Small Caps | Apr 03 2025
Post February interim results, analysts are warming to the operational outlook for Megaport.
-Megaport's improving metrics auger well for future growth
-Jarden's new research helps counter competition concerns
-Potential upside from new cybersecurity offering
By Mark Woodruff
Global Network-as-a-Service provider Megaport ((MP1)) is driving growth through strategic initiatives, including extensive new product development, a flexible pricing structure, and investing in its go-to-market and customer service teams.
Prior to February's interim result, Citi had flagged a lack of clarity around the slowdown in net revenue retention (NRR), with recent price reductions hinting at competitive pressures.
NRR was historically the core driver underneathMegaport's revenue growth, but this measure started to stall after the company increased prices at the end of FY23. As a result, Jarden believed Megaport had become less competitive, driving a decline in net new logo growth (i.e. additional customers) and net service retention.
When the half-year financials were released, revenue and earnings met expectations, but forward-looking indicators (including NRR, annual recurring revenue (ARR), provisioned port capacity, and customer utilisation) reinforced Canaccord Genuity's confidence in the company's underlying growth trajectory.
The market certainly approved, as the share price jumped by 18% on results day.
Instead of competition fears, Jarden is now citing a flywheel advantage due to greater go-to-market and R&D spend than key competitors PacketFabric and Console Connect, who both face funding headwinds and are cutting headcount, while Megaport grows.
This week, the broker began research coverage on Megaport with upbeat commentary and an Overweight rating, one level below Buy in Jarden's ranking.
While NRR is stabilising and ARR is accelerating, the analysts are waiting for unambiguous evidence new over-the-top products and an expanded network offering can reignite NRR or customer growth, before assigning further valuation upside.
Patience appears essential. Even Macquarie, which maintains an Outperform rating, acknowledges the road to recovery will take time, wistfully noting the company used to enjoy a recurring revenue stream one could rely upon.
For the medium-term, backbook (existing contracts) repricing is still going to present some overhang, in this broker's view.
Positively, management is evolving the business model to increase customer wallet share by expanding into cybersecurity-style offerings.
An upgrade of the company's technology stack and compute platform enhances its Secure Access Service Edge (SASE) capabilities, highlighted Macquarie, enabling a stronger shift toward solutions-based selling.
This represents a fundamental and higher-value repositioning from the company's traditional connectivity use-case, noted the broker.
What does Megaport actually do?
In general terms, Megaport benefits from increasing demand for multi-cloud strategies and digital transformation.
The company's core offering provides elastic interconnection services on a pay-as-you-go basis, allowing fast, secure, and scalable connectivity.
The port, the company's core product, is a physical connection to Megaport's network through a point of presence (PoP) in a data centre, which can connect to one or multiple cloud service providers (CSP)
A customer uses the port to connect its branch to a CSP or creates a virtual cross connect (VXC), a connection created between two points on the Megaport network, by utilising physical cross connects (copper or fibre optic cable) between adjacent points.
Jarden explains this process bypasses the public internet to provide private access with high security, low latency, and high bandwidth capacity.
Megaport's over-the-top products include: Megaport Cloud Router, allowing customers to route data between cloud services or between data centres without physical equipment; Megaport Virtual Edge, a device supporting network functions like a software-defined wide area network (SD-WAN) or firewalls closer to end users; and Private connectivity to cloud applications (e.g. SaaS platforms).
These services sit on top of Megaport's Software Defined Network (SDN) and help customers simplify complex network setups, improve security, and speed up cloud adoption, without relying on traditional carriers or installing additional hardware.
Being data centre-agnostic, the software doesn't require users to be in a specific branded facility. Any Megaport-enabled site works.
The software also supports on-demand provisioning, where users can spin up and scale connections programmatically via an application programming interface (API) or portal, with no physical rewiring needed.
Fending off competition
Jarden believes Megaport offers a differentiated and compelling value proposition as a data centre-agnostic fabric, positioning the companyto continue gaining market share despite intensifying competition from data centres and incumbent network providers.
The broker notes growing competitive pressure, with data centres expanding their virtual fabrics. For example, global digital infrastructure company Equinix reported a 14% year-on-year increase in virtual connections in December, while traditional carriers are launching more flexible solutions, including Lumen's network-as-a-service in July 2023 and private connectivity fabric (PCF) in July 2024.
Even so, the analysts see scope for Megaport to double its customer base, supported by deeper adoption of core products as key competitors experience slowing momentum. The company's relevance is also expected to increase further via new product releases and increased go-to-market investment.
February's interim results
Sales success has given management confidence to invest for growth, commented Morgans following interim results, highlighting -$4m of "opportunistic investment in go-to-market hires" in FY25.
In a great outcome both financially and strategically, according to the broker, management was able to absorb the extra -$4m in opex while maintaining FY25 earnings guidance.FY25 revenue guidance was raised by $2m at the lower end of the range to $216-222m.
Morgan Stanley felt an improvement in ARR versus expectations was a function of 3% customer logo growth, a 6% beat against consensus for ports and services growth, and stabilisation of NRR at 107%.
A (slight) improvement in NRR, growing from 106% in June 2024 was a strong result, according to Goldman Sachs, given it followed a steady decline across FY24 from 115% in June 2023.
Headline KPI's finally showed signs of re-accelerating, noted UBS, with new customer logos, ports, and services added materially improving in the second quarter of FY25, while the strong trajectory for both Megaport Virtual Edge and Megaport Cloud Router continued.
ARR grew by 18% half-on-half to $227m, (a rise of 14% in constant currency), which was well ahead of market expectations for $217m. While currency benefited the figure by around $8m, the headline figure and a softening Australian dollar provides a tailwind for revenue in the second half, noted Canaccord Genuity.
The addition of $22.6m of ARR in the period represented more growth than in the last three years combined, pointed out Morgans.
For Goldman Sachs, the clear standout from the interim result was improved customer/port growth, with a material acceleration in the second quarter reflecting the significant investment in sales/product in recent years, alongside the expanded data centre footprint.
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