Under the Spotlight AUS: Megaport Limited (MP1)
Technology is now a core part of many companies, and their needs are becoming more complex. Megaport enables businesses to connect their IT infrastructure to various networks. Let’s put it Under the Spotlight.
As our world increasingly shifts online, cloud computing has become central to businesses, connecting hardware to larger networks that offer more processing power, storage and databases. Providers offer access for a fee, so that companies don’t have to purchase and operate their own servers. However, connecting a company’s systems to the cloud, network services and data centres is not always straightforward. This is where firms like Megaport ($MP1) step in to help.
Megaport was founded in 2013 by serial entrepreneur Bevan Slattery, who was also behind the grounding of data centre operator NextDC ($DXC) and internet service provider Superloop ($SLC). Megaport made it easier and more cost-effective for customers to connect to the cloud through their Software Defined Network platform. Today, around two-thirds of customers use their services to link to major cloud providers such as AWS ($AMZN), Microsoft Azure ($MSFT) and Google Cloud Platform ($GOOG).
Setting up networks
Megaport quickly grew beyond its original home in Brisbane, to enter the European and North American markets. The company hoped to further this expansion by raising $25m with its 2015 ASX listing, although it only had an annual recurring revenue (ARR) of only $2.6m at the time. While Megaport emphasised the scalability of its services, the company’s path to scaling its own business has not been simple.
Establishing partnerships with various cloud providers, including IBM ($IBM), Alibaba ($BABA) and Oracle ($ORCL), has been key to growth. An agreement with Digital Realty ($DLR) brought Service Exchange to market in 2017, allowing users to access multiple cloud providers and other services through a single link. The Megaport Cloud Router eliminated the need for physical infrastructure to integrate and control actions from the firm’s web portal, reducing potential costs for customers.
The Megaport Virtual Edge platform was launched in 2021 to bring network services closer to end users, as many clients wanted to securely control their activities over large geographical areas. Megaport sees itself as a Network as a service (NaaS), with customers joining their ecosystem via ‘Megaports’ and then building connections to selected destinations or services. Using these ports, customers can manage connectivity services both from mobile and desktop environments or via customised solutions.
Testing connections
Megaport earns revenue directly from end users and indirectly from external partner resellers. Through the PartnerVantage program, affiliated firms can market and deploy Megaport’s services on behalf of their clients. The company’s client base grew and the trend of ARR was positive; the stock also started gaining favour with investors who were keen to become part of a tech success story.
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However, by 2022, sentiments were shifting and investors moved away from unprofitable companies like Megaport to those with more solid earnings in the short term. The ‘Scale Up, Scale Out’ program to build up the business’ capabilities involved reinvesting large amounts back into the company – and weighed heavily on its balance sheet. Resignations of the CEO and CFO in early 2023, together with news of customer and port growth being only 4% and 3% respectively in H1 FY23 caused Megaport’s share price to trend downwards.
Slattery returned to the helm as interim CEO and the company embarked on a cost-cutting drive. Operating expenses fell 15% from $43.1m in H1 FY23 to $36.5m in H1 FY24. These actions did include a reduction in the number of employees and related professional fees. Declines in marketing and travel spending are more of a short-term measure with both expected to grow again in the second half of the year. Revenue growth and increasing prices for some services helped to bring Megaport’s cash flows into the green.
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Future links
Megaport has managed to improve its finances in a relatively short period and is well positioned in an environment where AI is fuelling demand for cloud computing. On the other hand, there is considerable debate on whether this boom will continue and if stocks related to the theme are already overvalued. While Megaport’s share price remains far below its December 2019 high, the company might need to show more sustainable earnings growth to convince investors.
Megaport is still prioritising its expansions and is yet to pay out any dividends. The company has lifted its FY24 guidance for earnings before interest, taxes, depreciation and amortisation (EBITDA) to range between $56m to $58m, up from $51m to $57m. Revenues are expected to increase 24% to 27% from FY 23’s $153.1m to around $190 to $195m. The company’s and investors’ expectations are high. Both will be watching these metrics closely to identify any more potential gaps in Megaport’s network.
This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.
