Australia | Aug 11 2021
This story features MEGAPORT LIMITED. For more info SHARE ANALYSIS: MP1
While FY21 results for Megaport were generally well received, opinions vary over the impact of the short-term cost of reinvestment.
-Megaport achieves breakeven for earnings in June
-Strong pipeline for the Megaport Virtual Edge product
-North America becomes the main growth engine
-A step-change in reinvestment over FY22 causes some concern
By Mark Woodruff
Meagaport ((MP1)) has released FY21 results, achieving a breakeven in normalised earnings in June while increasing yearly revenue by 35% over FY20.
The company is a global network as a service provider that allows businesses to easily and flexibly purchase dedicated data connections to service providers. This pertains especially to cloud service providers (CSPs) including Amazon, Microsoft, Google, IBM, Salesforce.com and many others on the platform.
There are around 120 cloud on-ramps around the world, by which businesses may connect to use the CSP’s equipment. This is well short of the near 6,500 data centres in existence worldwide. To use the cloud the two sets of data centres need to connected, which is where Megaport comes in.
Megaport has a footprint in most of the cloud on-ramp data centres globally and is rolling out into the "other" data centres (the 98% of the market without cloud on-ramps).
Features of the result included a 43% year-on-year lift in gross profit, while the normalised earnings (EBITDA) loss declined -37%. The statutory loss increased -13%, with a large portion of this attributed to currency revaluations and expensing staff options.
A pipeline of 129 customers of the relatively new product Megaport Virtual Edge (MVE) showed customer are spending significantly more and using more services than non-MVE users, notes Canaccord Genuity.
Also, the broker points out the company-wide June 2021 gross margin was around 60% versus 56% for the second half of calendar year 2021. Management highlights that North America has spare capacity, which allows for further revenue growth at minimal incremental costs.
Canaccord Genuity also focused on second half FY21 trends, particularly in the regional segments. This confirmed North America as the main growth engine in the business in the same period as it crossed 50% of group revenues and recorded its first positive earnings (EBITDA) result.
The broker believes a strong period of new customer sign-ups and port uptakes late in the fourth quarter sets up well for FY22, and stays with its Buy rating while modestly increasing its price target to $19.70 from $19.35. Company analysis continues to show positive "land and expand" trends, with customers progressively spending more each year.
Cannacord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, maintains its Buy rating and increases its price target to $19.70 from $19.35.
UBS sees multiple drivers for potential upside to consensus. These include leveraging the PartnerVantage program to drive a large uplift in indirect sales and the potential acceleration of new product/revenue streams from the InnovoEdge acquisition.
Also, there’s considered upside from spend per customer, solid headroom from further data centre expansion in North America and Europe, and potential geographic expansion (eg South America).
The dissenter among brokers is Ord Minnett. The broker lowers its rating to Sell from Hold and the 12-month target price falls to $15.00 from $15.50. This is due to concerns over the company’s planned scale-up and scale-out approach, which is likely to see a step-change in reinvestment over FY22.
The analyst lowers revenue forecasts and believes the investments may take time to bear fruit.
What are the investments?
Some investment relates to the two previously mentioned growth initiatives. They are the expansion of the indirect sales channel, with the company launching its PartnerVantage program, and the acquisition of InnovoEdge for US$15m to drive new product development. In addition, investment will be required to the roll-out more Megaport Virtual Edge (MVE) integrations.
InnovoEdge is described as a complement to the company’s existing services, increasing customers’ ability to manage more functions on their network through a single dashboard.
The scale-up and scale-out approach outlined by management will likely lead to a step-up in reinvestment in the second half of 2022 to support the company’s growth initiatives. Ord Minnett expects returns from this reinvestment to be backdated, as it takes time to ramp up new hires.
The effect of increased costs versus revenue growth
UBS incorporates the large uplift in cost reinvestment in FY22 as well as the marginally incremental revenue benefits. As a result, short-medium term earnings (EBITDA) estimates are downgraded by -79% in FY22 and -14% by FY25.
However, the analyst increases its long-term data centre rollout assumption by 50 and increases the maximum revenue per port to 1,000, resulting in largely unchanged earnings in outer years. These forecast changes results in UBS retaining its Buy rating and increasing its target price by 9% to $20.45.
Meanwhile, Morgans have increased operating expense forecasts as the spend ramps up, and while this lowers short-term earnings forecasts it drives higher growth in outer years. The broker maintains its Hold rating and lifts its target price to $17.71 from $16.61.
FNArena’s database has three broker ratings with a Buy, Hold and a Sell, with a consensus target price of $17.72, which signals 3.9% upside to the last share price.
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