Megaport Limited (MP1) Earnings Call Transcript & Summary

[Audio Gap] And Leticia Dorman, Interim CFO, with us to take us through the presentation. This will be followed by Q&A. And for those who would like to raise your hand, we'll let you ask those questions live when we get to questions. We might hand over to Michael to take us through the question.

Fantastic. Thank you all for joining us online for the investor presentation, FY '23 full year results. We've got a packed agenda, so we're going to go straight into it. We're walk through company highlights. I'm going to pass over to Leticia sitting next to me here for the annual results, I'm going to walk through the business update and straight into outlook and guidance. All right. Let's start off with FY '23 highlights and what a cool half year, revenue $153.1 million, that's up 40% year-on-year, an additional $43.4 million coming in from a revenue perspective. What you'll note here, which is incredibly exciting, is gross profit is growing faster than revenue at 52% year-on-year growth, up $103.9 million and up a $35.6 million. Normalized EBITDA, we're going to talk about this shortly, but this is a monumental milestone for Megaport, $20.2 million, our first-ever full-year of positive EBITDA, up $30.4 million. Our net cash flow position was down $34.5 million, sort of a massive turnaround in the latter half of the year and particularly in Q4, we're going to work through that. We're up 31% or an additional $15.4 million from a net cash flow perspective year-on-year. Breakdown from a revenue standpoint, we talked about the $153 million. North America is our largest market, $85.4 million of revenue coming from that region. That represents 56% of our global revenue, and it's our fastest-growing market at 48% year-on-year. And folks we're only just scratching the surface, which is why you'll see us continually investing in that space moving forward. Asia Pacific which is our most mature market, $43.4 million, up 30%. That represents 28% of the global business and EMEA up 32%, 24.3%, clocking at 16% of our global revenue. Our normalized EBITDA, I called it out before, this is our highest on record, what a turnaround and a tribute to the success of the Megaport team. I want to thank everyone for their efforts here, up to $20.2 million. You can see the turnaround between FY '19, '21 and '22 and just that the green line there that we're incredibly excited to share. Moving into net cash flow. As I mentioned, net cash flow for the year was down $34.5 million. However, the real story is when we expand that out and we start to look at -- sorry, Steve, we should move over a little bit there. If you get to -- we've expanded out the FY '23 number and broken it down by quarter. And you can see Q1, Q2, Q3, all negative, the turnaround that occurred late Q3, a big shout out to our Chairman, Bevan Slattery, big — to help us turn that business around and clocked in at $2.3 million of net cash flow positive. And I want to call out that that includes the redundancy payouts of $2.6 million. So after paying our $2.6 million, we clocked at $2.3 million net cash flow positive position for Q4. We are calling net cash flow positive for FY '24, and we're going to talk about that further in the deck today. And that leaves us with a net cash position of $33.3 million. All right. Let's move into the annual results and using some very advanced AI technology, I'm going to beam in our CFO.

Thank you, Michael, for that incredible demonstration of technology. So the financial results for Megaport for FY '23 are impressive. The revenue growth of 40% is really driven by the organic growth and then some cloud VXC price increase, which we announced in March. The direct network costs in contrast have only grown by 6%. Now that's incredible and that really reflects that drive of the business, particularly in the latter half of the year across all contracts and every negotiation to really take that down to manage that cost control efforts to pull us into FY '24. The partner commissions are only up 1% when you compare that to as a percentage of revenue year-on-year, and that does see new partners and managed service providers, bringing us those opportunities throughout FY '23. Operating expenditure is also a very amazing turnaround story, which is driven by the cost control across all areas, which I'll touch on in the next slide. Now employee costs, in particular, is not just the reclassification from the decision to pay staff and their performance incentives with stock instead of cash. It's also part of that continued cost reduction activities and really reassessing how we pay our staff and key executives. Marketing costs were up, which is really, you can see, driven by return to conference activities. It's also some third-party consultants in the first half of the year -- going into FY '24 and in the latter part of FY '23, we have really focused on investing in those activities that give us an incredible ROI. Professional fees, travel costs, other operating expenditure has also been driven by the focus on cost reductions. So you have seen all areas reduce compared to FY '22. The cash flow is also a key highlight for me. In particular, the operating cash activities is a net inflow for the full year of $10.2 million. That is a direct result of that correlation of higher revenue for the year, but also the lower operating cost from the cost-out program. Investing activities are also down, which is a direct correlation to that lower expenditure in actual equipment compared to FY '22 as we make use of our inventory stock. Financing activities has increased, which is a direct result of the increased net repayments under the vendor finance facility. However, there is also reduced proceeds from exercise of employee share options in comparison to FY '22. Capital expenditure is another area, which I know we've touched on previously. However, I do want to highlight that we had invested heavily in the inventory stock levels to support the rollout of equipment to deploy to the network, which is not just upgrades, but also replacement for existing locations. We have continued to invest by holding that stock within our [indiscernible] and we will continue to do so in FY '24, utilizing existing stock and making purchases of key items of technology as required. The financial position. The call out here again is that net cash position that we now in for as at 30 June 2023. That cash is in, you can see in that line item, however, the vendor financing liabilities sits between current liabilities and noncurrent liabilities. The overall story, from my view, would be really that you can see that incredible performance compared to FY '22 in the revenue line. When you contrast that to the minor growth in the direct network costs, which is the cost of operating that entire network to support that revenue growth and also the activities of the entire organization to really focus on that cost reduction across all OpEx activities. All of that -- majority of that revenue growth has really hit that bottom line for both gross profit and EBITDA. The operating leverage that we're leaning into for FY '24, when you look at that month of June compared to previous years is again a really telling tail across all those categories. Revenue has gone up, gross profit has gone up and the EBITDA has started to come up, particularly for the normalized EBITDA started too. You can really see the journey there. So I'll hand over to Michael for a great business update.

Fantastic. Thank you, Leticia. All right. It got seamless. Okay. And of course, we should kick off with what is a pirate's favorite metric? ARR. I'll just pause and give you a chance to stop laughing, and then we'll keep going. Obviously, a little dad-joke there but we're known for them here at Megaport. Annual recurring revenue, folks. We shared this at the 27th of June, but I will -- I've got a little laser pointed at, they allowed me to have a laser pointer. So over here on the right, you'll see $179 million of annual recurring revenue for Megaport. If we break down to $100 million of annual recurring revenue for North America. That's a significant milestone that we've crossed. And if you look at that, we're up 45% year-on-year so an amazing achievement to cross that $100 million mark. Nearly $50 million in Asia Pacific, our most mature market, up 25%. Again, a significant milestone there as we get close to crossing that $50 million mark and $29 million in EMEA, up 46%. Customers, one thing that sounds me, I get an opportunity to go and meet a whole range of our incredible customers, our partners and managed service providers, et cetera. Just the sheer diversity of our customer set is astounding from the largest of the Fortune 100 through the government critical infrastructure around the world to small businesses who leverage the cloud to cloud native companies, you name it, across the board, Megaport has 2,856 direct customers on Megaport. That's 1,600 in North America, 1,051 in Asia Pacific, 578 in EMEA. You can see that they track very similarly to the annual recurring revenue. Now we're going to pivot or change gears, should we say, just for a moment, if you can bear with me, I wanted to give you a perspective of what it's like for a customer without Megaport and transition you into a customer that does have Megaport to articulate the value that we provide, but also share the product standpoint so that we're going to go into those product KPIs, et cetera, moving forward in this session, I want you to be aware of what that means. Now I understand that not everyone on this call is going to be in tech. But what I would do is just walk through this with me if you're okay. I am going to draw your attention down to the bottom left. This is our customer data center. These data centers sit inside colocation facilities. So all of our data center partners. We have 800 of these. If you didn't have Megaport, you would have a customer facility that sits here. Now what you can see is this is compute storage and network that a customer has provided. And you can see it's broken down all these different hardware investments. Now they're running their applications inside their data center. And for the past decade, we've seen this connectivity towards cloud, Azure, GCP, AWS, and there's not one cloud to rule them all. There's this space that you're constantly having to connect to multiple. Now if you look at this breakout here for the business, they're going to have to connect a whole range of carriage and service provider contracts. This is their one data center. They probably have others. They need to connect to those other data centers. They need to get prices for connectivity for each of these clouds. It could take you roughly 2 weeks to get a price, probably takes you 2 to 3 weeks to actually go through a procurement process with that particular [indiscernible]. You then probably afterwards, let's say you've made a decision, you've then got 6, 7 weeks to go and deploy each of these services. Then you've also to go and connect inside your branches as well. So what you have is a whole range of contracts. Most of them are going to be multiyear contracts. Each of them are going to be different depending on the carrier in each location, then you're physically connecting them into your infrastructure, you're managing all of that complexity, you're buying infrastructure inside your [indiscernible] servers to run that. And it takes a long time to go and execute against that. So that's [indiscernible] they basically doesn't have access to Megaport. Now I'm going to mix this to a bit of a busy slide, but I'm going to walk you through it slowly so stay with me. This is a customer that has Megaport and just contrast that. We're in the same data center over here on the left. However, what you see is this Megaport infrastructure that we've invested in 800 data centers, we can connect into Megaport from. Here is that customer you'll see a reduction in the infrastructure that they need to procure. And all they need set of all the previous connections that you saw, each one with a different contract, each one in a different country could be different carriers, et cetera, all that [indiscernible] to get to Megaport around 26 countries around the globe is this one connection. This is a cross connect in the data center, and it comes to our port. This is the port that Medco constantly refers to Megaport. This is the Megaport. Once in this port, you'll see our 2 diversions in this massive Megaport network that we've spent the past 10 years building out. This is incredible for competitors to try and access what we live, and it's a phenomenal investment that's continuing to grow. And as Tish said, the operational efficiency that we have on that existing investment is astounding. Once you're inside that network, you can see we do all the complexity for you. We connect you to every single cloud provider around the world and across the globe in many different ways. We connect you to 800 different data centers. So here that one connection, you grab that port, you spin that port up in 60 seconds, and then you take what we call a VXC or a virtual cross-connect and then you can connect into any one of those clouds and spin that up. I'm going to also talk about Megaport Virtual Edge, MVE. Now what you have down here is customers that have branch locations that need to -- that might be running SD-WAN as an example, and they're crossing into the Internet. How do you go and access all of these same cloud providers? Well, with Megaport Virtual Edge in less than 60 seconds, you can spin up all the major vendors inside our platform and give a direct connection into our network. What's interesting about this is there is no need for a Megaport port. You can actually access it through this MVE. The sign from the Megaport Cloud Router perspective. This gives you access into the Megaport network. Now, if you -- as I've mentioned before, there's no one cloud to rule them all. You might have had a decision to go down AWS's path and then you've got Office 365 and now you've got Azure, you're going to expand into that space. GCP is adding a huge amount of value in different areas. And you're constantly managing those different ones. Oracle steps into the scene, IBM, et cetera, [indiscernible] and it continues. But what happens is you've got data that sits in one cloud, and then you need to move it to the other cloud. Now you can do this without Megaport. Of course, you can leverage the Internet, but you have to pay for the exit costs, which you call egress. MCR reduces your egress costs by up to 40%. You can spin it up in less than 60 seconds, and you can connect it to any one of those clouds. And so, we also have some components called Internet Exchange and our ecosystem. I won't go into that now. But what I am going to try and do is switch this to a demo and show you the power of the platform. Now bear with me, I just have to stop screen sharing to make sure I don't cancel what I'm doing, change the screen. All right. Hopefully, you're seeing what I've got here. This is the Megaport portal. You can see it's a very clean portal. There's not much going on. What I'm going to go and do is I'm going to add a port. So let's start by creating a port, I click that Create port. I'm going to pick a location. We'll go into the United States. I'm going to now choose a data center, 800 data centers to choose from. Let's go to a Cyrus, let's pick CyrusOne, let's pick Austin, and we'll click next. All right. Let's pick the support speed. We'll go 10 gig. We'll give it a port name, Michael Anthony Reid. That's my name. And I've just to prove this is live, it's 10:49 on my life phone there we go, and will scroll through— this video is in my way so move that to the side. So I can see the screen. All right. There we go. Click next, and I'm going to click add the port. And over here in our cart on the left, you can see that port [Technical Difficulty] I click on order. And there is, we're ordering that service, ordering now. And as you can see, we're deploying. So what have I done? I've gone into a data center in Austin, into CyrusOne, Cone, and I've gone and deployed a port. Once inside our physical infrastructure that our customers can now connect straight into. Once you've got that port and it takes 60 seconds to go and deploy, you can then access anywhere inside that Megaport network. And we're deploying. Let me just give you a viewpoint and I'll talk you through this. Sorry, this is better? Too many things to share, regardless. Let's go here. It's all being deployed and it's going to grab our service. There's the mega Michael Anthony Reid, 10:49 deployed. That's the port that's been deployed inside the CyrusOne Austin. We're obviously just waiting for the resource to be allocated, but it's up and it's running. Now what I wanted to do is basically connect a connection from that port through our VXC to AWS. Now, I can click on this connection up here, and we can add there's thousand different connections we can go to or I can just quickly go down here and click AWS. Now I'm going to go through here. I'm going to scroll down and I'm going to click host a connection. I'm going to pick -- I don't -- I don't need to go into the United States. We'll keep it in the same terrestrial land. And we'll go, let's go East Coast, and we'll go, there we are, Virginia East Coast, and we'll deploy that. So we're connecting into AWS, and we're going to do that in less than 60 seconds. Let me just connect the name. Let's call it [ MARC ] you can see. We're going to pick a rate limit, let's go a gigabyte. Next, give it an AWS account. This is your AWS account specific to you. Next, add the VXC. It goes into our card over here. We order the VXC and where we go. There it is. We've actually -- what we've done is ordered a port and then we've connected a VXC into that AWS platform, and we've done that in probably a couple of minutes. Now compare that to possibly 10 weeks of time to work with your existing carrier and the fact that you can spin those up and down. There you go it's done. It's very, very simple. It's CEO proof evidently. Under 20 seconds. Okay. There you go. Let me go and get this share in sorted out again as I switch you back. Can you share Okay. With me -- All right. How does that look we're back. We did it. All right. So I think when I first stepped into the role, I basically sent out a questionnaire to all of our customers, asking them one word to describe Megaport. it's always good when you step into a company, you ask me, what do you think Megaport is? Everyone tell you it's easy, it's simple, it's flexible. This is from 227 customers of ours responded to that survey with one word to describe Megaport. And as you can see that easy, simple, dependable, reliable, flexible, agile, amazing. You can actually see that, that's in the deck, and you can look through some of those on words. We've also got customers that added multiple words because they love us so much, and you can see that through there. Now we're going to go down a little bit -- another slight rabbit hole, shall we say. I want to go into detail around cloud service provider, 100-gig port expansion and then the 10-gig consolidation. So if I look back to a number of the different earnings calls prior, I will say that they got confusing around what is cloud service provider port consolidation? How does that play out from a port count perspective? Now I'm mindful that there's a lot on this slide, so I'm going to walk you through it slowly. There's 3 phases. Phase I, Phase II, Phase III. Let's just start with Phase 1 here on the left. When we look at a Megaport data center, that's this bottom dotted line here. This is where we put our physical infrastructure into a data center. We allow a customer to access that port. Now I just showed you how quickly a customer can access that port. That's a 10-gig port that they've just gone and turned on. We did that in less than 60 seconds. They then get access to the Megaport network. And what I do is I ran a VXC to AWS, which was from this customer through into this cloud service provider that we have at the top. And the great news is clouds actually don't live in the sky. They live in physical data centers, their physical infrastructure, as someone would say to someone else's PC or computer inside a physical data center. Well, we live inside those data centers too, and we provide the connection. We have a port that connects into that cloud service provider -- so that sort of orientates you. Phase II, what happens is we start to grow customers inside that data center more take out 10-gig ports, et cetera, et cetera. And we need to increase the capacity that we have into our cloud service providers. So you now see 6, 10-gig connections into that cloud service provider. Just to be clear, these purple lines are costs to Megaport. The purple lines on the bottom are actually the customers would pay for that access to us. We pay for this connectivity into the cloud service provider. We charge a VXC to a customer to go across it. So then let's go to Phase III, where we've scaled the business appropriately inside those data centers. And this is where we take 10-gig ports, consolidate them down to a single 100-gig port. Obviously, that gives you 10x the capacity. So in this particular example, we've actually reduced 6 ports and added 1. So it looks like we're short 5 parts, but the capacity has gone up. So if you look at how that plays out, CSP port consolidation across the top, our revenue goes up, our capacity goes up, our ports go down from a quantity of ports and our costs also go down. This is a really good thing for Megaport, continuing to consolidate those costs down to bigger VXC. It also gives our customers the ability to scale up significantly larger connections into those cloud service providers. So moving into growth in customer ports. So let's walk you through what that looks like. And we've broken out for the first time those cloud service provider ports, CSP ports and our custom ports getting a little bit technical, but I think it's worth going into folks. The darker blue represents the customer ports, the lighter blue wise, if you want to recall that represents the Cloud Service Provider ports, and you can see those compressing at the top. That's a very good thing. So when we look at the total customer ports and talk about year-on-year growth for total customer ports were 9,172, that's 8% year-on-year. Now if we go into total cloud service provider ports, we're at 791, that's actually a reduction of 26%. That is a good thing because it reduces our cost. But here's where it should come home. Aggregate cloud service provider port capacity whilst reducing the number of ports by 26%, we are up 32% from a capacity to 27 terabits. Hopefully, that gives you a perspective on —I've broken it out here. Here's an FY '22 278 cloud onramps FY '23, 284 up. 10 gig cloud service provider ports down $383 from FY '22 to FY '23 and yet up here 104 100-gig ports in FY '23, taking that capacity, as I talked about before, from 21 terabits up 6 terabits per second to 27. So you can see we've increased the value that we can offer to our customers whilst reducing our costs down. All right. And I think this is the appropriate focus point here is growth in total services. Remember, you can access Megaport not just by a port. You can use MVE or MCR from an access perspective. And then it's the total services that you run across that. So at 30,516 services, up 11% year-on-year. 10.7% services per customer. And you can see $5,853 million is the annual recurring revenue per service, up 25%, and you can see how that's been trending over time. It's a beautiful slide. All right, Megaport Cloud Router and Megaport Virtual Edge, you indulged me before when I talk through some more technical slides, this is the Megaport Cloud Router and the Megaport Virtual– MVE, Megaport Virtual Edge product set. The darker blue is MCR. You can see when we introduced our product set in June 2018, you can see how rapidly it's been growing inside the business. And you can see the same when we added in MVE. Now what I do, I want to highlight is this average services per customer. If you're a port only customer, only have a port with Megaport, you have about 9.6 services. If you're a more sophisticated customer in terms of your engagement with Megaport, you've understood the value that we provide. You look at -- going to MCR, you've got 15.1 services. If you go to MVE, we find that customers take out 20.5. The more sophisticated a customer that uses our technology in a more sophisticated way, I should say, gives us an opportunity to add more and more services. Well, how does that translate from an ARR perspective, $54,000 is if you just have a port in a VXC, you can pull that nearly double that when you add an MCR to the equation and you can almost -- or you can over triple that when you get to the MVE equation. So what does that mean? MVE and MCR are significantly more bang for their buck, and it's a great opportunity to help go back to our customer base and articulate the value that we bring there. We get into quickly some key metrics. We're nearly towards the end folks. Thank you for hanging in there. Let me just draw your attention to the right, Aggregate Customer Lifetime Value. This is the lifetime value of all of our customer base added together over time from June '19 to June '23. We've crossed over $1 billion of aggregate customer lifetime value. Now let's switch over to this top left box. Our Average Customer Lifetime value is 9 years. 9 years -- we're only 10 years old. So that's an astounding number there. Our customer lifetime value is $384,000. Our LTV to CAC ratio, a measurement of the efficiency to bring new customers into Megaport versus the value that they provide over time. And that's 5.5 an appropriate industry standard there. Our rule of 40, and that's based on EBITDA, Rule of 40 is at 53%. You want to be -- this is a measurement of the -- again, the efficiency of the growth that you're bringing into the business versus the costs associated to access that growth and gives you a perspective, the goal here is to be over 40 for those of you not familiar with Rule of 40, we're at 53% for the year. Sorry, and I might call that out, up from 31% year-on-year. Let's go into the Annual Recurring Revenue contribution by cohort, one of my favorite representations of the business here. Now what you're looking at is each color on this graph represents a different cohort of customers depending upon the financial year that they came into Megaport and how they progress over time from an annual recurring revenue perspective. And you can see when we've added in different products along the way. What this chart represents is an incredible net retention ratio and value for Megaport from our existing customers. Our customers are incredibly sticky and expansive, and you can see each one of those is expanding over time and then stacking on each other to deliver what is this annual recurring revenue, which is fantastic. We've shared these similar dot slides in the previous year. If you look at it, it starts at FY '14 here on the right and then progresses to the latest years here. And you can see each one of these breaks down the year. This is average services per customer and then the average ARR per customer. These are pretty much intrinsically linked. The point of what we're showing here is over time, our customers add more and more and more services, and they continue to expand from an ARR perspective. And lastly, from a customer cohort and a survival perspective, you'll see a similar breakthrough in FY '14 here FY '23 on the left. Our customers that sign on —if we get to take to FY '14, we still have 51% of that cohort of customers inside Megaport today after 10 years. So we have incredibly loyal customers with resilient business. One thing I'll also point out is, once you cross the first 2-year mark with Megaport your retention inside that business stays. Our customers get stickier over time, which is also worth shouting out. All right, into outlook and guidance. So in the previous July 27th session, I talked in detail on the reigniting the sales machine. I'm not going to go into that detail here, but what we'll do is give you a bit of an update. It still remains our #1 priority from a go-to-market overhaul perspective. As I mentioned on the Thursday, on Monday, we opened up 20 new roles publicly on our website. We've had over 1,000 applications. I actually called out to the investor community to help us tell the world that we're hiring, and I think you've done an amazing job because we've got 1,000 applications. We've interviewed for 13 different roles. My CRO contacted me before and said, actually, none ever got 3 offers in the market. We've got a person who started, who left Megaport has come back to Megaport of our top reps has actually joined us is his first day today. So welcome back to the business. Customer success hiring is underway. And one thing I'll point out here is, as I mentioned in July, we had one single customer success person servicing 1,600 customers in the United States. That does not make sense just to be clear, but that's what we did have. And we're investing to grow out that team right now. But my point around that is we continue to expand and grow that business, showcasing the product-led growth nature of the platform inside the existing portfolios that we've sold. The [indiscernible] breakdown, functions metrics has rolled out. Compensation plans have been issued to the sales team driving the right behavior. Territory breakdowns are complete. Tim has done an incredible job across the U.S., breaking down sustainable patches that ensure that sales folks can be successful when they come inside our business, have the appropriate customer base and also have an opportunity to scale with our partners, et cetera, in those regions. FY '24 guidance. So, we're calling $190 million to $195 million of FY '24 revenue. EBITDA, by the way, that's growth of 24% to 27% in revenue for FY '24. Our FY '24 EBITDA is upgraded to $51 million to $57 million. That's a growth an astounding growth, if I might add, of 152% to 182% year-on-year growth in EBITDA. Our FY '24 net cash flow, as we called out, is positive. And so long as basically including all the investment that we've got from a sales perspective. Megaport is now in a very strong financial position. This gives us an ability to breathe. It's an incredible turnaround that the team has gone through and it also gives us an ability to invest. We are a growth business. We have only just scratched the surface of the customer base that we can access, particularly in the United States, but worldwide. We've continued to invest in that go-to-market engine to drive that top line revenue growth, and we're returning to a culture of innovation. You would have seen us launch Megaport reached most recently. You'll continue to see us launch new products in FY '24. Just to give you a visual representation of the revenue guidance, you can see how that revenues progressed from FY '19, FY '23, and that $190 million to $195 million is represented there on the right. And also, if we go and look at that EBITDA updated guidance, what a turnaround. We've come from a negative $24.7 million in FY '19 to $51 million to $57 million calling from an FY '20 guidance perspective. All right. We made it Steve. We got there. I'm going to pause. I'm going to stop sharing. We hand over for questions. And thank you all for bearing with us and hanging in there throughout that presentation. I know we went deep on a few pieces. I think it's worthwhile.

Okay. [Operator Instructions] Kane Hannan from Goldman Sachs.

Maybe just starting with the FY '24 guidance upgrade. So can you just step us through some of the main changes in your assumptions that have come through so since that original guidance? How much is the pricing churn benefits that enter in the fourth quarter, the annualized [indiscernible] offset by, I suppose, the step-up in investment sales that you've been talking to?

So I guess in terms of the key driver is the revenue growth, I would say, but also seeing that full cost out come through, offset by knowing that we will have to go and invest in the sales team and then the go-to-market strategy.

Yes. And is that revenue growth specifically, I suppose, of less churn, better pricing outcomes in 4Q?

Yes.

We expected a higher churn or protected ourselves by having a look at a higher churn based on the price rises. And that was the change that we saw in Q4. It wasn't like when it was high as what we expected.

Yes. And just in terms of currency, obviously, we see some sense in the guidance -- can you give us a sense of what I so EBITDA be would be if you were to run for FX in your guidance?

I think probably not. I think we'll try and predict the FX movements inside the business, hard to [indiscernible] guidance on that all predicted. So what you can see is the percentage breakdown of the revenue that does come from the U.S. and you can sort of run your model in based on that. And you can also see the ARR percentage of revenue based on the U.S.— based on our exit, which would be an appropriate way to sort of measure those fluctuations in FX.

Is there much, I suppose, from a corporate cost based in the U.S. so by translating the U.S. revenue back to Aussie we have to think too much about the cost base that off shore.

The -- well, there's -- obviously, the largest portion of our revenue comes from U.S. We service that revenue base with expenses or folks based in the United States. And so those 2 would be linked in terms of the -- there's no FX benefit of having the folks here. But what I will say is what's different to most of the Silicon Valley sort of companies that I've had experienced with that are global, our cost base here in Australia is really impressive compared with trying to hire folks inside Silicon Valley inside San Francisco, particularly developers, et cetera. The other piece that I thought I'd just sort of aside is that one of the challenges with being based in the Bay Area in San Francisco is your team is constantly getting closed. So you end up with a cycle of folks moving in and out of your organization, constantly trying to meet pay increases, et cetera. So it's like -- it's very disruptive. We're based in Brisbane and we have this -- we're one of the very few global tech businesses that I'm aware of that's been founded and grown out of Brisbane. And so our cost base is not only lower compared to Silicon Valley. And by the way, our team have a great lifestyle because it's a great place to live. But also, you're not getting this constant churn where Google, Amazon, Facebook, Microsoft, et cetera, are sweeping through talent constantly. So it's actually sort of 2 benefits there.

Yes. And just lastly, just talk about the compensation plan has been issued to the [ stats ] team. Can you just talk about what the key KPIs are that we'll hopefully see come through your reported metrics that we can see that the sales investment is it starting to pan out?

Yes. The goal for us is to grow our annual recurring revenue and to do that in a sustainable fashion. So if you look at -- when we talked about the accretive nature of our business, so that net retention, basically, you -- it's like compound interest. You put it all to the machine, it starts to expand. That is a new logo. We are hunting new customer logos to add to that expansion machine. But we've got a significant customer base, over 2,800 customers. So servicing that existing customer base continue to get expansion and improved net retention ratios over time to actually take -- as I was sort of articulating those product sets, we've got a huge amount of customers that just bought a port and just bought a VXC and have no understanding that we have all these MVE AND MCR platforms and other products that we'll look to launch moving forward. So we've got an ability to expand within our existing customer base. Now if you look globally right now, expanding inside your existing customer base in the market conditions that you've got is significantly easier than hunting new logos. So what we've done is balance the 2 of those equations and ensure that we are incentivizing new Annual Recurring Revenue growth inside existing customer base and the appropriate hunting of new logos in the business. And that, by the way, comes with our partner engagement, too. So it's not just the frontline seller on that. That's actually a huge partner community for us to deliver that as well.

Tim Plumbe from UBS.

Can you hear me? I'm sure there's lots of questions. So I'll just ask 2 and get back into the queue. A little bit further from Kane's question. You guys had identified $10 million of cost out. Can you give us a sense for how much of that $10 million you are planning to reinvest? And then, I guess, on a time-weighted basis, how much of that is impacting or going into FY '24 guidance, please?

So the -- in terms of the FY '24 guidance, Tim, the real reinvestment of that is back into the sales team to ensure that we are ready for that go-to-market strategy. So that's the key reinvestment piece.

In terms of quantum, quantum.

Let's not go into the detail of the quantum because it's related specifically to headcount and when we bring that head count on. So there's a timing element to it, i.e., we've opened the head— the reps depending upon how quickly we can fill those roles, have people start in those roles will depend upon how that flows as opposed to just saying we're going to expend millions for the year. It needs to be weighted through there. It's hard for us to give you guidance on that. What we have been clear on is the increase in 20 heads into the business from a sales perspective, being clear around where that's going. The majority of that goes into the U.S. So you'll see U.S. exchange rate paid out an appropriate pay levels for folks inside those regions.

Got you. And just to clarify on that or that is taking the direct sales team back up to 30?

So when you look at -- yes, but when you look at the investment from a sales perspective, you've got to be careful not to throw everything in frontline sales without the appropriate support. And so you've got to balance the investment. The majority of that investment goes into frontline sales, revenue-generating quota-carrying capacity-led sales teams, which are supported by solutions architect at the appropriate ratio and also our customer success, as I've mentioned before, expanding our customer success team. So we ensure we're bringing so much more value to our customers and servicing them in a much better proactive way versus what we're doing in prior.

Okay. And then just the second question, that revenue growth of 40%. If we were thinking about in 3 different buckets of pricing increase, new customers and increasing revenue from existing customers is the customer maturity profile improved? Are you able to give us a broad breakdown of how to split up that 40%, please?

I want -- yes, let's not go into --

Yes, I would say the majority of the revenue growth [indiscernible] was from organic, so it was over 80%. The VXC pricing increase has kind of come through in the latter part. So you will see more of that drive through into FY '24.

The VXC price increase because of where it was late in the year -- affect revenues highly. But even that, the price increases on existing customers. So again, that with the organic growth inside the existing customer base we have referred to before, those were coupled together give a larger portion to existing customer base growth.

Roger Samuel from Jefferies.

Two questions as well. First one is on your CapEx. Can you give us the guidance on your CapEx for FY '24, please? And what's the breakdown between capitalized wages and PP&E?

So I guess in terms of -- there's no change to what we've previously discussed on the FY '24 CapEx guidance. That does exclude any specific strategic initiatives that we may come up with throughout the year, which is I just said it.

Okay. Any breakdown between the capitalized wages?

We'll be fairly consistent.

Pretty consistent with FY '23. Okay. Great. Second question is on your installed data center. Obviously, it has been coming down. Any new plans to increase that number going forward?

I'll get into that. So Roger, yes, great question. And I think Megaport's story over history is getting to as many locations as possible to get that reach. And eventually, you get to a point where we've got the majority of the opportunity covered off. So you're attaching the majority of the customers that you want to go after set you can get to that point, it's sort of a lower diminishing returns to just constantly add data centers. So it's probably not a good metric just to say data centers up or down in terms of whether that will be a huge revenue driver. However, what we have said is we've reduced down some of those data centers as part of that cost out. There are data centers that we've invested infrastructure and taking out additional leases and expenses that didn't make sense. So when we build a data center, we look at a business case. And if that business case can come to fruition or it doesn't make sense for us to be in that region. You could invest in the data and not have a single customer as an example because it wasn't -- didn't make sense actually. What we've done is we've launched Megaport Reach which you may have seen, which gives us an ability to go and aggressively expand the data centers, but do it in a very different operational expenditure component from our side. And so we can reduce our operational expenses by opening up new data centers and new markets. So it's a totally different story to where we were by having large costs in data centers with our customers, as an example. So we're sort of balancing those 2 equations, reducing where it doesn't make sense from an expenditure perspective and adding with data center partners that really want Megaport to be there, and that's a bridge hopefully that gave you a deep insight there.

Darren Leung from Macquarie.

Just 2 for me, please. I might have another go at the staff cost and the EBITDA guidance place. But maybe if we pause the scenario that if we were successful at adding the additional 20 headcount over the next few months, should we expect an uplift in revenue associated with that? Or do we have to factor we're in a delayed start time?

So let me take that one. Revenue is always the lagging indicator. Annual recurring revenue is a little bit earlier, leading indicator. However, if you think of where we are in August, we've opened the racks, we've had -- we need to get those roles closed people inside Megaport. For folks who are coming back were fully who knew Megaport really well, obviously, like that the gentleman I referred to prior, it's a very fast round because I understand what we're doing. For those folks that are brand new, it's going to take 3 months to understand the tech. It takes 3 months then to ramp. And so you think of that time to get— to get opportunities and customers and so forth. So you'll see green shoots starting to pear towards the end of Q3 and Q4, you'll start to see the metrics turn. However, that won't result in revenue because revenue is going to be of the lagging indicator of that factor. So we'll see the metrics as green shoots, and then this story really is an FY '25 story.

Got it. That makes sense. On that basis, if those sales people added in the next quarter or so, is it correct for us to assume that there may be a downgrade to EBITDA guidance and given that the cost base may be more inflated than expected?

No.

The only reason is, for some reason, there was a change in revenue, but would expecting that. So that's all within the budget that we've just provided.

And just one for me, please. The equity settled compensation costs of $3.5 million. Do we think about the $1 billion blocks into FY '24 for that line, please? I appreciate it doesn't act the EBITDA, but obviously, it impacts [indiscernible] evolution?

It will be -- probably it was $2.3 million, but you probably see a similar kind of amount, maybe a little bit more given the increased headcount.

[Technical Difficulty] on a PBI, so it shouldn't impact on the sales folks, the commission base rather than PBI.

Paul Mason from Evanston Partners.

I've got 2. So the first one, I was just wondering, I saw a sort of a headline that you've released firewall as a service product on LinkedIn. I sort of wanted to check whether that was actually you guys getting into direct security products or whether that was sort of just like a relationship with a partner like Ford analysis goal or something like that?

So I can let you ask, you want to try -- so from -- so Megaport Virtual Edge is what you're referring to. If you remember that sort of diagram that I gave you, we can spin up other vendors inside our platform, inside our data centers and we can spin them up in 60 seconds as an example. We've got a range of different partners in that space. What we launched was Megaport Virtual Edge that was Palo Alto Firewall can now be run inside that Megaport Virtual Edge and spun up. So in effect, if you can spin up a virtual firewall on our platform and connect into the Internet and expand that across, sort of, back firewall as a service. We -- just to be clear, we have gone ahead and built a firewall platform and to do that security space. So that is spending our partners or our vendor partners inside our platform.

Yes. Great. Okay. And the second one, probably for Leticia, just in the receivables, there's been a bit of a tick up in like the age receivables that are more than 60 days. I think you guys made a comment on this in one of the more recent quarterlies, but if you can just -- like was there anything that was like one specific customer where you've changed arrangements? Or is that just sort of like the current environment getting a bit harder to collect? Or what's going on there?

There is an uptick from prior year, but there's no significant issues from a recoverability standpoint.

I think we have Eric Choi on your mobile. [Operator Instructions].

Hopefully, you can hear me. And thanks for our lightening up reporting season, the jokes of Michael. I'll stick with 2. The first one --

Eric I got this, I will only let do the second one if you could answer my dad joke. Is that a deal?

Done. Fire away. But let me go with the first one first.

What do you call a deer with no eyes? You can think about it and give me the first question.

Okay. Well, the first one, I was wondering if you could expand on your comments about sales being an FY '25 story. And I'm just looking at your '24 guidance, and you're going to deliver a $35 million EBITDA delta without the benefit of the new sales force. So I'm just wondering would you be pretty disappointed if you couldn't hold or accelerate that growth in FY '25?

Into FY -- the challenge is it's lagged —the revenue component is lagging. So you'll see similar to the price rise that we did in the latter half of -- towards Q4 at the start of Q4 to see that effect for the full year, you only have obviously a quarter of that period of time. So by the time that you've got the sales team ramped— in seat ramped and actually executed ideas, green shoots, let's say, new customers are landing at the start of Q4. You've got a small period of time when you're billing. So from a revenue standpoint, you don't see as big a hit to the revenue, which is why the story for FY '25 from a revenue and then all that -- that all flows through to the numbers there. Annual recurring revenue is slightly different. But yes, I'd be disappointed to think that if we've added that appropriate investment, particularly given that we moved from 4 frontline sellers in the U.S. for an annual recurring revenue of $100 million you would think between 20 to 30 people in any other organization is the appropriate investment. You would have to believe that, that the investment in the region, particularly given that the product is red hot, should be looking forward to see us improve those metrics. Did I cover that?

Very helpful. Is the answer -- and I got help with this one. Is it no-eye-deer?

It's no-eye-deer. You get to ask the second question.

Awesome. Next one, just for Tish. No one's really asked in the free cash flow yet. And just -- I know there was a $4 million to $5 million vendor financing tailwind in '23, and that was mostly first half weighted. I'm just wondering, does this need to normalize in future years? Or if there's any other factors that would drive the difference between operating free cash flow and EBITDA that we should be thinking about?

So I guess the key thing to highlight is that we did pay out quite a fair bit during FY '23 for redundancies. So that will be a key differentiator as well. Just to highlight that, we also did -- we're managing supplier of vendor payments back in FY '22. So you do have a little bit of an uplift -- a decent amount of uplift in FY '23. It will normalize out into FY '24 a little bit, but that's the kind of key driver -- those are the key drivers. And the receivables come in as well as previously as well that's increased.

Siraj Ahmed from Citi.

A couple of quick questions. First thing, in terms of gross margins for next year, how should we think about that? I mean you have pretty good cost control this year. Should we expect it to expand further in your guidance?

So I guess in terms of what we've provided. We've guided EBITDA guidance and revenue guidance. The gross margin is probably pretty straightforward in terms of modeling.

Okay. Got it. Second one, Michael, just in terms of reach, right, how is this different from enable data that you typically have as well? I mean, is it different from that? Or is it the same thing really?

No, it's different actually. Good question. An [indiscernible] data center is an ability to connect to a data center or very close to. So for example, we're in Brisbane, if you're in one data center in Brisbane and you've got a direct fiber connection to another data center not far away, that is extended in effect, you can extend into a data center. Reach is -- and this is one of the differentiating points of Megaport. We've got so many points of presence where are physically inside those data centers. That's that investment in that platform. I'd call that a massive moat to try and compete with us and catch up. Reach actually is not looking to just extend connectivity to. It's actually physically installing Megaport inside those data centers. It's actually -- again, it's not just getting carrier connections but putting a full platform in full cohorts all inside those data centers wherever they are. That's why it gives us an ability to go and access new markets. That's what's so important with that space, markets where we don't have access today. Even geo related, if you think here in Brisbane, if you just wanted to connect across, would actually going totally markets.

And so -- so is it lower OpEx base because of it or this is just the --how is it low OpEx compared to installed?

I want to get more commercial and confidence. What I will say is that it allows us the ability to reduce down the operational expenditure. So when you look at in the past from a business case perspective, there's a whole heap of costs that come into it. It gives us an opportunity to look at where our partners at data centers want us to be there. There's so many -- when I stepped into the role, I turned up at ITW. I was approached by a whole range of data center providers and owners. We want you to come into our data centers. We need you in there. And we just weren't looking at it because we didn't build a business case through an appetite. So we've changed how we think about that with Megaport reach, which gives us an opportunity to go not only to new data centers, smaller remote data centers if need be, but also new countries, et cetera.

We have time for 2 more questions. Nick Harris from Morgan.

I put one through on your net revenue retention, but I think you've answered that. So I'll just quickly ask 2. One was just the Rule of 40, Michael. I just wanted to understand, is your focus on the Rule of 40 using EBITDA margin going forward? And then the second one was just following up, I guess, on that reach DC installation, is it Reach data center the same as a traditional install? Or is that actually -- like physically the same as a different commercial model in terms of the cost, OpEx and COGS?

To answer the second question, you'll have to answer my second joke? What you call a deer with no eyes and no legs? Let you think about it.

What was the first question?

Rule of 40.

All right. So Rule of 40, you can think about you this. Rule of 40 is not based on free cash flow. You could measure, so Rule of 40 is gone through sort of an evolution. You can either measure it from EBITDA or free cash flow positive, the Rule of 40. You can get both of those metrics from the information that we're sharing. And so what we've just done is highlighted the EBITDA Rule of 40, which is the traditional, I think, measurement for businesses. The world is changing from a free cash flow perspective; you can measure it in both ways. That information should be provided for you to work it out. All right. Second one...

I just want to understand your focus is on the EBITDA but -- as you look at it.

Let me... You asked where is that – there is a metric to measure the efficiency of the business from a sales perspective versus the growth in revenue. And so it's a great way to constantly keep yourself in check. There was this sort of period of time whether it's this growth at all cost mentality through the Bay Area, where sometime we grew 200%, but actually their costs was so high that actually the Rule of 40 would have you well and truly below 40, which is basically saying you're spending way too much on your growth, but celebrating this huge growth number at this huge cost. So Rule of 40 is a way to just ensure you're monitoring the investment that you're putting in from a sales perspective versus the growth that you're bringing. And you can look at it from multiple avenues. I would say that we measure this business from a huge range of different metrics that we look at on a daily basis. The outcome is to grow our annual recurring revenue, ensure that our costs remain under control and our net cash flow is appropriate with growing that EBITDA perspective. Hopefully, that's helpful. Do you give an answer.

Yes, that's great. The answer to your question is still no idea.

Okay. That's it. Still no idea, you passed.

for which I can't do on a public call, so I'll show you that one later. Question was Reach DC. Just trying to understand, is it basically the same infrastructure as a physical install, but the cost, the COGS, the OpEx model is slightly different?

Yes, exactly. So we're not having to rebuild or redesign anything. It's just -- it's the commercial modeling and the partnership arrangements that we put in place. And we have an ability to execute it extremely quickly. We have suppliers of infrastructure throughout that COVID period. So we can -- that's why we can execute it less than 90 days. So it's a really great story. In less than 80 days from start to finish engagement, you could have Megaport reach inside your data center, giving you that access to over 1,000 connections like we just through --through with that demo to give you a perspective. There are so many data centers that are excited to have that ability because it gives their customers -- think about it from their perspective, they want to sell power and space and convince a customer to come. If a customer can't access all the different cloud providers and all of those different other elements that we're referring to easily, it's a barrier to entry for them and then they end up going towards maybe a larger data center, for example. So this adds huge value for smaller doses to come and actually convince customers to come. It also helps them keep their customers moving forward. It's a great story.

Tim Plumbe final question.

So most of my questions were actually asked. So I might just throw one last one in there, if possible, just in terms of that LTV to CAC calculation like I think the footnotes note that partner commissions are excluded from the calculations. Presumably, the customers coming from the third party parts are also excluded from the new rate as well?

Yes. So the measurement comes from the CAC is the Cost to Acquire the Customer versus the ongoing commissions that are paid out. So if you think about it, if a partner brought an opportunity to you and you weren't giving them a revenue share as an example, the cost to acquire that customer falls into that piece, the margin that, that particular partner makes is separated out of that measurement. So we're really looking at the cost to bring their customer to Megaport versus the ongoing cost of service, I suppose, does that make sense? So the CAC component is looking at, what is the cost to get a customer in and compare that to the lifetime value of the customer as a comparison to ensure that you're not spending too much to bring customers in, which is why you see us above 5 from a multiple standpoint, very healthy.

Got you. And I might just for one very quick last one if possible. Just in terms of the MVE pipeline, you guys delivered a pretty good number at the last quarterly. But obviously, that's got a materially longer sales pipeline than the other products that you're selling into the business. Do we need to think about maybe a little bit of a lag as you'll need time to refill that pipeline up and get through that sales pipeline before we see...?

I wouldn't say that there was a bunch of pipeline at all just executed against and now it's clear. We -- if you think about it, we've had the same sales force in place for the past year, I want to say. And so that would be consistent from a pipe perspective, i.e., people have been building. What I will call out is that it's been a very small sales team, as I referred to 4 frontline sellers in North America. It's hard to go on drive longer sales cycles when you have a very fast, easy sales cycle with the port of VXC, you can execute against that really quickly, very quick time to market. The time frame, the reason Megaport Virtual Edge was it gives a significant increase in the revenue, there are longer cycles because you're actually linking into carrier contracts and what they're rolling out from a about. You've got a big global WAN that's rolled out, that might be coming to fruition in a year's time. You've got to go to work through that opportunity. They're going to make a decision to go to an SD-WAN provider like Cisco is a great example. That takes time. So it's a process for that. And you're building out that design. So there's just more energy that goes into it, but they're big and they bring -- and they drag through so many more VXCs and connectivity for it. So I wouldn't say that pipes just disappear or anything like that, it's always consistent. What I will say is our goal is to increase it. We've got big investments inside the vendors that we partner with, if you think about it. There's -- each time we bring on a vendor into that space, into the MVE space, it gives us another sales force to go and access that they're working on inside their customers. The real story, I think the biggest opportunity Megaport has sort of that -- when I showed you the customers that don't have Megaport and the customers that do have Megaport, we saw Joe internally like this is a customer that doesn't realize Megaport exists and everyone that realizes Megaport exists is a customer. Now it's sort of a bit of tongue-in-cheek there, but the reality is our challenge is showing the world that we exist and we can solve these legacy problems. And so what's great about that MVE piece is we can go and sell into all these different vendors that have huge sales forces, but we still have to articulate the value of that. Once they get it, the light bulb comes on. And you'll see, in fact, some LinkedIn posts of Cisco example, understanding the value that comes and that's viral sort of post going out there, it takes that time to sort of build that momentum.

Thanks, Michael and Tish and everybody for attending. Just a quick call out that we're going to be doing our FY '23 roadshow at Sydney and Melbourne on the 18th to 20th of September. So there's a bit of delay to get through the rest of the reporting season. If you have any questions in the interim, please reach out and happy to connect and answer those. And thanks very much, everybody, for attending today.

We appreciate your time. Thank you all for your support.