Megaport Limited (MP1): At the tipping point of a virtual edge
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 10 February 2021, 8:00 AM
- Sectors Covered:
- Telecommunications, Technology
- Megaport Limited (ASX:MP1) released its 1H21 result. Given the company releases quarterly updates the KPIs were already known and therefore didn’t surprise. FX continues to be a challenge, slowing revenue growth on translation and causing a ~$17m FX loss to be recorded in the half. Excluding this, the result was, in line with our forecasts.
- Key bits of new information include: North America became EBITDA positive in Q2FY21 (management reiterated exiting June 2021 in an EBITDA breakeven position); and Megaport Virtual Edge is progressing well with a Q421 launch due.
- We make immaterial forecast changes and retain our Hold rec and PT (login to view).
1H21 key points
Annualised revenue grew 37% yoy and 9% hoh to A$75m. Reported revenue for 1H21 grew 39% yoy and 12% hoh to $36m. Gross profits grew 38% to $18.2m.
Gross profit margins held broadly steady at ~50% and were dragged down by expansion costs including into Japan.
MP1’s normalised EBITDA loss declined 15% to A$8.7m and NPAT loss grew dramatically to -$38m albeit largely due to $17m in FX losses which is largely non-realised, and is simply a mark-to-market hit as a result of the appreciating AUD.
Free cash flow (after rent and capitalised software development costs) was -$21m vs $32m in 1H20. MP1 had A$145m of cash on balance share as at 31 December 2020 so continues to look very well funded.
The key items of most interest to us were:
- Closing the gap to EBITDA breakeven;
- Megaport Virtual Edge progress.
With North America (NAM) now EBITDA positive all three regions are EBITDA positive at a segmental level and before centralised costs.
Underlying EBITDA (post centralised costs) was -$8.7m. Underlying EBITDA improved +$12m from 2H20. All things being equal, MP1 needs to add ~$9m of EBITDA in 2H21, to achieve group EBITDA breakeven.
They reiterated they are on-track to achieve this, on an exit rate basis, in 2H21.
Progress towards the launch of Megaport Virtual Edge (MVE) which is MP1’s SD-WAN solution continues. Cisco is expected to launch MP1’s 1st MVE in Q4FY21 and several others are expected in the following month, all going to plan.
MP1 noted their SD-WAN/ MVE pipeline covers ~50% of the SD-WAN market. In our view, if they are able to cement a position as the #1 platform in the SD-WAN market, this would be a very significant win for the company and cement its competitive advantage.
Investment view - Hold retained
We continue to rate the medium-term outlook from MP1 highly but retain our Hold recommendation and Target Price (login to view).
Following the 1H21 result we have made immaterial changes to our underlying forecasts.
From a macro perspective the strengthening AUD and sector rotation from technology and COVID winners into cyclical recovery stocks are both headwinds for MP1. Both are beyond managements control.
From an operational perspective we believe investors want to see an acceleration from the current sales rates and more details on the practicalities and economics of SDWAN, in order for the next leg of share price appreciation.
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