Megaport Limited: To $100m and beyond
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 25 October 2021, 7:00 AM
- Sectors Covered:
- Telecommunications, Technology
- MP1 reported another strong quarter with record Annualised Recurring Revenue added (+$10M ARR added in the quarter on a constant currency basis and +$13m ARR in A$/currency assisted).
- MP1 has achieved a major milestone which is ARR exceeding $100m in Q1FY22. This is a challenging number to crack and has been achieved predominately with direct sales. With a huge amount of work going into MP1’s product, engineering and commercial offering, we are hopeful sales accelerate from Q3 and beyond, as MP1’s indirect/channel partners/MVE sales begin to kick.
- We retain our Hold and (login to view) target price for now, hoping to buy on a pullback.
Event: Q1 FY22
Revenue growth and costs were both ahead of our expectations. Monthly Recurring Revenue (MRR) added in the quarter was a record on an underlying basis (ignoring currency) as well as in AUD terms (AUD terms were helped by currency movements this quarter).
Underlying MRR growth in the quarter was +$822k/$8.5m which takes ARR to $103m. We were expecting MP1 to crack the $100m ARR mark in Q2FY22 so this is a great outcome, in our view.
A large portion of MP1’s revenue growth in Q1 was cycling the full impact of record customer and port adds in Q4FY21. In Q1 ports, customers and services added slowed QoQ which means sales need to convert early in Q2 to deliver a strong Q2.
We are focused on Q3 where we expect to see a meaningful lift in channel sales.
At first glance cash costs were higher than we had expected but this is all timing related; and we are comfortable our FY22 costs are still in the ballpark.
There are ~$7m of quasi one-off cash costs in Q1 FY22 which will not repeat in the next few quarters. These include payment of commission and Short-Term-Incentives (carried over from FY21), upfront license fees (annualised cost which are paid in Q1) and one-off deals costs relating to the acquisition of InnovoEdge.
There were also some timing benefits in Q4FY21 which reversed in Q1FY22 (MP1 paid suppliers in Q1FY22). Overall, backing those out suggests FY22 expenses remain in the ballpark of $110m per annum.
In August, MP1 flagged it would increase investment in sales and marketing costs, so it doesn’t come as a surprise that operating costs have jumped. MP1 delivered negative operating cashflow for the quarter (despite exiting FY21 in an EBITDA/Ops cashflow positive position).
On the capex side, MP1 sealed the acquisition of InnovoEdge (-A$10m in Q1) and purchased equipment early to sensibly compensate for chip related shortages.
Forecast and valuation update
No changes made.
Hold recommendation and (login to view) Target Price retained.
We continue to be long-term bulls on MP1. We view its business model, structure growth, and managements execution all as exceptional. However, we are hoping a short-term buying opportunity may present itself over the next twelve months.
Key share price drivers will be data points supporting an acceleration in sales in FY22 and proving there is healthy customer demand for MVE.
This anticipated acceleration in sales is expected from Q3 FY22 onwards and should, in our view, be sufficient to more than offset negative EBITDA in 1H22 (investing for growth).
MP1 is not yet a cash generative business and needs to grow revenue to reach this point. With $114m of cash at bank (31 Sept 2021), MP1 has ample runway.
MP1 is a high-growth business and as such is subject to significant share price volatility. This includes a valuation highly sensitive to bond yields and inflation.
Find out more
Download full research note
If you would like access or more information, please contact your adviser or nearest Morgans office.
Request a call
Find local branch
Need access to our research?
You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team.
Create trial account
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.