Megaport Limited: Channelling their energy into growth
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 20 January 2022, 12:30 PM
- Sectors Covered:
- Telecommunications, Technology
- Megaport Limited's (ASX:MP1) Q2 result was in line with our expectations for revenue while cash costs were ahead of our expectations. There were, however, a number of one-off costs and timing differences in the Q2 expenses. Some of cash costs will be spread across the entire FY22 P&L while others will be capitalised.
- Q1+Q2 cash account suggests a -$15m EBITDA loss in 1H22 but this won’t be the case when the P&L is printed. That said, we have still increased our expense forecasts, albeit marginally.
- Overall, we were happy with MP1’s Q2. While there was no single “wow” moment in the accounts, collectively they show KPI’s are heading in the right direction and reinforce that MP1 has invested heavily in 1H22 to deliver an acceleration in sales in Q3 but more so Q4 FY22. Channel and VME grew as a percentage of ARR.
- After forecast changes we retain our Hold and set our target price at (login to view).
There was no single standout item from this quarterly but collectively all KPI’s are pointed in the right direction and this was a strong all round quarter from MP1.
Customer adds and port adds were above the trailing LTM average and bodes well for ARR growth accelerating in Q3. MVE’s grew by 12 in the quarter which was lower than the street anticipated, although we suspect much of this is timing.
Annualised Recurring Revenue (ARR) grew by A$7.8m in the quarter or an annualised growth rate of 47% to A$110m (vs ME $108m).
Operating costs was also ahead of our forecasts while MP1 ended the period with $105m in cash. There are some timing issues with Q2 cash costs. When MP1 releases its 1H22 result on 9th February 2022, we will be able to see a clearer picture.
Focused on channel \ indirect partners growing sales
Q1 & Q2 data points support the fact that MP1 has aggressively invested in channel which should drive an acceleration in sales in the coming quarters.
MRR from direct and indirect sources is now disclosed. Indirect has been 32% of MRR for the last 3 quarters but increased to 34% in Q2FY22. All going to plan with the ramp-up of indirect sales, this should progressively grow, and accelerate as a percentage over Q3/Q4FY22. See overleaf for more sale mix details.
MRR from MVE was 0.4% in Q4FY21, 0.8% in Q1FY22 and 1.6% in Q2 FY22.
At 31 Dec 2021, MP1 had a total of 22 additional indirect channel partnerships. SDWAN coverage through channel partners is now ~70% (from ~50% in Q1).
Forecast and valuation update
We have increased our revenue and cost forecasts in FY22 marginally and more materially in FY23/24. Our target price reduces from (login to view).
Investment view – Hold retained
We believe in the long term MP1 bull view – with a business model, structural growth, and management’s execution all very strong. However, we are also conscious of the negative impact from rising interest rates. This is driving a rotation from growth to value stocks. Longer term, and assuming successful execution, we see significant upside. However, for now we retain our Hold recommendation.
Price catalyst – sales acceleration
The key share price drivers, interest rates aside, is an acceleration in sales in 2H22 to prove MVE is a large mass marketable solution.
We anticipated an acceleration in sales in Q3 FY22 with a more material ramp-up in Q4 FY22 and beyond.
MP1 is not yet a cash generative business and needs to grow revenue to reach this point. With $105m of cash at bank, at 31 Dec 2021, MP1 has ample runway.
MP1 is a high-growth business and as such is subject to significant share price volatility. This includes a share price highly sensitive to bond yields and inflation. All other KPI’s unchanged, rising interest rates, result in lower valuations.
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