Megaport: Focus Returns To Global Potential

Small Caps | Aug 10 2022

Megaport’s FY22 result highlighted significant metrics disclosed for the first time, underpinning broker views of a solid longer term growth story.

-Megaport had pre-released headline numbers
-Official FY22 report provided significant first-time disclosures
-Brokers consider the company a strong longer term prospect

By Greg Peel

Megaport ((MP1)) is very much a new age company that we could describe simply as engaged in cloud connection services, but for a better understanding we’ll refer to the description provided to Yahoo:

Megaport Limited provides elastic interconnection services to the enterprises and service providers in Australia, New Zealand, Hong Kong, Singapore, Japan, North America, and Europe. It operates a platform that enables customers to connect their network to other services, as well as creates agile network that connects in multiple regions.

The company also offers Megaport Virtual Edge, an on-demand and vendor-neutral Network Function Virtualization service that enables branch-to-cloud connectivity on Megaport's global software-defined network; internet exchange services; and Megaport Marketplace, an online hub that interconnects service providers and enterprise customers. In addition, it provides cloud connectivity solutions; and virtual routing for cloud networking.

Megaport is very much a technology-based growth stock, yet to show a profit, and as such has been hit hard this year along with all companies (here and in the US) of a similar nature. The share price fell -77% from November last year to June this year.

As a growth stock, Megaport is beholden to bond yields which rose significantly over the period on central bank rate hikes before easing back on recession fears, hence the share price rebounded 106% to a peak in July. In July, the company pre-released headlines numbers from its FY22 earnings result. Yesterday, the official earnings release report provided a lot more colour.

Revenue was up 40% year on year, which reflected significant fixed cost leverage. Gross profit margin (after partnership commissions) grew to 62% from 53%. Operating costs in Australia Pacific and Head Office fell in the second half from the first, implying the company can rationalise costs when required.

The most significant metric was a first time disclosure of life time value versus customer acquisition cost, which came in at 6.3x. Morgans considers more than 3x worthwhile and 6x impressive.

This figure justifies spending aggressively in growth, Morgans suggests, although Megaport still needs to demonstrate progress towards becoming free cash flow positive on current funding – an issue that has led to investor hesitancy.

Management disclosed churn numbers for the first time, highlighting an annual rate of -7% customer churn. In Ord Minnett’s view, this is relatively healthy and is backed by 50% customer retention after eight to nine years from Megaport’s first two cohorts.

However, the sharp drop-off in Year 1 (average -14%) and Year 2 (average -11%) does suggest the targeting of computer-assisted coding (CAC) could be improved, according to the broker.

Longer Term Story

Morgans (Hold) remains a long-term bull on Megaport and its global potential. The broker expects to see improving sales traction over time as the indirect/channel partners ramp up.

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