Megaport Limited (MP1) Earnings Call Transcript & Summary

Okay. Welcome, ladies and gentlemen, to the Megaport First Half FY '25 Results Update. Today, we have Michael Reid, CEO; and Tish Dorman, CFO, who are going to take us through the first half results. We'll have Q&A afterwards. [Operator Instructions] Handing over to Michael.

Perfect. Thank you, Steve. All right. Welcome to the FY '25 half year results for Megaport. This is our investor presentation, and we're excited to bring you the updates for the past 6 months. We're going to take you through company highlights, business update, financial results from Tish, and then we're going to finish on guidance update. Let's start with the highlights. Annual recurring revenue at $226.6 million, up 18% or 14% in constant currency, a $34.9 million increase year-on-year. Let's talk about net retention. This has been a story for some time with Megaport. This is the first signs of stabilizations, 107% net retention, up 1 percentage point on the half. We're going to talk about this as we go through the deck on the reasons why we've seen that turn. It's the first signs of those stabilization, and we're very excited to share that number here in the highlights. Gross profit is $74.7 million. We've sustained 70% gross margin throughout the half as we've continued to invest. That gross profit is growing in line with revenue and is up $8.1 million year-on-year. Net cash flow of $15.7 million, up 26%. We continue to deliver profitable and sustainable growth from Megaport, up $3.2 million year-on-year. Let's go into the business update and probably the most important slide in this deck, which is talking about the execution against the strategy and the investments for the future. This is important because the remainder of the deck is really talking about the news, reporting the news, and this is about making the news. We look broken into 3 different buckets: greater network presence; product and innovation; customer and ecosystem. Let's start on the greater network presence. And we've been sharing this 400 gig backbone story since I landed in seat actually about 1.5 years or a bit over 1.5 years ago. That 400 gig backbone was executed and rolled out through North America and also globally most recently, but it continues to expand. The importance of this investment actually leans us into the second point. We announced throughout the half that we can deliver 100 gig VXCs or in effect, 100 gig connectivity from all of our different data centers. That is 597 data centers that we can deliver 100 gig connectivity. That makes us the largest Network as a Service platform on the planet that can deliver 100 gig connectivity within 60 seconds. This number continues to grow and was actually only at the half. It's continued to grow since then. Strategic DC expansion. The team has been very, very busy. We've added 82 new data centers onto the network from a deployment perspective inside that half. Yes, that's in 6 months. A big shout out to the team that's been executing fast there. We've added 4 new Internet Exchange locations. These are really important for the health of the Internet globally. We're now at 27. We added 25 cloud on-ramps to land us at 315 globally. We actually added 2 countries. We added Brazil and Italy, now in 26 countries around the globe. Our story of Internet. The Internet product that we rolled out about a year ago, we continue to innovate and expand. As we land, we need certain regulations to be solved for in all these different countries. We've added France, Japan and Germany in the past 6 months as we roll out that platform globally. Let's talk about product and innovation, probably the most important discussion when it comes to a tech business. Without product and innovation, you aren't a tech company. And boy, have we made some incredible strides in the past 6 months. I started with this point. It's something we didn't share publicly, but it is probably the most important note. Megaport for the past sort of 1.5 years has been working on our new compute platform to be rolled out. We launched that in the last half. This is incredibly important for the future. This is a platform that enables us to deliver huge amounts of innovation in all these different locations well and truly beyond what the product set that we have today. And since that rollout, we have already been able to, on top of that platform, deliver 100 gig Megaport Cloud Routers. That is a 10x leap from where we were prior. So that is 100 gig connectivity from the cloud providers to other cloud providers delivered in 60 seconds, and we can deliver that globally. That is one example of the new compute. The next example is NAT Gateway. And for those of you who follow me on LinkedIn, you'll see a math tutorial, I suppose, on a whiteboard of me explaining the value that NAT Gateway brings, the Megaport launch of NAT Gateway. It's a 70% reduction in your NAT Gateway costs. And that is also delivered on that new compute platform. So we're just warming up on what we can deliver there. BGP on Internet. We continue to innovate on the platforms and the products that we have. By adding BGP, it opens up the TAM or the addressable market to what we can deliver for Internet. And by launching BGP early on in the half, we've seen tremendous results as that product is starting to scale. We've launched what is a very simple thing, but actually important for customers, a platform called Managed Cross Connects. So when you order a port with Megaport, you also need to get a Cross Connect inside that data center. And the admin of trying to order 2 things, manage the contracts, et cetera, is tricky. And so what Megaport has inside the portal, one click, a Cross Connect. It's actually a great revenue source for Megaport, and it saves our customers time and effort. I talked about the new compute platform. I'm just going to keep reminding you how powerful it is. Megaport Virtual Edge also resides on that compute platform. And with that new compute, we are -- we can provide faster virtual edge platforms and more. And so this is get exciting. In the past 6 months alone, we've added Palo Alto Prisma, Aviatrix and 6WIND. So that continues to grow. In fact, I'm going to show you a chart later on, we grew 90% in the half in MVEs, which is an awesome product. Let's talk about customer and ecosystem. The AI Exchange. We launched AI Exchange in the half. Now I'm mindful that there's a lot of hype around AI and people just stick AI in front of things and call that their entrance into the AI space. This truly is us providing GPU as a Service. So the things that make AI, the farms that make AI. And so what's been happening is all these companies have been buying NVIDIA chips and others actually now, putting them in data centers all over the place, wherever they can get space and then they land providing the GPU as a Service for customers only to realize that customers don't live inside their data center. So how can you get there? Enter Megaport in 60 seconds, we can connect you to 30-plus GPU as a Service providers around the globe, and we can deliver most of that at 100 gig, which is outstanding. Financial Services Exchange was also launched in the half. Financial services companies, and for those of you on the call, you're probably familiar with this, there's a lot of connectivity between other financial services companies as you're doing transfers, you're sharing information, you're sharing market data, you're accessing exchanges, et cetera, not actual ASX as an example. So then you'd say we've got 600-plus companies on that platform, and we can actually access each other, and that is continuing to grow. That's 600 financial services companies. The partner portal co-branding was also launched. This is inside the platform itself for our partners to be able to sell Megaport and brand that appropriately to help us scale was launched inside the half. A big work from the development team, big congrats there. The sales head count expansion is ongoing. As we continue to grow, we've got this awesome opportunity to take what is the most revolutionary product you've ever seen really and disrupt what is traditional telcos around the world. And to do that, frontline sales is a key part of that story. I'm going to share with you later in the deck how that's performing from a net new logo perspective. Super important to actually bring in new logos into the business, proving out not only that the sales team is working, but also that the product is hitting product market fit. Customer success roles have been probably one of the most important factors that was missed before I joined Megaport. This is -- these are the folks that actually impact net revenue retention, and we talked about that 1 percentage point increase to 107%. These are the folks that call our existing customers, make sure they're happy, talk to them about our incredible new products. They protect the churn inside the business, and they help us expand. And we've built out what is an incredible team there, all ramped now and making a real big impact. We'll continue to invest in that space. And lastly, customer support for Megaport is really important, like for most companies. Interestingly, over 95% of our customer support tickets are actually managed via chat. And so what we've added into that is an AI-enhanced chat component from one of our providers that actually is going to improve the way in which customers engage with us from a support perspective and speed up those tickets even more. Let's talk about annual recurring revenue. This is a strong growth, $22.7 million, up 18%. We've got some tailwinds from FX we called out in the first slide. But you can see the breakdown between the businesses here -- in terms of between the regions, I should say, $227 million overall, $131 million for Americas. It wasn't that long ago we were sort of talking about the $100 million mark that we crossed in the Americas. That's 58% contribution from the U.S. We're just scratching the surface. It's where we've put a huge amount of investment, and that's where you'll continue to see us not only grow but grow the fastest, I suspect. $59 million in ARR for Asia Pacific, our early market and continues to grow and $36 million in EMEA. All right. Quarterly net new logo -- customer logos -- Quarterly net new customer logos, it's a mouthful. What have I done? We've broken down these metrics, and I've given you it in quarters versus halves. Of course, we're reporting in the half. But I wanted you to see how this is playing out quarterly and give you granularity in what has been a massive turnaround inside this business. For those of you who have been following for some time, you know that we've had a massive investment or turnaround, I should say, in basically all go-to-market marketing, frontline sales, customer success, you name it. And also, in the product and engineering space, that has been, I'd say, some incredibly heavy lifting that sort of came to fruition in June. Now what you can see in Q2 FY '25 is a really massive improvement in net new customer logos. This really does showcase that the go-to-market is performing. And instead of talking about green shoots that we've been sharing in the past that you couldn't see in the metrics you can now see what I'd call saplings on their way to trees showing through here with a great result. New logos do 2 things. It proves that you can win new customer logos, which means your product is still making a massive difference. Companies want to be with you. The product hits product market fit, it's priced appropriately, all those pieces. It also means that your existing customers are staying with you. So it's a really important measure that we're seeing there. We talk a lot about ports because we are Megaport. And I've been sharing that a port is not a port is not a port. I'm going to take you through that on the next slide. But let's just walk through the quarterly net new port adds. And since Q3 FY '24, you can see this trending in the right direction. And it is a true reflection of the investments not only in go-to-market, but also product. Product is so important because you only buy a port when you want to do something with it. And it's something that pulls the port through and then the connectivity is that that's something. And so by adding more and more ports, we build for the future in connectivity and expansion. But let's jump on this next slide, and I'm going to show you a breakdown. It's the first time we've shared this. I'm going to spend a minute sort of explaining it. The light purple, so this light purple, it represents 100 gig ports and the dark purple represents 10 gig ports. Now it's capacity. So it's net change in provisioned port capacity. What does that mean? On the side on the Y-axis, what you've got is, so let's say it's 1 gig is 1 tick, a single 100 gig port would be 100 ticks. A single 10 gig port will be 10 ticks. And it's breaking down the difference between what is on the previous slide, counting both of them as equal. They are not equal. One is 10 times larger than the other, sort of fairly obvious math here. But you can see how as we've been investing in this turnaround this has been growing in the right direction at a rapid pace. And you can see in Q1 FY '25, we had our largest net change in provision port capacity in Megaport's history, in our history. And then we backed it up with Q2 beating it back-to-back largest capacity contributions in our history. Why is this important? Because this dramatically increases future connectivity revenue potential. It means that if you've got a 100 gig port and you want to do a 100 gig connection, you can now do that. Not possible on 10 gig, and it's significantly more expensive to do a 100 gig long-haul connection than it is a 10 gig, as you can imagine. So hopefully, you can flow that math through and why that's so important. The next slide, as I mentioned earlier, is Virtual Edge. We have seen 90% year-on-year growth inside this platform. It's an incredibly disruptive product. It's a much more sophisticated sale. It results in almost 3x the ARR per customer when the customers take that on. So $203,000 of average MVE ARR for a customer on MVE versus a port-only customer at about $71,000 in ARR. This growth highlights that not only -- I said before that's more of a sophisticated sale, it means that solution selling, you actually need to get the entire sort of group together, a solutions architect becomes critical in how you design this along with the frontline seller and engagement with the networking teams of our customers. So it's very much a solution sale engagement, and it's showcasing that investment in the go-to-market with all of our solutions architects as well is paying off. And the last slide, which I think is probably one of the most important to get a perspective of utilization. You can grow revenue in Megaport and not increase the utilization if you just increase prices. But the customer utilization is probably the most important signal to showcase that customers are getting value out of Megaport and adding more and more connectivity. And you can see this line up into the right from a trending perspective since June -- since this sort of time frame here. And this is showcasing that customers are loving what Megaport is offering. The new products are enabling our customers to take out much higher speed services. The higher speed services bring in more revenue. And this is a really important signal inside the business. This is a metric that I get to look at that I was very proud to share with you all to give you some perspective on how the underlying trends are performing. This is no doubt a direct result of all that go-to-market investment, but also a huge part of the product investment that we've had over the past 1.5 years now. All right. Let's go to the financial results. I'm going to pass you over to Leticia Dorman, our CFO. She's going to slide in next to me.

Thank you, Michael. So Michael has talked through the turn in the metrics. And what that really showcases is that we are really starting to see the strategy of Megaport for growth be reflected in ARR and NRR in particular, which is our key metric as well as revenue. It's a solid financial result, and we'll continue to invest to drive future growth. In reality, the strategy that we set over 18 months ago is really proving out in the numbers. We're seeing revenue up 12% and gross profit up 12%, showcasing our operating leverage. The gross margin staying stable on 70% is also a key indicator. Whilst EBITDA is slightly down year-on-year, you will recall that in the August presentation of the full year financial results, we were highlighting the June '24 exit. This was in line with planning for our future growth, which was really around reinvesting back into the business, particularly in the go-to-market function, which, as we've indicated many times and particularly further earlier in the slide by Michael is that ARR turn. I would like to draw your attention to the bottom section, which highlights around the EBITDA in particular and really showcasing that if you -- if we had not taken the opportunistic investment in a go-to-market of $1.5 million throughout the year, then it will be $29.1 million from an adjusted EBITDA standpoint, which is, again, really consistent with that June '24 exit when you're comparing the 2. With regards to cash flow, free cash flow, combination of operating activities and the investing activities is showcasing that it's positive, and it will continue to be positive. This includes investment in a 3 years of equipment licenses within CapEx of $6 million. In addition, our cash is sitting at around $90 million for the half. Again, showcasing talking around FX movement, that is driven largely by the USD/AUD pairing. The net cash improvement versus this half last year in FY '24 is $31 million. On to CapEx. Now our guidance for the full financial year of FY '25 remains unchanged. You'll note that the H1, the CapEx spend was $19 million. However, within that $19 million was the $6 million in the equipment licenses that we will utilize over the next 3 years for our network. We've maintained inventory in order to support the continued expansion and upgrades across the network. And we also have included major projects, including that 400 gig backbone rollout that the team has executed on throughout the half. We've got new locations as well as network operations interface tool. Our cap wages, these really predominantly reflect our efforts to continue to enhance the network, the product development that Michael's referred to previously as well as deploying to the new sites, upgrades and is in line with the FY '24 spend. So a short snapshot of the financials for half 1. Back over to you, Michael.

Beautiful. Thanks, Tish. All right. We're just about there, folks. Guidance update. So FY '25 revenue at the full year, so in August, we called out that we would be landing between $214 million to $222 million. With that net revenue retention stabilization and actually the tick up, what we've done is we've tightened the lower end of that revenue guidance, bringing it up to $216 million to $222 million. In EBITDA, FY '25 EBITDA, it remains unchanged between $57 million to $65 million. It's worth noting that, that range includes opportunistic investment in key go-to-market roles, which is expected to be about $4 million for the full financial year. We've managed to remain inside that guidance that we gave prior to even realizing that investment was an opportunity for us. Now it's worth noting that the foreign exchange rate between AUD and USD is something that I don't think anyone's done a good job of predicting. We won't try and predict it. So what we've done here is given you some guidance around how to model the math, shall we say. So FY '25 revenue guidance is locked in at 0.668 AUD:USD. That's what we've assumed, and we've kept that. That was at the start of the year. It's obviously not that today. The same is true for EBITDA. So we're holding that consistent because we can't predict the AUD:USD. And what we're doing is giving you this movement. A $0.01 movement in AUD to USD results in revenue of between $2 million to $2.2 million as an estimate and EBITDA between $0.6 million to $0.8 million. So there's sort of some math that you can roll out depending upon how the AUD:USD continues to play out. All right. That is the end. Let's land with some questions. Steve, why don't we -- and Tish, why don't you join me over here. And Steve, I'll hand over to you and we'll see where we land.

Okay. Thank you, Michael.

[Operator Instructions] I will go to Tim Plumbe at UBS.

Michael, just 2 questions. First one around the NRR recovery profile. Good to see this stabilized and starting to increase a little bit. And it looks like you guys have got strong momentum in terms of new customers. They should start funneling down into existing. You mentioned that you've increased your customer service team. So how do we think about these changes that you've made flowing through the reacceleration of that NRR profile? And how are you thinking about the reacceleration profile?

Yes. So we've been sharing the story around net revenue retention for some time. There's multiple levers that move net revenue retention. And there's some we can control. Market is one of them, and so we obviously can't control that. But we believe we can outswim the market because of what -- because we are not saturating that, so to speak. But to do that, you need to have world-class customer success folks protecting and calling on our customers. You need to have new products to take to that customer base. Probably one of the most important things is to take a new product to the existing customer. It's very hard to sell someone something if they bought everything that you've got. If you've got something new, you can expand. So that's why we've had this huge focus on product innovation and the amount of launches that we've had from a product set across all different parts of the business that we've been doing that for the last 1.5 years. I think you've been on that journey, and you're starting to see that pay off now. That never stops. So what you'll see from us is a continual investment in new products and new revenue generating products that can make a difference for our customers and a constant investment in sort of in the go-to-market when we can scale and expand into all these different locations. So the goal is always to push that net retention higher as high as possible, obviously, along with growth. But you need to be doing the things to do that, which is why if I just sort of -- I'll just take you back to this one piece, which is why this is the most important part of this deck because it's around what you're doing for the future and to ensure that we continue to enable that. And this is where I'm incredibly proud of what the team has delivered. And so all of this is lining up to help drive more net retention and new logos. Hopefully, that gives you some perspective.

And the second question goes back, I think you put a bit of a call out to customers of distressed competitors a while ago come across to Megaport and you can move across the free for a period of time. Presumably, these aren't showing up in the fourth quarter KPIs. But any color you can kind of provide in terms of uptake of that offer and potential ARR that might just be sitting in the background and working their way through that free period?

So I won't comment in too much detail on that other than to say that we are constantly taking business off what I would say, traditional competitors in the market and also those that are similar. Those offerings are always in place. And so if you look at what we've taken on that go-to-market investment most recently that we -- that Tish has sort of pointed out. Obviously, those folks start hitting the ground running. But it wouldn't be showing through in the metrics yet. You're right. It takes time. So I won't give you insight in sort of any of the free services that are coming off. We'll wait until they flow through. But I'm very happy with the results that we're seeing with the new folks that have joined the team. I'll put it at -- I'll leave it as that.

If we can go to Siraj Ahmed at Citi.

I guess the first one, Michael, just in terms of net revenue retention momentum through the half, is it fair to assume that 2Q was better than first quarter, and...

Sorry, Siraj, we lost you just at the start.

Can you hear me now?

I think so. Yes.

Yes.

Sorry, mate.

Yes, no problem. So just on the net revenue retention momentum through the course of the half, Michael, just is it fair to assume that 2Q was better than first quarter? And then just confirming, any impact from the back book sort of repricing, were your front book is cheaper than the back book? Are you matching the price? Just keen to understand that.

Yes. So I think you're -- 2 things. You're referring to -- we made significant changes out of the back of last financial year from a product perspective, including a lot of pricing. We kind of -- as I shared, we pulled a lot of levers at the same moment in time. When you pull lots of levers, it's always difficult to predict how things will flow out. We had a view. We had a sort of a thesis around how it would play out. But there's always risk that something doesn't play out. And there was always a potential to think that -- I didn't feel that, that was a great risk, but there's always potential that you can't see with all these changes occurring. So one of the things we haven't seen is any churn from that customer -- from that pricing that we put in place. I didn't expect to because of the way we've structured it. It's quite sophisticated. I think we've sort of shared that on some of the road shows around how we went about that. But we haven't seen any of that play out in a negative fashion. If anything, we've seen it play out in a massive positive. And that is we can take products to our existing customer base at red hot prices that make a massive difference for them. And that's what we've started to see. And that is why you're seeing that net retention change because you can see customers taking out long-haul connectivity, global WAN, Internet and a whole range of other things that we've got priced appropriately. It still very profitable for us. It's something that we couldn't do before. So that's played out as we hoped, which is really nice to say. The second thing is you're asking about net retention. It's early signs. We've got 6 months of what I would call stability. The tick up of 1% is fantastic, but it is 1 point. And so it's important, incredibly important, but we need to see this play out over time, which is why we're constantly saying early signs. I'm confident with all the energy, all of the changes, all of the innovation and go-to-market, it makes sense that we're seeing that turn to be clear. But as always, you shouldn't call something out until you start to see it, which is why we've shared it on this call.

Tish, can I just ask a quick question on the EBITDA guidance? Can you just help unpack, because it seems like you're trending towards the bottom half of that EBITDA guidance based on the cost reinvestment? Or do you reckon gross margins can improve from that 70%? Just that would be pretty helpful.

So I think --- Siraj, I think the key thing to note for us is if you refer back to the June '24 exit margin, in particular, that's a key -- that's kind of the key comparative that I refer back to. When we were setting the guidance, we did not plan for or factor in that opportunistic go-to-market hiring, which we're estimating or expecting to be $4 million for the full financial year. So I think that's probably your key items. But in terms of like upper or lower end of guidance, the thing for us around putting out their EBITDA guidance is that the second half of the year costs are fully within our control. And so if we decide to invest, we will invest. If we don't, we won't. So that's why we've retained that guidance range to allow us that flexibility.

I have Kane at Goldman.

I just suppose we'll look at that customer cadence that came through in obviously the second quarter and then really ticked up. I mean you would have seen most of that at the AGM in late November. So just trying to think about those comments you made around the FY '26 growth expectations. Is it reasonable to assume that they still stand? Or are we potentially a little bit more upbeat on the growth outlook into FY '26 given what you've delivered today?

Not giving guidance for FY '26. I think that what we've seen is a great result, and it's important that we continue to see that, and we'll continue to report against that throughout the half. We'll update FY '26 guidance in August and/or unless we see some material change between now and then.

And maybe just -- sorry, just quickly on guidance this year again. So I appreciate the FX comments, and it's obviously impossible to forecast. So you're saying that the change in revenue is purely reflecting the early signs of NRR stabilization rather than banking in sort of FX today to sort of where the first half numbers have landed? Is that the right way to think?

Correct. So if we just focus up here on this box, which has got 0 impact from FX, i.e., we've assumed a constant -- we've assumed $0.668 of currency. We -- when we were at August, the range that we provided in terms of revenue guidance had 2 elements. One is -- or 3 actually, sort of mid of the guidance was that we actually flattened or held -- we held NRR. The top end was that we increased NRR and the bottom end was that we would -- saw a continual decline in NRR, which is why net revenue retention is so important. So the lift or the tightening from the bottom end is a bullish signal from our side to you all around the fact that the risk associated with the bottom end, I don't see that. We're confident -- quietly confident, I should say, not quietly, we're publicly confident that, that net revenue retention has stabilized for now, at least leading into the back half. And we -- and that's why we've tightened the bottom end of that range irrespective of the foreign exchange. Happy to take your FX bets on this call, if you like, and we can test them at the full year.

Roger Samuel from Jefferies.

Not sure if I can find the run rate margin for each region in its result. But can we assume that they're pretty stable from June 2024?

Yes.

Okay. Maybe just a follow-up on the new products, especially NAT Gateway since you described it in quite a long way in your social media. Can you just describe that product a bit more? And as far as I understand, it allows you to land and expand the products across your customer base?

So it is a totally new product, and it's solving a challenging problem that most customers don't realize that they have. And that is you're familiar with the egress story that Megaport has been solving for some period of time, which is basically you get charged $0.09 per gigabyte when you leave a cloud provider through the Internet. The NAT Gateway is in addition to that, and you get charged $0.045 for any gigabyte of data processing either in or out of the NAT Gateway. Now we're in a bit of a technical space. NAT is network address translation. So it's basically if you're receiving a whole heap of information from different sources outside of your cloud and it's coming in through the Internet and then landing inside your cloud platform, you need to actually use an address translation from public addresses to private, it gets a bit technical. But the point of that is -- and the reason I did that sort of maths -- mathematics lecture, I would say, on my LinkedIn is because it's a pure math story. We literally reduced the cost of NAT Gateway expenditure by 70%. And the point is if you're up around a petabyte of data processing per month, we're going to save you about $0.5 million per annum just in that gateway cost reductions. So it's not for all customers, but the customers that this does make sense for, it's incredibly impactful. The challenge is actually getting the story out there. I think a lot of folks don't realize that what you're paying just to leverage the platform in a NAT component. Now we solve that by -- we're in 300 and -- whatever it is 20 different cloud on-ramps. We live right next to those clouds. We have massive pipes that go into them. Inside that new compute platform, we can spin up incredibly high-speed NAT Gateways, very, very clever NAT Gateways inside our platform. You can split them across multiple data centers and have them fully redundant, have the different pipes go in. And then through the Internet platform that we've rolled out, you can then punch that through the Internet. So you save both on NAT Gateway, which is the processing, and you also save the Internet component. I suggest you -- super technical, and it's very mathematical, but my little -- I'm disappointed you said it was a long lecture. I got that down to 3 minutes. So in 3 minutes, you can watch that on LinkedIn. And I suggest you have a look because you can sort of see how the numbers play out.

Next question comes from Eric at Barrenjoey.

Well done, Michael and Tish as well on the customer turnaround. So my first one, just on that subscriber momentum into the second half. It's probably a bad way of looking at it. But if we monitor the traffic to your login portal, it was a pretty good leading indicator for your first half customer growth. And if you look at that same traffic data, it shows positive year-on-year growth again in January and February. So I'm just wondering if we can infer that positive subscriber growth has continued into the second half. If I could do a second, just following up on NRR trends, like Michael, you've always said there's a cyclical versus structural element to NRR. And if you look at your NAS peers like Cloudflare their NRR probably picked up 1 percentage point as well in this quarter. So to me, maybe most of that stabilization maybe it's cyclical? And does that mean there's still more of a structural improvement possible from -- I think previously, you've talked to getting fresh new logos to sell to. And since customers have only just started to pick up that more material NRR step up is still to come.

Yes. Thank you. Yes, I need -- we need to -- we should call you on the monitoring our platforms to figure out future growth. I'll put it into the forecast with the sales team. I won't comment on changes in the first half. We're obviously just talking about the prior half. But we obviously wouldn't have given -- we wouldn't have tightened the range on the revenue if we weren't confident. We wouldn't have also shared the net revenue retention if we weren't giving the right signals and signs from what we can see inside the business unless we were comfortable. On the -- you referred to sort of Cloudflare, some of our peers globally, there -- as I've shared even just before, but on sort of the previous calls, there's multiple factors that move net revenue retention. One of them is market. And what we did see, I saw -- we follow Cloudflare closely, we saw that their net revenue retention turned up in the last quarter as well. And that had been, I think, on a constant decline from memory from 2022. So there is going to be an element of market. There's going to be an element of product. But one thing I can tell you is you can't get net revenue retention to turn up unless you have world-class products that customers want to choose, want to purchase and want to procure inside your business. So you have to do all of it. You can't get one piece and just reside from it. The only way that, that would be true is if the product didn't need any changing from 1.5 years ago. And by the way, the product underlying is world-class and has been forever. What we changed was the pricing and the products that we offer. They are the 2 things that we change and the product platform couldn't deliver upon that. So I would argue that if you hadn't made those changes, if you hadn't started communicating with that customer base, think about it. We had one customer success person talking to 1,500 customers, the amount of churn and the fact that your new products that you're bringing out, you just wouldn't be able to take them to that base. So I would argue that it's definitely both. But remember, swimming against the stream that's flowing fast against you is difficult. And so if that stream is changing across the market, that's going to be beneficial for us as well.

Bob Chen, if you could ask your question, please.

Just a question on the greater network presence. I mean, obviously, you've expanded into a couple of new countries. There's been a lot more strategic data center expansion happening as well. Are those regions contributing to the new logo growth yet? Or is that still yet to come? And then if they are contributing and you're getting sort of these new logos from these new regions, can we assume that they sort of come on a little bit underpenetrated and over time, they'll purchase more? So it could be a net benefit to your net revenue retention going forward as well?

The typical trend, and this is back to -- I mean, I think I've shared the sort of 5 points that drive net revenue retention. One of them is new logos expand faster than old logos, which sort of makes sense. You sort of land and then you expand, you land small and expand. We are selling far more strategic sales with contracted terms. So that could slightly change that, but we still see that new logos expand faster than old, which makes a lot of sense. The only thing I'll argue with that is when you add a whole range of new products, you have the right to go back to that existing portfolio and expand that again. So that's why it's so important to have both of those pieces. The new countries, they're small. Like we've landed in the majority of the largest countries. You can see the United States is 58% of our revenue. Brazil and Italy are unlikely to surpass that ever just based on the population -- not population, based on the GDP, I suppose. Brazil is a really exciting land for us. Brazil is massive, as you probably know. It's hard to land there. There's a lot of regulatory challenges to get through, and it took some time. So we're really proud to land there. Actually, the cloud providers dragged us down there because they're seeing tremendous growth in Brazil. Italy is smaller, but it just makes sense to continue that expansion inside Europe. And we are landing new logos already from those. But one thing I'll note is that when we land in a new country, one of the -- there's lots of countries that we have on the list. They're obviously the harder countries to land and otherwise, we would have landed there. But what we're following also is there are existing customers that need connectivity there. So for example, we could land in Brazil and not sell to a single Brazilian customer and just sell to multinationals based out of the U.S. or elsewhere that have presence there. So when we look at landing, we're also listening to our existing customers on where to land. Having said that, we then invest with local head count to go and sell into that local market and disrupt that space as well. So it's sort of covering off both ends of that. I wouldn't say that the 2 countries are skewing those new logos, though. It's not percentage-wise enough to make a dent, I would say, on the net new logo chart that we shared.

Nick Harris from Morgan, if you could ask your question, please.

Great result, guys. Really nice to see that NRR and customer growth firing up. So just really 2 questions for me. Maybe one just following up on the question about Brazil and new data centers. Just trying to understand, as I look at it, it seems like you've added quite a lot of new enabled data centers, 82.5 versus not really too much change for quite a few years. So just trying to understand, is that sort of a step change? Or are you back into a cadence of expanding into new data centers? That's the one question. The second one was just on the opportunistic hires and your competitive position. So I guess my digging into that sort of suggests you've hired a lot of those frontline and support salespeople from one of your closest competitors. So it feels like they're kind of jumping ship. I'm just wondering, from your perspective, do you feel Megaport's gap or competitive advantage versus closest competitors is getting bigger? Any comments on that would be helpful.

Beautiful. All right. Let me -- we start on the DC expansion component. Megaport for -- I guess I'm not sure why, but we turned off the DC expansion mission. And so one of the very, very early things that we turned back on. And if you recall, sort of a similar slide to this, the strategy that's important for us is about greater network presence, and we shared that in the past. And you should be measuring us against how we execute against these things, which is why this is probably the most important slide for me is like you're seeing what we're telling you what we should be doing, and then you see how we execute against that, and that will play out in future metrics. We -- there are thousands of data centers globally. I think I saw a chart of tens of thousands, I don't even know. But we will constantly focus on the data centers that make sense for us to land in and where we have plenty more to go. Every time we land in a new country, we're going to have to go and light up a whole range of new data centers inside that country. Brazil, as an example, I think landed with 2. We'll end up with 6, probably go to 8, keeps going and so forth. There's still plenty of expansion inside the existing markets. So the United States alone continues if you sort of follow in this DC space, there is a huge amount of CapEx being poured into DCs. Granted, most of it is probably going to hyperscalers, but there is still a huge push for colo, and that's where we live. So we'll constantly follow where our customers need us to be. And usually, if our customers are in there, there's more customers, and we'll also assess each data center based on the number of customers they have in there. You'll also remember that we launched a thing called Reach which -- Megaport Reach, which enabled us to land in a whole range of data centers that we typically wouldn't have landed in because we could actually partner with the local data center and land in there in a different fashion and a different cost set. So that is helping us expand as well. So those 2 things. You'll never see us slow that down until such time was saturated, and we're a long way away from that. The second point around competitive comparisons, it feels like Megaport's global competitive strength is just improving. There's been a lot of change, I think, in that space in the past year, even 6 months, I would say. We saw -- we've seen some competitors that were getting acquired, not get acquired, that's changed their strategy. We've seen some competitors make some big changes in terms of their business, probably related to fiscal challenges, et cetera. The point for us is, we remain consistent, dominant and growing. We're still the largest Network as a Service platform on the planet. The only one that would be similar that is Equinix, but Equinix lives inside Equinix data centers, and we partner very closely with them. So I'd say it feels like we're getting a lot stronger. Having said that, we were already the most dominant from a global perspective anyway.

Andrew Gillies from Macquarie.

Most of the questions that I would have had kind of been asked. So maybe if I can just focus on Australia just for a second. It seems like some recent regulatory changes kind of made large financial institutions have to kind of push a little bit more into multi-cloud and there's been a bit of activity there. Like can I think about that new financial services exchange is kind of meeting what is effectively regulatory push demand rather than you having to pull those customers to you? And any other commentary you can give on sort of the change in that landscape would be really helpful. And then I'll wait to ask my second.

I'm not familiar with the regulatory change. But what we have -- we see this in the United States. We see different regulatory pieces globally. And I suspect it's -- is it about redundancy, making sure that you've landed in more than one cloud in place there's an outage? Is that what the...

Yes. So I'm referring to APRA's new CPS 230 standard and the Privacy Act changes.

The CPS 230 standard. That's -- yes. No, of course...

That's why I didn't put in my question.

No, it's -- so that makes -- look, it makes a lot of sense. So one thing that makes tremendous sense is having diversity and redundancy built in. So if you're all in one location in one thing, I mean, if you think about it, if you think of a traditional data center, you don't stick all your eggs in that basket in case the data center goes down, there's a fire, there's power outages, whatever it is. In most cases, they'll deal with the power outage. And in most cases, they're very, very redundant and resilient anyway. However, if the thing did go down, you would want something secondary. Now inside the big cloud providers, they build a lot of redundancy inside what they've got. But there's always the risk that the cloud provider goes down or has some challenge. You can't access that. In fact, at a previous company, I spent my life monitoring that. So we do know that, that occurs. So by having diversity between the clouds makes a lot of sense. The challenge with that is it's very difficult to have an entire system replicated between 2 clouds. So I don't know whether that's going to solve the problem. But if that regulation plays out, it just plays beautifully into our strengths. The reality is you need to have high-speed connectivity between the cloud providers. That Megaport cloud router, so if you look at that 100 gig router that we've got there, that gives incredibly high speed between the clouds. And so that's a great example that would solve that C 230 regulation and help those financial services institutions. So we have a huge number of existing FSI customers. We have some of the largest banks here in Australia, leveraging us for huge amounts of connectivity, not only between cloud, between data centers, but also Global WAN, et cetera, as well. So we're very strong in that space. And we're very strong globally, which is why we've called out 600 companies. The FX exchange is the ability for those banks to communicate between each other as opposed to communicating to the cloud providers. The cloud providers, you can get to on any about 320 on-ramps. The FX exchange as an example, is you're probably needing to access market data, you want a private connection to that. You want high speed and resilient, ensuring that you've got that. Now a lot of that's delivered across random routers that they're sticking inside these banks. So some of our biggest customers have asked us, please, please solve this problem for us because we're managing all these random routers that other banks turn up and give us and that still has Y2K stickers sitting on them. I mean I'm exaggerating there. But the point is -- I'm actually not. But the point is being able to connect across Megaport -- you're already on Megaport, you want to connect to the bank, a VXC, spin that up instantaneously, make it private so that no one can see that or access from a security perspective. That's the FSI exchange.

And then just on the kind of recent -- kind of stepping back kind of a long way, right? Recent product releases, like you've upgraded the global backbone. And with the upgraded compute platform, it kind of feels like you're moving in the SASE direction. Like do you have any kind of comments around that? And it seems like there's a lot of scope for sort of more SASE style or cybersecurity style products that could potentially be in the pipeline. Can you maybe give us an indication of kind of how far along that product road map you are? Like are you short of ideas? Is there a lot more to come? How should we think about sort of the product road map?

Yes. I'm sitting in our boardroom actually, and we recently just had a Board offsite and went through some of the strategy that we've got for the future. In answer to your question, we're running out of ideas? No. We have an incredible list of highly disruptive products that we will bring to market that we are innovating on right now. And the importance of that new compute platform, you sort of picked it up and figured it out, this is the platform for us to go and roll out very quickly in every single country, diverse across every region inside that country, new products that can be deployed on that platform. We've got a huge range that are in the pipe, some longer term, some shorter term. And my constant message will be that focus on product and innovation, as long as we're in this -- as long as I'm here and the team is focused on it, we will never stop innovating in this space because it's the only thing you need to focus on to keep -- to remain as an incredible tech product. If you stop the innovation, you fall out of product market fit. If you keep the innovation, you keep adding value to your customers. If you extend and expand products, in line with what makes sense with your existing go-to-market and the sellers and the buying centers that you deal with today, that makes a lot of sense. And that's why you're seeing a lot of our products are sold to the existing buying centers that we talk to today. So you don't have to roll out a whole new sales team to go and execute against it. So watch this space. And again, we're excited about some of the further disruption and simplification that we can add. Everything will be incredibly highly automated, very well priced and delivered globally. So that is this constant focus that we have.

A question of the Q&A function. Two parts. The first one is the new hires that have come on recently, what was their contribution to the December quarter run rate? Tish, I think this might be one for you. And then the second thing is, if there was early signs of NRR improvement, how come you moderated FY '26 expectations at the AGM?

So with regards to the new hires that came on, there's an element of ramp period that happens. So you may not -- you will not see that immediately in the revenue. I would say that fundamentally, we're happy with the return from those new hires, both within monitoring early hires, which Michael is obviously very focused on as well as starting to see that result in terms of the compensation piece.

We commented already on FY '26, I won't give further guidance on that. Suffice to say that what's really important, and I've shared this before, it takes time to see a trend. So they -- I think when we're referring to that, when you look back, we've said 6 months stabilization, you're at the AGM in November. It's not a trend until you start to see that play out. And so we really need to see that constantly trending before you go and make a call. It would be too early to make any changes. What we did share was similar growth rates in FY '26. And if you remember, we gave a range. So you could take that growth rate off those range. It would already have covered in net retention in there anyway. So hopefully, that answers that question.

I think an important thing to note, though, at the time of the AGM, not just we haven't seen a trend yet. The FY '26 revenue had baked in a significant growth in NRR, and we had not seen that yet.

You're saying consensus.

Consensus.

Yes. Yes. We were solving for consensus at that point in time.

Fraser McLeish at MST.

I just want to echo the comments about good to see the turnaround and the improvements in the half. And just 2 quick ones for me. Just in terms of the addressable market for your core Virtual Cross Connect services, there's obviously some good drivers of growth in that market. Are you seeing any sort of offsets from maybe cloud service providers offering more on-ramps and more data centers, which might need customers less usage potentially of Virtual Cross Connects? That was my first one. And then second was just on the margin profile of your new products, which where more of the growth is going to come from. Is that particularly different from your -- the margin profile of your current base of products?

I'll answer the margin one first. Margin is going to be very similar for all those products, excluding Managed Cross Connect, which is a very small part. But yes, the remainder is in line. VXCs on -- so what you're referring to is the -- you take a port, you take the cloud router and then you take the connectivity. The question is, is by more cloud providers rolling out cloud on-ramps and data centers is that connectivity. There may be a small -- there may be a portion of that, which would slow that down. However, the growth is outstripping it. So they're still growing at such a big rate that. I'd say that, that we shouldn't see that as a major issue. We're not seeing that as a major issue. The other important piece is that when we talk about VXCs, they are -- it's connections. And so as we launch more and more products, remember, Megaport came from a cloud connectivity company. We are still the world's best cloud connectivity company and delivered in 60 seconds and all that magic can automate the entire thing using code. But they have very low-cost connections. And so we've got 30,000 plus of those. When you take long-haul connectivity, when you take DCI, which is our VXC connectivity between data centers, it's significantly more expensive because you're running very, very long distances at very, very high speeds. And so that revenue itself will dwarf any revenue inside just the cloud connectivity space over time. So the market is significantly larger from a revenue perspective to go after, which is why I've shared in the past that -- and I sort of shared on that chart with the comparison of a 10 gig port and 100 gig port and what it means from a connectivity perspective. One connection, like one port is not comparable to the other connection. It really depends on the speed and the distance that you're traversing. So by opening up all of those markets globally, that is an awesome path for us moving forward. So that would far outweigh any loss that would come from what you sort of potentially describe the cloud piece, which we're not seeing.

Paul Mason, if you could ask a question, and we'll take one more after that.

Just wanted to ask generally around your strategy around Internet. You've got a couple of new Internet products that look pretty exciting and then you're expanding the IX locations as well. Just maybe, first of all, like sort of how has the initial phase of offering Internet-based products gone with customers? Like are you getting much traction incrementally there? And then sort of secondly, like how are you sort of thinking about like the size of your IX business over time? Like Megaport originally bought a whole bunch of IXs, but then sort of left that business on the sidelines for a while, but it looks like maybe you're thinking about that strategically quite differently now, yes.

Good question. So on the IX, IXs are really -- I mean, they're a really impactful thing in the world, i.e., they actually shorten the distance for Internet across countries, they make the Internet better, and they've been doing that for some time. They're probably one of the most sticky businesses have ever come across. They're not -- they don't grow super fast, but they're very sticky. And what we do is we provide that totally automated. So we have a platform that really no one else on the planet has figured out how to deliver. And it's because we deliver it in so many locations. Most IXs are run locally and the vast majority are just represented in a country. So we would -- we will continue to provide Internet Exchange locations wherever it makes sense. The cool part of our IX is back to our -- I'll keep referring to it, that new compute platform, the new IXs can just literally be run inside that existing platform. So instead of having to roll out additional infrastructure, we could spin up IXs wherever we choose, and we can spin them up really quickly. It just needs to make sense for us to land there. Yes. So there's still a lot of focus on that. The customer base on that are the largest companies on the planet. So we already have those relationships. It makes sense to continually grow. And it's cool. It's a cool space. It's not going to change our revenue dramatically, but it is really important to have. It also drives a lot of connectivity and also covers that sort of speed space. Your first question, sorry, I went through -- Internet, yes. We've added a bunch of functionality. BGP is an example. Internet to me is a really simple product. It's super simple. We all know what the Internet is and Megaport never offered it. And so the mission that we should be on is how much more valuable things can we add on the platform, totally automated and delivered to the existing customer base that makes sense. Internet is by far the easiest discussion to have with an existing customer. Hey, you've got a port with Megaport, you connect to the cloud. It's in a data center. I'm sure you have Internet in that data center as well that you're paying someone else with a Cross Connect and the connection, wouldn't it make sense to put that on Megaport? And then we provide that as an automated service. So we needed BGP to expand into a different market set, expand that offering. That launched early, and we've seen great traction. So if you look at the chart, it's up and to the right in terms of customers adopting. It's decent revenue. And over time, it could be massive. And I'd love to -- I'm very keen to put comparatively to the IX, which will only grow so much, Internet could grow dramatically over time. So we're putting a lot of energy into that.

We'll have one final question from Jon Atkin.

Yes, I'll make this maybe multipart. But one thing maybe just on that last answer, what are the products -- you mentioned going to countries and some of the times that geographic decision is based on where your customers want you to go. On the product side, what do you not offer today that customers are inquiring about? And then secondly, on kind of new logo generation, I'm curious if you could drill down a little bit on how much of that might be coming from inbound inquiries versus aggressive outbound direct sales efforts, agents, indirect as well as when you don't win a new logo, what's the reason? Is it DIY? Or is it an offering that a CDN company or a fiber company or one of your direct pure-play peers or Equinix might be offering?

Good question. So I'll start with the last one. Logos come from many sources. And so we actually -- if you look at the go-to-market function, it's broken down into many different functions inside that. Each one servicing different either channel, which is in the United States, very different to the rest of the world when they have agents, we also look at managed service providers. And actually, then we have all of the cloud providers and every MVE, every time we add, say, like Palo Alto, a Cisco, a Forti, a Meraki, name it, every time we add one of those, we actually access their salesforces as well. The data centers are very strong for us. So each one of them contributes to this pool of folks that are bringing us or supporting us to bring business, but you've got to feed water, you got to love those relationships, give them a lot of energy. And we've been doing that. If you remember the World Tour, that was about revamping that. I'll say outbound is not easy in the world today. I think one of the biggest challenges Megaport has and sort of to your point before about like would you lose? We very, very rarely lose if a customer realizes what Megaport can do because in short, what we do is totally automated, delivered in 60 seconds, solves the customer problem, is better priced than the competitors and far more resilient. And so you go, how do you have all of those pieces of the puzzle playing out. And so therefore, so long as it's on-net, so long as what they're trying to do is connect on-net, Megaport should never lose ever. The challenge we have is we're 300 people. We're in 26 countries. And it's a bit like that LinkedIn video I just shared people just don't realize we exist. And as soon as you realize that we exist, that's the game. Now the challenge is that it's very hard in today's AI world, and I'm sure you'll all appreciate this, how often do you get pinged on an e-mail or a text message or something trying to sell you something and you just -- it's just becoming noise. So it's tricky to take that to market, which is why you need to constantly focus on organic inbound. The Internet website is super important, and we're still seeing awesome inbound from that. And also, you still need to focus on outbound and with all those partners. So that's key. On the product front, I won't give you the insight into the products we're missing because I don't want to alert our competitors to where we're thinking are going. But what I will say is there is -- back to the original point, there is so many paths that we can take that leverage a network style solution that can live both in security of network, network and network security in that vein that make a huge amount of sense for us to land and that new compute platform was really the key to unlock that, which will enable us to do that in a far more rapid pace. It's exciting times.

Okay. We might wrap things there. Just a reminder that Michael and Tish will be in Sydney on March 3 and 4 and in Melbourne on the 5 for the roadshow with some one-on-one meetings and a number of group meetings, reach out if you'd like to join some of those. Thank you very much for your attendance today, and we'll end the call there.

Thanks so much. Cheers.

Thank you.