Megaport Limited: Focused on MCR upgrades this quarter

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

23 October 2019, 4:47 PM

Sectors Covered:

Telecommunications, Technology

• Megaport Limited's (MP1) 1Q FY20 was in line with our expectations and we make some immaterial changes to our short term forecasts.
• Investors seemed nervous that MP1 had only installed equipment in 4 new DCs in Q1. MP1 was more focused on installing their new product (Megaport Cloud Router 2) in 56 existing DCs across 27 metros in Q1. MCR drives higher customer usage and revenue so is a critical part of MP1's ongoing development roadmap. We also note that traditional DC installs have varied from 4-36 per quarter so do not follow a smooth rollout curve. Our forecasts for MP1 to be installed in 380 DC by June 2020 and 470 by June 2021 are unchanged.
• We have made small upgrades to our medium-term forecasts and this results in our PT increasing (Morgans clients can login to view detailed reports and price targets). Add retained.

Q1 FY20

MP1 added A$0.5m of revenue in Q120 which is the same dollar value added in Q4FY19. Monthly Recurring Revenue growth was 13% on Q419 (QoQ) and 71% on Q119 (YoY).

MP1 ended the quarter with A$49.2m of annualised revenue.

This was a good result, broadly in-line with our forecasts, and we make no short-term changes.

Cash burn has been broadly stable the last three quarters and MP1 ended the period with A$69m of cash (more than 12 months of cash in the bank).

The key driver of the uplift this quarter was revenue hitting a record of A$914 per port per month due to a record of 2.9 services consumed per port.

Today the average MP1 customer has 8.1 services and MP1's cohort analysis suggest this should be closer to 15 over time.

Operational progress in the quarter

In Q1 20 MP1's key focus was deploying Megaport Cloud Router (MCR) infrastructure.

Added in the quarter were four new DCs; 9 new Cloud on-ramps; and 56 MCRs.

MP1 now has 141 total cloud on-ramps on its fabric. MP1 added new SAP on-ramps in response to the growing demand for SAP-enabled applications within AWS, Microsoft Azure, and Google Cloud environments.

This is good for multi-cloud demand (the key attraction of MP1 to customers) as it means the Tier 2 Cloud Service Providers (CPS) like SAP are becoming more deeply embedded on top of Tier 1 CSP infrastructure.

For instance SAP accounting software is drawing data out of Microsoft so end customers need multi-cloud connectivity.

MP1 pointed to a couple of recent customer wins for exactly this reason.

Investment view – Add retained; PT increased

We have made some minor changes to our short term forecasts which are not overly material to our valuation.

Our DCF based valuation has increased as we've lowered our longer term forecast for capital intensity (capex plus capitalised research and development costs).

This results in our DCF increasing (Morgans clients can login to view detailed reports and price targets).

There remain a number of upside risks to our medium term forecasts and DCF based valuation.

Management execution has been strong and we continue to back them and a growing addressable market.

More information

Morgans clients can login to view our detailed report and updated share price target for Megaport Limited (MP1). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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