Megaport CEO on displacing the public internet

Global network provider Megaport (ASX:MP1) has been a key beneficiary of the shift to working from home, connecting organisations to the cloud, getting an extra kick in demand amid the pandemic, and sending it shares 46% higher so far this year, far outperforming the market and the Technology index (ASX:XIJ).

Since listing five years ago, Megaport has amassed some 1,800 customers including some internationally recognised brands like Adobe, ING, Major League Basement, BHP, Tesla, FedEx. Megaport’s earnings and revenue have swelled, but one question remains - what's its path to profitability?

I chatted to Megaport’s CEO Vincent English to learn more about the business and its path to future growth. Watch the interview or read the transcript below.

Time stamps

• (0:27) MP1's elevator pitch
• (1:55) What investors should know about MP1's results
• (4:21) When investors can expect MP1 to generate net profit after tax
• (4:53) The inside scoop on the cloud industry
• (7:08) MP1's focus on ESG
• (8:58) How MP1 addresses gender balance

Edited Transcript

Jess: Hello, I'm Jessica Amir, a market analyst with Bell Direct. Joining us today is a company that's benefited from the shift to working at home amid the pandemic. Cloud services business Megaport (ASX:MP1). The CEO of the company, Vincent English, is with us now. Vincent, thank you so much for joining us from Brisbane.

Vincent: Thank you. Lovely to be here.

Jess: Let's start off with Megaport's elevator pitch.

Vincent: Thanks Jessica, Megaport is a leader in Network-as-a-Service (NaaS). What we've done is we've built a global network that connects 197 cloud provider locations: Microsoft, AWS, Google, Oracle etc. So, where customers have their own equipment and their own servers inside in the data centre and they can actually connect that equipment to a public cloud to augment their business. The model is based on a pay-as-you-go model, so it's a lot more efficient, it's a lot more cost-effective for our customers and they also have a portal or a one-stop shop effectively on the Megaport platform, where they can pick and choose what services they want to use to help them run and manage their business. We have over 1800 customers at the end of June. Some of them are fortune 500 companies, large multinational companies right down to small medium-sized companies, and you know, they're in that presentation, our earnings presentation which is on the website and also on the ASX has a good example of the type of customers and user cases that we've got today.

Jess: Your shares have done exceptionally well, outperforming the market and have gained 46% year-to-date as at the time of recording this and hit an all-time high after handing down your financial year results, which showed a 66% jump in revenue and an increase in your cash position. What should investors take away from your results.

Vincent: Yeah look we had a very successful year last year and we report every quarter on our KPIs and on our revenue, so again probably wasn't too much of a surprise in terms of the total revenue for the market as a whole, which is good for investors and shareholders to keep pace of how our business is tracking, but we did have two very successful capital raises during the year, where we closed at the end of the financial year with over $160 million cash in the bank.

We have a very resilient model post COVID-19 in the world that we're in today we're again enabling customers to speed up their connectivity and allowing their businesses to thrive in this environment, so that's been a key driver. Not all businesses and verticals are as we all know today are not all equal. So hospitality unfortunately and airlines, etc, we know are suffering as a result of COVID-19, but then a lot of businesses are working remotely need connectivity for video and then you've got businesses like pharmaceuticals, banking, financial services, manufacturing logistics, which are all trying to keep pace with in today's world keep up with their demand for their product. So you know again a lot of that work has been done in the public cloud environment, so we've sort of benefited from enabling that connectivity and uptake in demand.

So you know in terms of the overall results you're right, 66% up in revenue we had 94% growth in our North America business during the year and you know that was 54% in our APAC region and 36% growth in our European region so all business units are contributing and one common denominator is demand is increasing for services and the speed in which we will enable that for customers is kind of a big driver.

Overall, we had an EBITDA loss in the financial year just under $20 million, $19.9 million and improvement substantially on last year and also on our gross margin as continues to improve as we drive more revenue and the business scales much quicker. And we're looking to exit this financial year FY21 in June 21 on an EBITDA break-even basis so as I've mentioned on our earnings call.

Jess: But we do have to ask what about profit. You are in lost territory at the moment. You're a growth tech business but when can we expect Megaport to be generating net profit after tax?

Vincent: Yeah, I suppose just to clarify, we're aiming to be on an exit run rate to be EBITDA break-even in June. You're right, we're very much focused on EBITDA, there's a very strong correlation between our EBITDA numbers and our cash break even position and you know depreciation and amortization are the two big non-cash items that are charged on our income statement.

Jess: So how big is the cloud industry? Where does Megaport play a part and who are your biggest competitors?

Vincent: Well there's a study we've been kind of quoting this one for a little bit there's a Gartner 2019 report on a study on the cloud market overall so as of FY20, the industry is in around the $280-$290 billion market size and you know it's expected to grow up to over $350 over the next two to three years. That's companies like Microsoft, Google, AWS, etc, Oracle, right including the Telcos, includes everything that's in that spend. So, we're a subset of that you know right now, with our total revenue being $58 million at the end of June and obviously continuing to grow, we're a small subset at the moment but we're an important contributor to that in a very growing space.

Like I said last year we grew by 66%, last year we grew by 78% in terms of our revenue year on year, so you know, we have an important role to play in that industry.

And then look you know in terms of competition, it's a little tricky that one, there's no real direct like for like comparison in the space that we're in. You know when we when we did our IPO back in 2015, we did talk about it openly saying you know, we are the first of our kind and we are you know running to try and capture as much as we can. I suppose typically we're probably comparing ourselves a bit more like the Telco model or we're displacing maybe the public internet for connecting to the cloud which is you know is not great for latency and it's not great for security etc, particularly when you've got mission critical workloads that businesses want to use public cloud for, so they want to make sure that they've got proper secure connectivity and it works properly. So we're sort of in a different space to a lot of people and that's why it's quite disruptive in terms of what we're doing and enabling customers in a much different fashion than it was traditionally there before.

Jess: Changing pace now, company longevity is at the forefront of CEO's strategic plans, so what's your focus when it comes to environmental, social and governance, known as ESG.

Vincent: Yeah look it's at the forefront of our business and it's all they're all very important aspects starting with governance that's really important for us as a public company, we've grown, in size we've gone into the ASX200 this year for the first time. So as along with that it brings on other things that we need to be more cognisant of in terms of on our governance and are including bringing on more board directors, independent, non-executive directors onto the board.

In terms of environmental, we actually don't produce anything because we're a tech company, everything we do is sort of virtual. Effectively we're a physical network but we do use state-of-the-art equipment, we do deploy all of our equipment we use. When I say we use state-of-the-art in terms of the consumption of energy, it's a very high efficiency output in terms of what it's doing so very cognisant environmental impact it has on our network. We work with obviously some of the biggest suppliers and vendors and also partners in the world, including data centres, which are very top of mind for them in terms of power and consumption usage. Then from you know from a I suppose the other aspects of there, we feel like that you know as a company that's a modern company in a new company, it's easier to involve all of these aspects as part of your day-to-day environment and it just becomes the norm and it's the way of doing business, so that's you know we're very cognisant of it and our responsibilities in those areas.

Jess: So, this year you're welcomed to the ASX200 and with that there's more of a focus on having a gender balance in leadership. What's Megaport doing in this regard?

Vincent: Well I'm pleased to say we're doing quite a lot and you know 40% of our 214 employees today across the network, 40% of our employees are female and we've got on my exec team, our Head of People and Culture, Melanie and then Anna who's our Head of General Counsel for heading up our legal. Two very key important members of the team and I said that the board as well with those new directors coming on board, we're planning on making sure that we have a higher, greater diversity on the board level, which we've outlined in our annual report along with our policies related to those and how they how it all comes together and our plans for the future.

Jess: Vincent English, Megaport CEO, thank you so much for your time.

Vincent: Thank you Jessica.

Jess: And thank you for watching. For more information about Megaport, head to Bell Direct's website.

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