constantly or consistently upgrade capacity in the network and there is an ongoing plan to do that. That's very much in line with revenue, and that should pay for itself. We've always guided that we are comfortable with this business becoming a 70% gross margin business or above, and you can certainly see that in APAC, where we had 79% closing this financial year. I realize with the indirect sales channel starting to take off, there's always going to be a little bit of revenue pay away. So you're going to see an increase in those partner commissions. So I don't think we will ever get to the 79% on a group basis, but I'm comfortable certainly.

And just the cost side as well. I guess if you look at the second half, APAC and I think head office costs even went back a little bit second half '22 versus first half '22, it's a great cost control. Is that just an FX thing? Or could you give us an idea of...

No, it's not the FX thing. I did say that the investment in Scale Up, Scale Out that we did in the first half of the year was the build. It was the step-up. I did guide at the half year that I didn't expect any additional costs come in or it's certainly not any significant additional costs to come in, except for a little bit of an annualization of those staff costs where they were hired through the period. And as I mentioned in the presentation, there has been a reversion to pre-COVID levels of activity in terms of marketing and travel, and that seemed to be in the second half but that's going to continue. And from here on in, further expansion we might see in our workforce will be revenue driven, and it will be there to help service our customers as our customer base grows to -- whether that's on a transactional basis or pure customer service. But there will be no significant step-ups in terms of OpEx from here on in.

Next, we'll move along to Jonathan Atkin from RBC.

So I wonder if you can comment qualitatively just on the sales pipeline? And is that growing? What do you do velocity decision cycles amongst your corporate and SMB customers given some of the cost pressures that they're seeing? And I have a couple of follow-ups.

Jon, yes, look, we're seeing -- we had a good -- obviously, a strong quarter 4 coming in, and it's typically a strong one. And the pipeline is strong going forward for the second half of this year. July is always a bit of a skittish month because of just vacation in Europe. Everybody end of the year, same summertime in the states, all of those things, it's always a slower one to start off, but we've got a very strong pipeline. The partners that we've got on MVE, as I've just shown you in the slide, is strong, and that's helping us to supplement what we've already got in terms of our direct side of the house. But we're not seeing a slowdown in terms of IT spend or network spend. So it's -- I think there's a lot of projects out there. There's a lot of customers out there that are trying to transition to certain things. And I think that's like -- I don't -- we don't see that's slowing down.

And then just curious about in cases where you don't convert an opportunity to an actual win an order, what are some of the reasons for that? Is it competitive factors? Or is it DIY or anything kind of point?

Yes. No, no. That's a good question. It's not -- Jon, it's not something that we would lose based on price. We never lose anything on prices. It's really going to come down to, do you want to use the Internet or do you want to use Megaport. That's usually where it comes down to where we don't succeed and cheap in share for wins. And it's a question of a trade-off or a balance between the Internet security SLAs using the cloud versus using a private network to do your connectivity.

And then specifically on MVE, my last question is just any regions or countries where you anticipate that you might see kind of that next leg of success for that product?

Europe very much GDPR security, it's top of mind with every enterprise customer and just being able to branch to cloud has been a big ticket item, and the Internet, it's not what they want to use. So that's what we're seeing. We're seeing a strong -- and that's by the fact that probably, if you look at the half year results and if you look at the full year results in Europe, we grew 33% in the full year, and a lot of that growth came in the second half of the year and then predominantly because of security.

Next, we'll take a question from Tim Plumbe from UBS.

Just 2 questions from me, if possible, please. Firstly, on the free cash flow profile, just from memory, Sean, I think at the last update, you spoke about a more normalized level of CapEx going forward, especially from the reduced need to prepurchase equipment, but also given the completion of some major programs. Can you give us a bit of a guide in terms of how we should broadly be thinking about planned CapEx for FY '23? And then given the kind of trajectory of the business, how does that tie into your thinking around free cash flow breakeven, please?

Yes. I did notice that the $40 million that we spent this year, that would feel a little bit high for me and I answered with about $10 million kind of assets under construction on my balance sheet. But hopefully, I'll be able to realize at some point when we don't have to buy on a kind of a 9-month window. That, to me, is the indication that I'm comfortable with about $30 million kind of on a go-forward basis. I've said that publicly in the past. And whether that is all CapEx in terms of equipment or PP&E or whether there's a little bit of a swap-out between our internal IP development and IP. It's around about that level that I see -- I'd be comfortable with going forward. And I'm not seeing -- I'm not -- I don't have any pressure at the minute but going to see that accelerating in the current year.

Got it. And sorry, just in terms of how you're thinking about that in the context of free cash flow breakeven?

Yes. I mean, I don't really want to give any guidance on that. You've seen that we've turned to EBITDA positivity or profitability in Q4, just the way we account for things or the way we have to account for things. Cash flow from operations lags, EBITDA a little bit because of the IFRS 16 lease -- speaking of leases under IFRS 16. But as the operating leverage continues to go through, cash flow from -- there will be cash generated from operations relatively shortly. And the growth that we see coming, is just going to bring that down to free cash flow, a few quarters thereafter.

Right. And then just this question around the reduced head count. Could you maybe provide a little bit of color in terms of where those reductions were made, how we should think about the net savings and kind of how much of that is from a capitalized cost versus the OpEx bucket, please?

Tim, I'll pass you off to Vinny to -- he can answer that probably a little bit.

Tim, yes. We had a little bit of a rightsized exercise that we carried out after adding a significant amount of employees over the course of the year and 2 years during COVID, et cetera. So it was a mix. It was across the board. And other than that, I don't really want to comment on it.

Next, we'll take a question from Kane Hannan from Goldman Sachs.

Maybe just MVE ARPU trends. Can you talk a little bit about, I suppose, how that was trending in the fourth quarter. I think it came off a little bit sequentially. I suppose how I reconcile that with some of the examples you had in the deck, that $100,000 global example that's out there?

Yes, Sorry, Kane, I didn't get the question, sorry.

Just talking about the -- like the MVE ARPU trends. I think it came down a little bit in the fourth quarter on an exit run rate. So how we'd reconcile that with the global MVE example you put in the pack that was $100,000 a month.

Yes. So Look, MVE is a product that is suited to a lot of, obviously, branch to cloud. If you think about it, it's quite extensive. It can be metro -- within the metro, within a city or it can be geographically developed okay? So we've given an example to illustrate not necessarily with the $100,000 of value, to illustrate the use of all of our products. So it's not MVEs, okay. That's MVEs only 1 component by $100,000. It's all the ports, the VXCs and the MCRs and the multi-clouds being used. So it's all of our products. That's the first thing. So it's not $100,000 of MVE. So I think you need to extrapolate that. But for our -- for where we see where MVE is going and the ARPU and the $12,000, that's the average purely on MVE only.

Yes. And in terms of the customers you signed up to MVE 12 months ago, can you just talk about the sort of spending specifically on MVE that they have had across the course of the year?

Well, we've only -- we've only launched it. It's only a year old, so we didn't really have anything this time last year. We just launched it. Really only...

It's 20-odd customers in there that you signed up sort of 4Q last year? I mean are they just have held static in their spending on MVE?

Yes, they're part of that $12,000 just on the MVE component alone. And what we're finding is customers are starting to add. And I think that's the same thing about the services on the cohort and now this chart that you're looking at. And we see, as we add these products, they're actually adding more VXCs on top of it, which create more services per customer and more revenue per customer.

Yes. And then just one last one. Just a survival chart you put out there. So like the FY '22 1-year survival churn seemed almost the highest in the 1-year record. Is there anything in that, that we should be reading into sort of the macro trends? Or is that just a small sample size going down to the 81% survival rate?

No, I don't think so. No. I think we've got a lot of customers that come on and come off, but the 81%. If you look at -- again, I'm sorry, I'm just looking at the chart here now, but if you go from FY '14, 94%, 86%, 86%, 86%, 90%, 84%, 82%, 85%, 81%, it's quite mixed. So it really depends on how many customers are coming on for different types of projects. But if you -- if you go back a slide and you look at the revenue per customer, even with that 81% they're still spending way more money than the previous cohort year previously. So it's sustainable and it's strong, and that's the main thing that's coming across.

The next question we'll take is from Siraj Ahmed from Citi.

Vinny, just first question. I mean, previously, you used to talk to the MVE pipeline in terms of customer numbers. I think it was around [ 200 ] or something at the half. Any update on that and whether you're really seeing any movement in the uptake of MVE?

Yes, it's continuing to grow. We've got a pipeline, we're around north of 300. So again, I think if you look at the stage gates that I presented today, it takes a little while for them all to come through and get qualified. It's more important. And that's not customers, that's just our partners, right? So it's not just MVE, those partners getting qualified to be able to help to sell all of our products, not just MVE. I think it's crucial. But yes, we've got a consistent pipeline. They just take a little bit longer in terms of the sales process. Like as I said, it's a longer lead time. But I think you can get an appreciation from 1 or 2 of the slides there that not only is it a higher-margin product or it's slower to get there, but in terms of a transaction. But it not only is higher margin, but it's also a longer sales cycle. But that's the nature of the product. And it needs logistics to coordinate that between the IT managers or CTOs on the other side of businesses who are trying to put together their solutions for branch to cloud.

Sure. And Vinny, should we think that the conversion of the pipeline is a bit faster in FY '23, just because I think there was a lot of pilots in FY '22. So do we expect that to actually drop through this year? Or it's just a longer cycle? Just assume similar conversation?