Is Megaport at an inflection point?

Network as a Service provider (NaaS), Megaport (ASX:MP1) is a company we follow with interest, and one that we have commented on in several previous articles.

In late April, the company provided a third quarter sales and revenue update, and the market liked it, pushing MP1 shares up around 10 per cent on the day. Although there was nothing very surprising in the Q3 revenue numbers themselves, clearly investors found something encouraging in the company’s disclosures on the day.

From our point of view, there are several encouraging pieces on information in those disclosures. Included in these are:

• Megaport recently appointed an experienced Chief Revenue Officer, Rodney Foreman, and he is leading a transformation of the MP1 sales strategy, away from direct sales and towards “channel” sales through integration with leading service providers like Cisco which have a very broad reach. Successful execution of this transformation has the potential to significantly accelerate MP1’s future revenue growth.
• The early signs on this are encouraging. Some acceleration late in the quarter was apparent, and MP1 goes into 4Q with a very robust sales pipeline and good momentum.
• Looking back, while MP1’s revenues had not benefited from COVID as much as some might have hoped, this can be understood in the context of some of MP1’s clients, particularly in sectors like travel, reducing their data demands as a result of business disruption. MP1’s NaaS model allows customers to quickly increase – and decrease – their data consumption as needed, and while COVID did not immediately drive revenue growth for MP1, it has helped demonstrate the merits of the NaaS model.
• Consistent with this, the company is seeing clients increasingly seeking to move away from legacy infrastructure towards the cloud, which is at the core of MP1’s offering. We think this trend provides a healthy tailwind for MP1 for many years to come.

MP1 remains a difficult business to value, given the relatively early stage of its development, but with run rate EBITDA breakeven expected to be achieved in June, the business is quickly approaching a point at which its scale and operational leverage will translate into hard dollars. As investors, we are excited to see the full potential of the business starting to be revealed in the years ahead.

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