Goldman Sachs Target price : $11.90
UBS Target Price : $13.30
Megaport CEO Mr Reid's LTI and STI. If Charlie Munger's theory is correct that " Show me the incentive and I will show you the result" or something along those lines then next 3 years Megaport will have full support from the CEO.
STI
Megaport released its FY23 report this morning
Revenue ( FY24 my estimate based on guidance)
Customer Receipts
Operating Cash
Total Customer
Debt
Cash
Megaport announced Q4 FY23 results and it demonstrated how cost cutting and price increase has changed the game in terms of cash flow narrative in 6 short months.
Story changed as much as that it actually generated free cash flow in the Q4 ( if you ignore redundancy payment)
So for FY23 it is expected to have Revenue of 153m and they are starting FY24 with ARR of 179m. ( My revenue assumption for FY24 will be satisfied even if they don't add any new customers - Nice place to start)
So in a hypothetical situation, if they don't increase the cost and serve existing customers and get 179m cash ( from ARR), they potentially be a profitable business but Management has guided that they will invest in the Sales function of the business for further growth specifically in the North America region. After that investment, they have guided the market that normalized EBITDA for FY24 will be in the vicinity of 20m
The board has decided to terminate $25m debt facility. and after this result, it will definitely won't require to dilute at the wrong price.
Looking forward to FY24 now...
In case if you are wondering what just happened last week with megaport shareprice. I believe it has something to do with this.
xa-09-2023-networking-report.pdf
The annual Cisco Global Networking Trends Report highlights important strategies and technologies within the enterprise networking and cloud industry.
In the 2023 report, cisco surveyed more than 2,500 IT leaders in 13 countries across North America, Latin America, Asia Pacific, and Western Europe.
Key Findings:
- Hybrid work continues to pose secure connectivity challenges
- The transition to Cloud and multi-cloud is accelerating
- Securing user access to cloud applications tops the bill of 2023 networking challenges.
Six best practices to provide secure access to Multi clouds can be accessed through the report ( one that relates to Megaport is as below)
The recent blog on Megaport website
https://www.megaport.com/blog/whats-new-with-megaports-services/#outposts
An interesting development from this blog for me :
Comment from the CEO in AGM Address:
I think this can provide safety for free cash flow and profitability.
UBS - PT $14.10
Megaport released 1Q global updates today. it achieved EBITDA profit and positive cash generated from operating activity. On the call, CEO and CFO confirmed that they have sufficient funds to achieve profitability and no need for capital raising.
At the time of writing, Shares are down roughly 15%.
So let me check my thesis as per my valuation calculation. I factored in as below. ( More detail in valuation straw)
- So is Revenue for FY23 on target to reach $138m?
- in 1Q it did 33.7m and ARR as of the end of Sept stands at $139.2m - so it is well and truly on track to achieve my target
- Is Gross margin on Track?
- On 33.7m Revenue, it achieved Profit after direct network costs and partner commissions equals to 21.7m ( i.e 64.4%) - So yes its on track
- Is employee Expense on Track?
- Total employee expenses were 13.7m for 1Q - so annualized comes to around 55m so yes its on track
- How is the partner channel performing?
- They signed 100 new partners and roughly 38 transacting so its gaining momentum
One concern is that one of the KPIs is Net new ports and it needs monitoring as you can see below - However, every other KPI moving in right direction.
They also advised that MegaportOne is also getting traction and sold it to two customers
I think overall, I am happy with the result (probably i was expecting a lot worse) and my thesis is still intact so will continue to hold IR and SM. I believe that Megaport is funded to achieve +ve FCF and Profitability.
There is very high short interest in this business. at some stage, they will need to cover those.
Megaport reports quarterly so the majority of things were already known to the market. Things that caught my eyes in FY22 report is:
Reduced workforce:
Now we can take this as positive that management is adapting to the new market conditions and responding accordingly or we can be sceptical about it : I am not 100% certain but I am leaning towards negative at this stage.
Gross and EBITDA Margin
On the call, it was evident that CFO is ok with guiding the market that an APAC-like Gross margin won't be achievable but they are comfortable with a 70% Gross margin in the future for the group.
Churn or Customer cohort survival
Compound annual churn rate is trending toward 7% and decreasing.
If I am reading this graph correctly, it tells me that Megaport loses roughly 20% of the newly signed customers in the first 2 years ( Probably because they used megaport services for a specific projects rather than recurring usage)
Competition
On the call, the CEO mentioned that they have never lost a deal because of the price or specific company as yet. They lose only if the customer chooses to go with the Internet instead of Megaport services ( i.e for workload not requiring great network and/or security).
CEO Remuneration
CEO fixed rate increase from 547K to 1m ( I find that's a huge jump)
How megaport sell its services
The following illustrates the evolution of other channels to sell its services. Obviously, we could see the investment in FY22 for it - but hopefully, it will increase the growth from hereon.
Overall, things are going very smoothly and still need to monitor the growth and margin trends - can't wait for FY23
Customer Growth
Megaport, like clockwork, keep adding more customers -- in other words products/services it provides has been in great demand and customer is selecting to go with Megaport in the past
(Main questions --
- Will Megaport's products and services be in demand in the future?
- If Yes, Will the customer opt for Megaport or Any other competitor coming to the surface?)
MRR by Channel
Megaport at the end of 2021 switched from Direct Channel to Indirect Channel - in last year, it signed multiple Solutions Integrator to sell their product and services -- that strategy is showing the result
If it becomes successful, then it will provide scale and may be growth will increase in the future [ Need to monitor, How it is progressing each Q]
Future demand
All the research company is drawing a conclusion, that Megaport services is essential and will become even more critical in the future.
EBITDA Positive
Take that with little pinch of salt
Roger Montgomery's view
https://rogermontgomery.com/why-did-megaports-share-price-jump-23/
Valuation
Assumptions
Revenue will increase by 25%
Cost will increase by 10%
market will give PE of 30
discount rate 10%
If we calculate from FY26 figure - today's value comes down to $10.57
If we calculate from FY30 figure - today's value comes down to $22.11
Average = $16.34
New customers: Growth in new customers hasn't slowed based on the numbers
Existing customers: Existing customers keep spending more each half ( average monthly spend per customer cohort)
NaaS market prediction
Megaport published their HY FY22 result today.
Operating leverage is very much clear to see in the result ( ~15m increase in revenue only required ~2.5m in-network costs)
However, Cashflow paints a different picture
The main reason is for the investments megaport has done in the last 6 months.
- Employee costs increased by 8m ( as staff count increased from 229 to 300 --i.e added 70 more staff)
- New channel support division
- Acquisition of InnovoEdge ( which is what is driving the new Megaport ONE product)
- Integration with various SDWAN providers
Growth in Megaport services and MRR can be seen clearly in the diagram below
The below chart shows how MCR and MVE growth will affect the Average Monthly Revenue per Customer. ( MVE has just been started since last 6 months so there is plenty of growth in the future)
New Product ( i.e integration of InnovoEdge to Megaport)
2Q revenue was marginally softer but Megaport has made tactical and strategic investments in the last year to emphasize on the indirect sales channels.
- Launch of VantageHub ( onboarded 22 indirect channel partner)
- partnered with two big distributors ( Arrow and TD SYNNEX)
- Gone live with 5 SDWAN partners (Cisco, fortinet, aruba, vmware and versa)
My view is that there will be increased growth in the coming years because of the above. 3Q22 and 4Q22 results will indicate if that's the case. Normally it takes good 18 months for such businesses to develop successful sales channels and educate all concerned parties. All the blogs/collateral and youtube videos I have seen suggesting me that Megaport is doing it right.