Megaport Limited (MP1) Earnings Call Transcript & Summary

It's my pleasure to introduce the team from Megaport. Starting from the left-hand side of the screen, Chairman, Bevan Slattery; then beside him, Sean Cassidy, CFO; and closest to me, Vincent English, CEO of Megaport. So really delighted to have you all here today. Also from the Megaport team, we've got Helen Coghill from IR; and Adam also from the team. So I think the plan is for Vincent to kick off. We'll do a 15-minute presentation, and then we'll open it up to Q&A. [Operator Instructions] So with that, straight over to you, Vinny. Thanks.

Thanks very much, Nick. Appreciate it. Good morning, everybody. This is our Q2 outlook presentation. Just a couple of things to point out in the presentation. Everything that we'll be talking about in the presentation is in Australian dollars. We do have everything in U.S. dollars in the appendix for reference for everybody. The second thing is after this call today, we are reporting our full half year results on the 9th of February in-person meetings and presentations for that period, so we'll be going into a fundamentally black-out period pretty much after this call today just to make everybody's expectations. But a lot of material that will be in our half year, we will be discussing and going through today. With that then I'll just go straight into our highlights. We had very strong EBITDA growth in the quarter, a AUD 2.4 million in EBITDA in quarter 2, total of $3.4 million for the half year, up from the $1 million that we had in the previous quarter. The total revenue for the half year was just over near just under $71 million. So up significantly on where we were and continuing to grow in the quarter. We have continued focus on our operational efficiency as we continue to maximize what we've already built in our operating model in our business, and we're starting to see that come through in our financials in terms of both the revenue, the margins increasing and optimizing what we have. We're going to touch a little bit on the sales channel and how that's continuing to progress and grow as we continue to build activity there, and again, is more of a future revenue generation in the periods ahead. And also, stand very focused on the area of cloud and IT trends in January because it's intrinsic today the key part of our business with nearly 70% of our customers are connecting to one or more cloud partners today. So that's a key revenue driver, a key focus point for us. We've had some announcements with AWS Outposts where we were one of the first providers to get accredited for that which allows us to work even closer with a lot of our data center operators. And also when -- in the space of -- within the space today of quantum computing and has been more [indiscernible] because that's in the developing space as more and more data is being consumed and more and more partners and not just data centers, but providers out there need to actually be in a position to provide those types of services. So we want to continue to make sure we're at the forefront of that. And again, like the interconnection and continuing to add more enablers and do things, new partners like at this age, which are the data center operator, again, with a much smaller and more boutique in Europe, but tend to be more at the edge rather than at a centralized location. So again, making sure that we're having -- providing the same interconnection platform to any data center operator. And we've had some other deals with DataBank in the quarter as we continue to develop particularly with Megaport ONE, and I'll touch on that a little bit later. In terms of key performance indicators. So we're continuing to see some consolidation on our network in terms of our ports. And a lot of that has got to do with the upgrade in the capital expenditure we've invested in the business over the past 3 to 4 quarters in terms of upgrading our backbone, our network match for a 400-gig capability, but also ability to sell and use 100-gig ports, which means that we get a reduction in our cost structure, we get a reduction in 10 gig ports that are consumed on the network as we maximize and move up to 100 gig. You can see from the chart there, we have totaled 368 port growth for the quarter, of which 165 of those were sort of consolidating this part of that exercise. Overall, our customers went up just over 1% to 2,740 for the quarter. In terms of our monthly recurring revenue, up AUD 661,000 in the quarter, now at a run rate of $12.4 million, up 6% or up -- and in overall in terms of our total revenue of $800,000 for the quarter-on-quarter movement. And you can see the -- you can see from the chart that it's an uplift of $800,000 from $11.6 million to $12.4 million quarter-on-quarter. So it's continuing to grow up 6%. In terms of the split of revenue, we're continuing to see up 9% of that total revenue uplift has been contributed from the North America region, up at $7.1 million and it flows a monthly recurring revenue. Asia Pacific's up at 3%, and then Europe is also up at 7% and continuing to grow. And we're starting to see more traction happening in Europe, as we said last quarter, continuing to move forward there. And with the business overall, like I said, $12.4 million, up 6% or $800,000 for the quarter. In terms of our EBITDA journey, I kind of wanted to start and call this out, and we talked about this at the last quarter and also at the full year results, when we talked about where our trajectory is going in the business in terms of how we're performing our economic model and our data. And you can see, going back to FY '21, as we were down at just under $5 million for the quarter, a negative on EBITDA and how we've probably now sort of come out the other side of that towards the back end of last financial year and into the first 2 quarters of this year. And that's -- and I'll hand it over to Sean shortly when we go through the numbers. But basically, we had $1 million of EBITDA in the first quarter of this financial year and we did $2.4 million in EBITDA this quarter. So our total for the half year is $3.4 million. So it's starting to come through in the business based on our economic model. As long as we stay focused on our revenues, managing our costs, the EBITDA model starts to flow through fairly efficiently. And that's the overall underlying trend that we're going to talk with you today. In terms of PartnerVantage, in the program, again, we're just showing you the continued partner signings up 43% in the quarter as we're adding more and more partners. And again just to remind everybody, anybody who comes on to PartnerVantage or more like a third-party reseller, so they will have many customers, are trying underneath that, that will help us to grow and continue to sustain our revenue growth by selling on behalf of Megaport. And of those 43%, that growth that we picked up, which is just under 150 partners already, we've got 31% of them are nearly half -- just under half the -- just under 60 of them are actually already billing and transacting. In other words, registering deals and bringing customers. And of that 26% of the monthly recurring, which is over $100,000 a month, is coming from this pool of partners that we've built up over time. In terms of some of the leading companies that we continue to add to our network, of the 2,740 customers that we have, we're seeing more and more customers, albeit, a little bit slower customers coming on, the customers are larger, right, and they're bigger, and they're more global. And you can see from the brands in the logos, and you can see from the right-hand side there in terms of what the capability of the customers that we have in terms of Fortune 100 or 500 in the company. So anywhere ranging from 20% to 25% of large multinational companies are using Megaport for cloud access and as part of their global network and their footprint. With that, I'm just going to hand you over to Sean to take you through the next couple of slides.

Thanks, Vinny. I'll talk through the financials a little bit. As Vinny noted earlier, revenue of $37 million for the quarter is up 10% on quarter 1 and up 39% on the same period previous year. Our MRR in December of $12.4 million only means that we have annualized group revenues of slightly under AUD 150 million. For those of you reading our results in American dollars, our MRR at USD 8.3 million means that the annualized revenues have crossed an important threshold in U.S. dollar terms to our annualized revenues are now across USD 100 million. Another interesting thing to point out about the revenue in the quarter, $37 million in the current quarter exceeds the total revenue that we did in FY '19. And it just shows you the kind of continued growth journey that we've been on and continue to enjoy. Direct network costs of $8 million are down slightly or about 2% on quarter 1, and 11% up year-on-year. And we continue to drive a cost optimization program across our network footprint to ensure it is the most cost-effective network in the right locations to service our customer needs. Partner commissions of $4.2 million are up $0.4 million on quarter 1 or 10%, and that's in line with revenue growth. Profit after direct network costs and partner commissions, in effect, our gross profit, with $24.8 million is $3.1 million or 14% up on quarter 1, and $8.3 million or 50% up year-on-year, and this shows the operating leverage continuing to come through in the business. Our gross margin percentage, 67%, is 2 percentage points up in Q1. Employee cost of $15.6 million are slightly up by 5% in Q1, and it's annual pay increase was effective on October 1 came into effect. The employee cost as a percentage of revenue, at 42% year-to-date was 13 percentage points better than the same period last year. And as you see, we're getting much more efficient at scaling our revenue and servicing our customers. Marketing and travel combined at $2.4 million, it's 33% up on quarter 1. And we're seeing a normalization of marketing and conference activity across the world as the world reverts to kind of pre-pandemic or pre-COVID levels of activity. EBITDA of $2.4 million has grown $1.4 million on quarter 1, it was 140%. And this is the third quarter in a row of positive EBITDA. Our EBITDA margin of 6% is up 21 percentage points on the same period last year. Cash from operations, positive $0.2 million, is down on quarter 1 by $1.2 million, largely because of receipts from customers and a major supplier was a contributing factor to that. This is essentially a timing issue, and therefore, receipts in January have been consequently very strong. CapEx of a net 4.8 -- sorry, $4.6 million includes a reversal of an amount of $3.6 million, which is now being treated as an operating expense. CapEx includes continued upgrade of our core and our capacity as we complete the number of major projects. The continued expansion of the 400 gigabit metros, intellectual property of $4.5 million and includes further development of Megaport ONE and security enhancements, both internal and for our customers. And Vinny is going to talk a little while in a little bit more detail about CapEx and the full year view shortly. Cash flow from financing relates to the repayment of the 0% vendor financing and the payment of operating leases that have been capitalized under AASB 16 regulations. Included in this is a one-off outflow of $3.6 million relating to the reversal I mentioned in CapEx as well. Our movement to cash balances in the period of $11.9 million and $25 million year-to-date means that cash balances at the end of the period of $57.5 million remain on hand to service the group as we go forward. And I'll pass back to Vinny now.

Thanks, Sean. So just on that point on CapEx, just to bring everybody around, this is probably the first time we are looking a little bit more forward out in terms of projections on our cash -- sorry on our CapEx or cash spend. In FY '22, the period ending in June, we spent just under -- just $39 million -- just under AUD 40 million in CapEx. And in this year, we're forecasting somewhere between $32 million to $33 million, okay, depending on FX and movement in the second half of the year. I mean, for next year, we're looking between AUD 28 million and AUD 30 million. That's the profile of our cash spend. And there's a couple of reasons for that, and I'll touch on that in a second. Part of it is related to -- and you can see from the profile in the charts that the first half of the financial year typically is when we spend our heavy lifting on our CapEx because we want to actually put it in place and have it built-in in the network for whatever we're spending it on so that we can actually optimize that in the second half of the year. So that's typically the profile of how the cash is spent. In terms of the breakdown of the half year on half year, we've listed out here a few of the projects that we've spent, and a lot of this money that we had spent towards the second half of last year or FY '22 and then it follow through into the first quarter of this financial year in terms of our cash has been mainly about the -- some network replacement, but mainly massive upgrades on our 400-gig backbone and also on our 100-gig port capability. So we actually sell and service our network for those. That has now been finished. So we've done all the heavy lifting on that. And that's why the profile of our cash CapEx is starting to reduce. It also has a big impact on our future outlook in terms of our cost control, in terms of -- we are now selling -- utilizing 100-gig ports on the backbone network that we can now move forward over the next couple of years without having to reinvest in that for a long [ way ]. And so that's why you can see from the chart here in terms of our business as usual, which is continuing to upgrade our network capability or add more locations or add more capacity where needed. But the big projects that we had that was part of our uplift, which you can see highlighted in the charts there, is starting to reduce significantly over time. I suppose this brings me down to the -- probably the last slide in the presentation. And we'll talk about our operating efficiency. So again, we invested in the network significantly to allow us to move forward and continue to develop network-as-a-service as a platform, usually the Megaport ONE, and our capability to actually be relevant in the cloud space for the next 3 to 5 years, right, and stay relevant. Part of that is -- as part, we've invested in the CapEx into the network. It also now means that we can start looking at utilizing our network efficiency and seeing where we can save money. And part of that is where we're going -- we've identified a major amount of work streams that we want to work through in terms of the [indiscernible] annualized between $8 million and $10 million as a result of that investment in the CapEx and the investment that we've put into the business, where we can now actually make more efficient decisions about how we're managing our costs in the business. So a lot of that is related to the consolidation of cloud on ramps, our network operations, and like I said, the utilization of 100 and 400-gig ports in the network, which, as we said, we've invested heavily in. The majority of these we've already identified. We were actually working through our work program right now as a result of all that, and we expect a lot of these to start to come into fruition over the course of this financial year, and then obviously, put us in a good place going into the new start of the New Year with a reset in where we're at. Also announcing that we are doing a slight rebalancing on our pricing on our VXCs for -- to bring it in line with our MCR and MVE, metro pricing on VXCs, and there'll be more detail about that a little bit later just -- it's still price sensitive at the moment. But effectively, we're talking about rebalancing from $100 VXC in the metro to $200, the same as our pricing for MVE and MCR as in -- a lot of our legacy customers and legacy business has been so. Expecting that to be effective around May coming into June this financial year. There's no other changes in our pricing report. We have gone through an extensive review of what we are doing and why we are doing it. We believe all of our pricing is in line and it's competitive, and this is just one of those changes that we felt that was bringing it more in line with the cost structure that we have and also more in line with the value that we're delivering for the business or for customers. And then we're also looking at a further strategic review. We've been -- 2013, '14, when we started the business, and we're now doing a big deep dive in terms of making sure that we're setting ourselves up for the next 4 or 5 years into the next -- where we want to go and where we want to be as a business. Focus on improvement and work with our new CRO, Jeff, who's only with us now, I want to say, 50 days. So he's obviously taking a good hard look at not just the existing sales organization and how we're going to continue to grow that, but how do we maximize the channel and how do we make sure that that's more optimized under his management in the sales group. That's kind of it for the presentation. So over to questions then.

[Operator Instructions] So I'll see if anyone in the room wants to go first. If not, I've got plenty.

Just a question for Bevan probably. I understand you changed the incentives of the executive team to focus more on profitability. Could you mind just explaining those changes?

All the changes?

No. Just how much you -- I believe that shifted to an EBITDA focus and weighting towards that. Is that correct?

Yes. I mean the whole business had it, so not just the incentive package, but I think the whole focus of the company and the market has to, right? So we didn't do it because that's what the market is, but it's always just a maturation of the business heading towards that. So certainly, our focus is on profitability. And I think certainly, with the things that you're seeing, profit and cash, they're obviously the 2 things we're really focused on. We still focus on growth as well, very important. But we've actually built just seriously an incredibly amazing business here and an amazing platform. What -- I spend probably, I guess the guys have noticed but the best part of November, an incredible detail on the business and re-understanding and even re-architecting some of that with the team. So knowing how important this is, and obviously, the cash that we have, we sat down and worked out probably on annualized basis, we've said here's $7 million to $10 million worth of cash savings there. We looked at -- and a lot of that is because we did that re-architecture of -- and it's probably a bit missed. I mean we spent a fair bit of money doing this 400, 100 gig upgrade. And let me just explain why it's really, really important. And it was such an important investment, but also that investment, that CapEx and heavy lifting is pretty much completed now. One of the challenges we had in the group, and we've been seeing this climb over the last 2 years is, as enterprises consume more of the cloud, we have these legacy 10 gig ports that we operate with the cloud providers, the AWS, the Microsoft Azure and Google. We wanted to be ready with 100 gig when they start kind of opening up the 100-gig capability. And that's really important for a couple of reasons. One is people are ordering -- they want instantaneous access to cloud. Two, the cloud providers are not allowing oversubscription or very limited oversubscription. So we basically said, look, we've got to make sure that our customers can connect to us at 100 gig. And any time they want to service into the cloud, we're able to deliver that without wondering have we got capacity. The other point of that is we have to order a lot of cross connect, so to interconnect to cloud at this 10-gig legacy level. So doing that is -- what we basically found is we're now ready. So when the cloud operators say, we now have 100 gig available, we can do that. To give you an idea, our annual cross connect teams clipped $10 million a year at the end of last year, which is extraordinary. But what that shows you is the growth that we've actually had in cloud connectivity, but also shows the big opportunity and efficiency when we go to 100 gig. So my focus was certainly with the team. And for the last 18 months, we've been deploying all this infrastructure out there to, one, reduce interconnection cost, but also our scalability in the cloud. Two, it's also we replaced over 200 edges -- edge locations around the world. We've done it to make it consistent everywhere and the 100 gig's available at all the places we need it available from a customer standpoint. 400 gig in the core to be able to carry this data through that. But the other reason as well, again, is to reduce some of our costs in terms of delivering these services. So that's been an incredibly big part of what we're doing. And this cost out program that we're doing right now, you're going to see that. But when we did that analysis and that deep dive and look at the legacy network, we just realized that we're charging too few, but -- too little money for these cloud cross connects -- cloud Virtual Cross Connects, particular to the legacy networks, where we've got all these 10 gig circuits. So what we've had to do is to make sure that that's in parity in alignment with how we do it on the other side. And I really probably can't -- I can't stress enough, I mean, the leverage that we actually get in this capital investment that we've made. It's pretty much on that whole program in terms of 400, 100 gig. It's all done for now for this phase. We'll business as usual, do some upgrades over the next 2 years as needed. So the CapEx cash flow on that program, for example, is pretty much completed. The second part is that you see these strategic ports that we're talking about, we're transitioning off the legacy network or the legacy cloud availability zones on a 10-gig basis. We say there's massive amounts of cross connect that gives a lot of scalability in ports in those locations. And I think that's probably -- that's going to continue beyond this, but we've got this current phase brought out. So my focus and the focus of the team is to -- sorry, and just on that kind of point, by changing that pricing, there's $7 million to $10 million of -- we expect to have annualized incremental revenue, that's pretty much -- it's all profit, but it's not like we gauge in terms of the profit. It's more than -- it's now more than covering the cost of the investment that we've made. So we're continually reducing the investment -- the cost of that, and we've slightly increased the price of that 1 product to make sure that's aligned. And what I think shows is just, as I said, a really dedicated focus on cash and on profitability.

On the CapEx profile, is it all about like every 3 years, you have to replace the old kit? Or is it all about growth and keeping -- and the network as a proportion of your CapEx budget?

Yes. There's 2 parts to that. So like in any network, you always have to have a certain amount of enhancements after -- our typical profile is somewhere between 4 and 5 years, right? Now we -- just to clarify what Bevan was saying as well. So what we did as we removed over 200 edge locations and upgraded them from what their capacity was up to 400 gigs only. So we've swapped out that equipment and upgraded it after a 4-, 5-year period. So we'll continue to do that. But those -- all that equipment now is set and repurposed for 100 gig at the edge. So that's one thing. The second thing is there were various programs like what we just went through, which was upgrading the old network to 400 gig, which is kind of like a one-off exercise that you need to do. But bear in mind that we're in a lot of locations so there's a lot of places we have to upgrade. So I think where we feel what we've done now is set ourselves up for the next couple of years, where we can really now maximize and leverage what we've built and the way we set it up and how the business is going to consume it and how our partners want to work with this and where we're at. When we go back to 2014 and '15, everybody would still talk about 1 gig. And we were one of the first to come out with 10 and we're told no one will ever use 10. But now we're talking about 100 because that's the way the conversation has already moved away to where broad consumer data is a business in general. So we just wanted to make sure that we were ahead of that. And that's what we did last year.

Yes. And just on those, most of those sites, the devices we replaced [indiscernible] devices, which, again to Vinny's point, has 40-gig kind of trunk or aggregation, which we've done to 100 and some to 400. But the other reason that's really important is that there's a product consistency we want across the board, both in terms of being able to instantly offer services and not have to worry about capacity, number one. It's always been a consistent thing we've had. But number two, there's a couple of new features that we want to enable. And we want to enable it across the entire network. And for us to do that, those devices we replaced, they're an average 4 to 7 years old. So we've got certainly a fair bit of a life out of those devices we've been replacing. So the path that we're working on is very much working on giving our customers, the enterprise customers, some intent-based networking and intent-based routing, and that new feature will be coming at, not that it's going to absolutely excite a lot of people, but the gigs in the enterprises really one of that product, and we're going to be able to deliver that.

Just stepping back a second, the 2 major changes I'm seeing from today's announcement are that repricing at $7 million to $10 million revenue, you take $7 million to $10 million costs out of the business. So put those 2 things together and next year, as I see it, that takes you 2/3 of the way to being free cash flow positive as in massively step changes the business. Is there anything wrong with my math there?

Seems consistent. And that's just -- again, I can't stress enough, the focus amongst the team is to make sure that -- but again, we built an amazing platform. We just had to tweak some pricing on it to make sure that our revenue is aligned with our costs and in the investment that we've made. And that's obviously where we've done this massive amount of work on infrastructure investment, network aggregation and simplification, and third, in terms of tweaking the product pricing. So you can see, as you said there, there's a $14 million to $20 million swing. That will occur -- that should occur over the next 3 to 6 to 9 months. On the VXC pricing, as Vinny said, we'd probably expect to see a little bit of churn out of that. But because it's effectively a doubling of the price, it will be -- we expect it to be net positive, which is taken into consideration. And when we -- as I said, when we look at that, I'd say that 67% of that increase will probably happen on a month recurring revenue base will happen in this quarter and then 30 to 40 will have to happen the second quarter or the fourth quarter, the next quarter because we have given 90 days' notice to some strategic partners. So some of that stuff comes in pretty quick. We've identified the cost outs. A bunch of those are already -- a number would have been completed. I'd say about 20% of it, there's another 25%, 30% that's -- we're just doing validation that's there and then the rest are expectedly done over the next 6 months or so.

One last question, and then I promise I'll open up it to network. Just obviously, new Chief Revenue Officer joined in late November, I won't try and pronounce his surname, but just comment, obviously, I presume you're very happy with that person just to get on the background. And do you see things changing materially within the business in terms of your revenue trajectory and go-to-market sales strategy, et cetera?

No. Look, Jeff, he's a very strong and capable person. We were happy when he came on with us. He's had an incredible background, 18 years working at Akamai obviously. In the cloud industry, he knows everything, knows the partners. He's, like I said, he's about 50-odd days into the job and right now is -- I've asked him to look under the hood. And the way we both felt about in the process and how we were going through it and with the team was that we kind of thought we've made a lot of the big changes we need to make, either with the channel or with the program to know all of that. It's just like, well, how do you feel about how do you want to run it and how do you want to share it. So I think if there's a change to be made there, they are kind of ramping more on the minor side of things as in tweaking things and to make sure that we're optimizing our sales structure to give us the best benefit for what we have, plus also our go-to-market and what tweaks and changes do we need to make there. And then just what we've spent probably the last 10, 15 months talking about is not only that, now we've got a network that's optimized. It's built. We have the operational efficiency there, how do we leverage that with the sales and go-to-market plans so that we can actually get more revenue coming in? And then obviously, that obviously helps with our cost profile and maintaining the cost control that we've got and it helps us steady our financial outcomes.

UBS. Go ahead, Tim.

Can you hear me?

Yes.

Sorry, just a couple of questions from my side. Vinny, just wondering if you can touch maybe a little bit on the ports added during the quarter on a gross basis. How are you thinking about the go-forward trajectory relative to that June quarter of, I think, you did 533? And maybe can you make any comments in terms of the pipeline that you guys see at the moment?

Yes. Sure. Thanks, Tim. So in terms of -- sorry, I'm just moving on to the slides here. Yes, so in terms of the ports, we have seen a good, strong start. We're nearly at the end of January now, more or less at the end of January. So we've had one of our stronger months, January, compared to previous periods. So I think a lot of it had been -- there has been a little bit of, I suppose, in general, that most people are talking about, people are probably holding off and making decisions on buying things, a little bit of uncertainty around the economy and what have you. But having said that, we provide very kind of key connectivity solutions to customers who want to use cloud in a very efficient way. So I think we've seen a little bit more of a timing difference there, and it probably will continue a little bit going forward as other macro developments happen and then things settle down. I think sometimes big decision makers coming into the year period at the end of the half year, or in our case, the calendar year in the U.S., some of those decisions get held off until a new financial cycle opens up and a new budgetary cycle opens up for a lot of enterprise customers, particularly in the U.S., which is a calendar year. And we started to see that come through for the beginning of this quarter.

Got it. And just kind of following on from that, in terms of the strategic port consolidation impact, I mean, I know that you guys said that you're expecting a little bit more consolidation following the pricing increase that you're about to put through. Should we think about similar sort of kind of impacts around that kind of 125, 155 ports for the next couple of quarters? Or do you think that reduces materially from here? And then just the final question for me. Can you talk a little bit about SD-WAN, the partnership with Cisco? How are you seeing the sales pipeline momentum, et cetera, going there, please?

Yes. Look, there's still a bit more port consolidation to happen. I think we'll see it through to the rest of this financial year. Over the course, it will reduce over the next 2 quarters. I think that's the -- and that's a positive thing by the way. Obviously, we have to grow -- keep growing our sales, and that's important from that point of view. And the consolidation and the port has a big impact on our margins, right, and as we talked about that and how we consolidate our network. So I think that has a bigger impact for us, not just -- I mean, they're not -- it's not revenue impacting, that's port consolidation. It's all internalized. But what it does have is it has a big impact on our gross margin and our operating costs. So I think you'll still see that probably as we finish that over the course of this financial year. Sorry, Tim, what was the last part?

Just a bit of an update in terms of SD-WAN partnership with Cisco, sales pipeline within that part of the business, please?

Yes. So I had that chart there on Page 8 in the presentation when we talked about PartnerVantage. So we're continuing to build that out and that's with our SD-WAN, not just our SD-WAN partners, but resellers for all of our products, right, because that's important. It's not just about MVE either. It's also about selling more ports, more VXCs, more connectivity across all our product portfolio. So that's continuing to grow. We expect that to continue going forward and sort of -- throughout the rest of this year and onwards. And we're -- like I said, we've got our team in place and we're building on those relationships every year other day of the week.

Next on the line, we have Bob Chen at JPMorgan.

Great. Just in terms of the sort of strategic review comments, can you provide a little bit more color on what you're potentially thinking about here? I see some words there around operational efficiency as well as maybe automation. Could we see maybe some changes to head count across the business as well going forward?

Yes. Well, basically, I think there's enough information in there that we're looking at doing that. And I think it's more of a half year. We're going to -- we just want to give some -- be open about how we're doing that. Honestly, from our standpoint, we've done great work on reviewing the cost of goods sold in terms of network side of the business, the significant reduction in CapEx, increase in revenue. The one area that we really want to focus on is how do we make sure that we do a full cleanup of the legacy contracts, arrangements and things to make sure that they're fully automated and actually within the business, and to make sure that, as a business, we're operating as efficiently as we can.

And probably just to add to that. The automation and component is really important for me. That's one of the key things that we see is really important to driving our financial outcomes and our margins, and that's optimizing and automating as much as we can, not just on the customer journey, but also internally in our -- in how we manage and run our business right and our support internally and how we do that, and taking as many of those manual areas away and making it automated and streamlined as simply as possible, the same way we deliver our service to our customers. So 2 aspects to that automation piece that are really important.

Okay. Perfect. And then just on the comments around Megaport ONE, the MRR-driven though, sort of $2,000 at the moment with another $10,000 closed in January, and it looks like a pipeline of around $100,000. How healthy is that pipeline? And how is that pipeline sort of growing as well?

So Megaport ONE or just in general? Are you talking about the Slide 8?

Just Megaport ONE.

Yes. So -- well, we've only got 1 significant customer -- 2 customers. But 1 significant customer at the moment has continued to grow, and maybe Sean may want to jump here on the actual numbers themselves for revenue. But -- we just came back from PTC, with Pacific telecoms conference, which we got over here and it's a huge event for us and a lot of partners. And we had a whole demo room cell for Megaport ONE. It's not for every enterprise, right? It's mainly geared towards large resellers or a data center operator or a network service provider, et cetera, who have got many, many clients, and we're going to help them with a white label solution to actually optimize a resell our network and our IP that we've got to help them sell their own their product, right? So the case in point, I think it was Orange, Orange telecom, out of Southeast Asia and Singapore, and they've adopted it and they are -- in turn, they don't have a corporate portfolio. They don't have a corporate service offering that has a cloud service offering, and so they're using Megaport ONE to sell that. And it looks and feels like it's an Orange product, but it's our services, the same way we've done it with Digital Realty and et cetera. So I think it's something that's going to continue to grow. Coming back from the conference, we have a strong pipeline. There's at least -- there's half a dozen, at least, very strong prospects that we have that we're looking through, that we need to take a bit of time to -- takes a bit of work to deliver and get it all put together. But at the end of the day, they're meaningful deals. Sean, do you want to add to that?

There are -- that's pretty much all of it. That's pretty much the way it is. We have 2 active customers at the moment. One that is very much concentrating on the -- through the cloud element as they turn up engaged. And the other one is using kind of the [ 2 ] of the cloud, the more traditional kind of white label of Megaport portal. That deal was signed in Q2, and we're starting to see kind of the reselling of that coming through in the current quarter. We've seen their RFPs out for their customers. They're winning deals and using Megaport ONE or using Megaport cloud connect services as part of the overall solutions they're providing to their customers. And it seems to be very compelling proposals that they are winning business with and they're extremely keen. And they're working very closely with our account managers and giving us good visibility of the kind of deal registration and the life cycles of those deals that they're working on. And if it's an indicator of how versatile and how adaptable Megaport ONE is as customer -- as a product for these kind of resellers, I think it's a clear example, and I'm only having an Orange business as some sort of like a [indiscernible] as a reference.

Next from the line, we have Ben Rada Martin at Goldman Sachs.

Can you hear me?

Yes.

Excellent. I might just ask 2, if that's okay. First one is just on MVEs. Obviously, you had a bit of a difficult quarter, both from MRR and new customers. Actually, interested in what kind of changed in that quarter, whether it's less the sales focus or whether it's anything to do with the kind of partners that you sell through having less success.

MVEs, specifically, there's probably 2 aspects to it. One, we've had a good few, what we call proof of concepts or, POCs, which were activated in the first quarter or whatever end customers typically start them off, turn them on and then turn them off again. And then once the proof-of-concept project is completed, they reengage with the service and build it out. And that's part of what we've seen, a big -- an uplift in services in MVE have come into January. We had that same scenario that happened back in June, July and August when we had -- when we launched the product and services were turned up as proof concept. These are large Fortune 100, 200 companies, so they're not small. So they have to think about things they and what to do in a sort of an isolate way, bring it all up. It hasn't been revenue impacting because a lot of proof of concepts we do have been more about, here, take it, try it, see how it works. And then, they stand it down and then bring it back up. And that's kind of what we've seen on that. And I'd probably just couple that with, like I said earlier on, there has been a little bit of the end of the financial year ending December and also just with the overall macro economy side of things, some of the decision-making on certain things have slowed down a little bit. But these are big decisions they're making on MVE and where they want to locate in logistics and the size of them. So they're not small. They are big decisions. And that's been a contributing factor to what we saw at the end of quarter 2. But the good news is the start of quarter 3 looks good and healthy from that perspective.

Great. And maybe just one more on the cloud VXC pricing changes. Maybe just interested if you guys can talk into a few more of your assumptions on kind of the spin down or churn you're expecting and the kind of net pricing increase. That would be great.

Yes. I don't want to go into a lot of detail, but we're generally comfortable in those numbers. Probably at the half year we might give it a bit more analysis. But I think we've got an [ advantage ] over there that I think is -- I certainly hope is conservative, but we'll wait and see.

ZheWei Sim from Macquarie.

Can you hear me?

Yes. Go ahead.