A cloud connection alternative: Megaport

Vincent English is the CEO of Megaport. The business was started four years ago by Bevan Slattery, who was the founder of PIPE Networks, which he sold to TPG Telecom. Bevan is also the Founder and CEO of Superloop.

Megaport is what’s called a software defined network, that is to say, it’s an alternative to the internet. It provides businesses an alternative way to connecting to the cloud.

Here’s Vincent English, the CEO of Megaport to explain how it all works.

Well, Vincent, apparently there is such a thing as a Megaport, so could you explain to us what a Megaport is? 

Yeah, sure, Alan.  Megaport is a product that we have developed here in Australia about three or four years to our Founder and Chairman, Bevan Slattery.  The concept behind is that, how do we connect seamlessly from a customer in a location to services that may not be in that same physical location.  From that, we developed what effectively is what we call today, an SDN or a software defined network, which is a physical network that connects multiple locations together across its own dedicated network with protected capacity connecting each one of those locations together. 

Across that we have a software stack which we have fully integrated into six of the major cloud service providers today.  What a Megaport does, the customer gets the Megaport on our platform in one location and that Megaport gives them access to the entire universe across our platform and today that’s across 186 locations, across 3 continents and 19 countries. 

Is it the case that that’s sort of an alternative to using the internet?

Absolutely.  I think today most people who are thinking about or have or will be connecting to any form of cloud would certainly have security as top of mind in terms of how they would connect to have their adjacent move from either their own equipment or it’s in their own data centre into a cloud environment, and security is a key factor in that.  As we know, public internet has best practices and best endeavours to get connectivity, but at the end of the day what Megaport offers is a dedicated private connection all the way directly into those cloud environments which is secure and is very not like the public internet.

How is it connected?  I presume therefore you don’t use the internet yourself, you must have your own cables, do you?

Correct.  What Megaport does is today we’re connecting data centres together.  We do that by procuring our own dark fibre from various different vendors globally depending on the city and the country.  We have redundant pairs of dark fibre in and out of each building for redundancy.  Those dark fibre are all full protected, connecting each of the buildings together.  And we also bandwidth capacity connecting cities together in the same fashion.  We connect that to all of our equipment which resides in each one of those locations, so that when data flows from the Megaport or the customer’s ports in those locations, it’s all across our own protected private network.

How do you connect the data centres to your customers?

Customers in data centres, when they sign up for an account with Megaport and they go to get their Megaport, we provide them with another layer, a letter of authority which effectively allows them to order a cross-connect from that data to our equipment or the meet-me room in that location.  Once the customer has completed that cross-connect and they’re live, then the customer can see the entire universe across our platform and can consume services within 60 seconds.  The software that we have in our portal and our user experience is very dynamic.  It allows them to quickly use and consume so you can navigate your way through if you want to connect to KWS or Microsoft.  You click on the tile, it takes you through two or three steps, you add in your account number, you choose your speed, then pretty much within 60 seconds you’re provisioned live into that cloud environment. 

So when you go to log on to your cloud environment, you’re actually able to start consuming cloud straight away.  It’s that dynamic and that’s the power of what software sits across our platform, across that physical network that we’ve built to allow connectivity from a customer in a location to another location or to another service provider.

Does the Megaport provide your customers with access to the internet as well or is it entirely separate, they have to connect to the internet some other way?

No, it’s completely separate.  Everybody can access the internet today.  You don’t need to be in a data centre, you don’t need to be – it’s a question of what you are using your connectivity across the internet for.  More and more people are being very, very careful about what they’re using across the internet and you have to use a lot of encryption in your own business if you’re using the internet or you’ve got to take your own precautions.  But more and more, we don’t use the public internet for any of our services.

What does a Megaport cost?

A port typically costs $500 per month.  Think of it as a subscription fee to have the port.  Once you pay your $500 every month, as you consume services, you pay for those other services on a consumption basis, so a per usage basis.  So, if you use it for one hour, two hours, three hours, if you’re going to multiple different connections you pay for those on a per megabit per usage basis.   You have a $500 port fee that you pay every month, like a subscription fee for the port, that gives you access to the entire network.  Then as you want to use services how and when the customer wants to use those services, they can spin up their services at that point in time and they only pay for what you use. 

It mirrors the consumption model of how the cloud service providers sell their cloud products today.  The customer pays for – once you access any of the cloud providers today, you pay for that on a consumption basis.  What Megaport does, is it matches the networking concept of paying for your network on the same way as you would pay for your cloud, so the customer is paying for seamless networking and seamless cloud services in the same way, so they understand what they’re paying for and how they’re paying for it.

Those data payments, are they going to you or to the cloud service providers?

The port fee will come directly to Megaport because that’s across our network.  The customer connects to us on our network and they pay for that connection to our network.  Then as the customer pays for services across our network connecting to an end point, for example, to a cloud service point, they pay Megaport for that.  Once the customer logs onto their end point, which is maybe a cloud service provider, they have their own account and their own details and at that point in time they’re actually in the cloud and they’re actually paying the cloud provider for services they’re actually using at that point from then onwards.

Are they paying you and the cloud service provider for the amount of data they’re using?

They’re paying us for the connectivity to get to the cloud provider and they’re paying the cloud provider for what they use in the cloud.

Okay, let’s just take a step back.  The business was started by Bevan Slattery in 2013.  At that time and now, so over the past four years, firstly was he a pioneer in this caper of setting up a software defined network and are lots of people doing it now?

Yes he was.  I would describe Bevan as a serious entrepreneur.  He’s always thinking about what the customer wants and how to make things easier and more affordable, so a lot more available and scalable to customers.  A great attribute to him on having the foresight to do this four years ago, we believed we were probably ahead at the time, two or three years ago to have this done when we were working with the likes of Microsoft and AWS to do our integration into the cloud well ahead of anybody else today that may be starting that process now.  It’s taken a while, a proof of concept was done.  Obviously, we started the business in the Australia to where it is today, which is across what was 30-odd locations in Australia, now we’re over 186 today. 

There’s not that many people in this space that actually are doing – we believe what we’re providing today is a very unique proposition from an end to end value proposition from a customer wanting a service as opposed to just providing part of that service, but also a very dynamic way at which the customer can actually use it and that is the power of the software sitting across the network.  We believe we’re at the forefront of this and we’re setting the standard and setting the pace in terms of the expansion that we’re growing into and getting more access to more customers, which is ultimately what the cloud service providers want. 

They want to extend the reach of their network to the customers outside of any one set of four walls.  But equally, customers who don’t have access to the physical cloud have to figure out how to get there and build that connection and we’re actually helping them solve that problem by doing it fairly quickly and seamlessly.

In the December quarter your receipts from customers were $5.2m.  Give us a sense of how much of that was from Australia and how much of that overseas?  Are you sort of full global now?

Yes, we are.  About 18 months ago we started building out into North America and in the last couple of quarters we’re seeing a lot of traction now in our business model as it starts to kick into gear particularly in the US on the back of all of our partnerships and spent a lot of time there growing that business out.  We have our results coming out on the 21^st of February for the half year.  We’ll go into that in a little bit more detail in terms of the breakdown.  We have a 22% growth quarter on quarter in our monthly recurring revenue at the end of December and a high percentage of that growth has come from the US market, double digit growth in APAC and Australia business and similarly in Europe. 

It's coming from all three markets, they’re coming from different bases obviously.  The Australian market is a little bit more mature and has a deeper revenue base there from today.  But North America has come on leaps and bounds in the last two quarters in particular.  It won’t be long before it catches up in the not too distant future.  Really exciting, really happy the way that’s progressing. 

Against that revenue, how much cash are you burning now?

We’ve closed the quarter with $21 million in the bank at the end of the quarter.  It’s just short of $2 million a month that we’re burning through.  Most of our costs now today we’ve built up in our model, are fairly assessed.  We’ve got a very strong team now across 19 countries and three continents, over 100 people.  As I said, at the full year results back at presentation we did in August, we believed that we’re pretty much set apart from a couple of incremental additions we may need to make to the team as the business rolls out and scales.  But fundamentally I’ve put the business in a position where it can scale from this point onwards or has been for the last two quarters. 

That’s really all about adding customers and as we talked about the Megaport and selling the Megaport and obviously the services which that Megaport then consumes, which is the connectivity components and the usage component of our network, which drives our monthly recurring revenue.  They’re the leading indicators that we’re very much focused on executing over the next foreseeable future and bringing to the market into an EBIT positive position. 

How much of your costs are variable or are most of your costs fixed?

Most of our operating costs are reasonably fixed.  There’s an 80-20 rule in terms of our operating costs are fixed.  The direct networking costs are the costs of providing our network services.  Again, as I said in our presentation at the full year, the second half of FY16 we turned a gross profit after networking costs, which is revenue minus your network costs.  We turned a profit in the second half of the year, exiting in June 2017 and that was really important for us coming into this half year because that’s now continued to grow and our direct network costs are really a factor now of every new location we add. 

So, as we add more and more locations to our network, there is an incremental cost associated with that.  But we’re very much focused on working with each one of our locations and our partners to make sure that we have a sell-with model so we’re actually getting a return on that investment much quicker as we go forward.

What’s your average revenue per customer?

We look at it as average revenue per port.  The reason I say that is if you think of it like a mobile network, you can have many customers but you can’t subscribers, which is your unique subscriber on a network.  We do the same port.  A customer can have many ports.  Some customers have 10-15 ports geographically.  So, we tend to look at it as the revenue per port, which is our highest of the quarter ending in December 2017, which was $707 up from the high $600s the previous quarter. 

That’s a measure of the amount of services so, as I mentioned before, a customer buys a port and then as they consume services on that port, that drives up the revenue on the port.  Every port is important that as it grows, the value attached to that and the stickiness, the more and more services that are available, the customer can actually use.  That ties into the concept of a one-stop shop or one Megaport allows you connecting many different things.  As I used to say, connecting everyone to everything.  That one port is your single interface to the rest of the world and the more services you consume off that port, it drives up the revenue per port.

How many ports have you got now?

Ports at the end of December was just 2,259.  That was up just under 10% quarter on quarter.  The number of services including ports that we have in our network is 5,041.  That means that the number of services that each port is using is increased and revenue per port jumped up to $707, which in turn drives up our monthly recurring revenue which was $1.6m at the end of the quarter, up 22%.  You need to look at all four in connection with each other because they actually follow.  Locations are important for us on the network, the reach to customers.  Yes, customers are important, but a customer then acquires ports.  If they acquire a port, that’s the first billable event or the first revenue trigger point for us.  Then from that point on they consume services and then that in turn drives up the revenue per port and that in turn leads to the monthly recurring revenue.  They’re all inextricably linked together in terms of follow through. 

Yeah, I get it but I’m just trying to keep it simple for my subscribers.

Oh sorry, go ahead.

It’s $707 on average per port and that’s $8,500 a year and your costs are something like $8 million roughly.  You kind of need 10,000 ports to make a profit?

No.  Most of our businesses with the exception of one or two markets are actually gross profit.  In other words, where we track the revenue less the direct network costs associated with that port or providing those services are all in a gross profit positive position.  The way we look at it, the cost we have will bring you up a new location, we work on a breakeven per site in terms of how many ports or services do I need for that site to breakeven.  That’s how we measure our success on each location and driving that in.  It’s important that we track on that. 

Then our opex effectively, as we said, this is a case of volume so your opex is reasonably fixed.  What it is, is that you need to sell more and more ports after you hit your breakeven point on the location, every port or service that’s sold after that thing contributes to the bottom line to cover your opex.

A lot of start-ups, the closer they get to breakeven, the further and further away it gets.  They add cost and in particular marketing costs because they keep sort of wanting to go for it and increase and get volume, and that’s fine, I’m not criticising that.  Are you that sort of business or are you going to basically say your costs are done, we’re right and now when we hit breakeven, that’s it, we just keep going?

No, it’s a combination of both, right?  Again, in the context of where we’re at because we’ve got different markets and different levels of maturity.  Not one answer fits all in this particular case.  If you look at our APAC business and Australia business, yes it’s profitable, it’s EBITDA positive.  It’s important that we keep offering more and more value to our customers.  So our investment there is not necessarily all about marketing but it’s actually more about the services that we’re bringing in and increasing our ecosystem.  That doesn’t necessarily cost a whole lot of money but it is time and effort that our current teams are working on to bring more and more value. 

When you flip to somewhere like the US where you’re trying to build the business up from 18 months ago and bringing on more and more partners, our investment there is more on the physical locations because it’s a much larger market.  So you actually have to be in more and more markets.  We would continue to roll out into new markets there.  Our plan is to be at 225 by the end of June and 300 by the end of FY19 in terms of locations globally.   That will go on and similar with Europe that will follow that same pattern, so there’s kind of three different distinct road maps for each of the regions as they’re at the level of maturity. 

We factored that in our last capital raise that we did at the end of June.  We factored in that that would get us where we needed to be.  The thing that’s also important for shareholders and for investment is that we’re at the forefront of what we’re trying to do here.  We’re also taking advantage of a first mover play in the market and it’s important for us to size up literally periodically how we’re doing and do we need to speed up certain investments and do we need to stay on track with our current plan.  And I think that’s always a state of the business that we’re in and particularly in a global basis that we stay afloat of that and to be in a position we’re always able to take advantage of any opportunities that may come up because they may not present themselves in a few years’ time.  It’s a constant reassessment that we have that we go through each time.

How much does each data centre cost you?

To rollout capex in a data centre depending on the size of the location can be anywhere between $40-80,000 dollars in terms of capex, then the running costs of that can be anywhere between, depending on the location again where it is geographically, could be anywhere between $4-7,000 dollars a month.  To breakeven on that basis you pretty much need 15 ports or 15 services per site to breakeven.  That’s the level of metrics that we track.

Your capital expenditure in the most recent quarter was $2.3 million, which was up from $972,000 from the previous quarter.  Where do you think that’s going to settle?  Is it going to be that sort of order, $2-2.5 million a quarter or more than that?  And have you got enough cash for that?

The quarter just gone, we have 33 locations that are actually currently in build which we actually spent some money in the previous quarter, which will actually get all turned on and live this quarter.  Some of that was pre-spending last quarter for this quarter, so I think you actually need to average it out over two quarters for the capex.  Particularly around the Christmas period, networks and businesses, a lot of people shutdown and there’s not much activity going on over that period, so we did a lot of pre-work done in the quarter ending December to get a head of steam for this quarter here. 

We’re looking at adding 25 of the 33 locations before March this year, so a lot of that work and some of the procurement of the equipment, etcetera, was done in December 2017.   Yes, it was a particularly high quarter for that reason but we have a lot of those sites coming on live in this quarter coming up.

When you say, first mover, what’s the competitive environment now?  Is anyone else doing what you’re doing and offering the same services you are or not?

We believe we’re unique in the value proposition that we offer.  We’re independent and agnostic where we’re effectively connecting lots of partners together.  When we talk about our product and how we’re selling it, we always talk about the end journey for the customer, so we’re connecting people to cloud service providers or to other partners or other services that we have on our network.  SDN and SDN1 have been commented a lot where they’re using best efforts internet to use some software technology to connect businesses together.  That will always be there but we believe our model is based on, as I said earlier on, our own private network, our own dedicated path to these services so it’s protected.  And we believe there isn’t anybody really truly in the same way. 

We’re the only customers of the fixed largest cloud providers where we’re fully integrated and we’re continuing to expand on that and we’ll be adding more over the next couple of quarters.  That’s important.  It takes a long time to build that up and to work with these companies and their engineers and have a product that works.  We’re fairly confident that we’re in a very unique position in that regard.

When you say, you believe, don’t you know?

I do.  Maybe I’m just being a little bit generous.

You do know?

I do know.

So it’s not just a belief?

No, but you’ve got to believe yourself that you’re doing the right thing.  You’ve got to believe that what we’re doing is on the right path and we also have to believe that what we’re doing and what we’re executing on is the right way and we know what we’re doing…

No, but the question of whether you’re unique or not, whether you’re being competed against by somebody with the same offering as you is either a fact or it’s not.

Yes, okay, we’re unique.

[Laughs]  Okay, that’s good!  Now, Bevan Slattery still owns a third of the business? 

That’s correct, yes.

And he’s called Executive Chairman.  I mean, clearly he’s in charge of the business, but is he the actual CEO or are you? 

No, I’m the CEO of the company.  Bevan Slattery, as you said, is the Executive Chairman of the board.  We have five other board members, non-exec directors on the board and including myself.  It’s my role and my job as the Chief Executive Officer of a public company and I report to the board.

I was just wondering, does Bevan come into work there every day?  Does he have the corner office or do you?

No, he doesn’t.  He’s actually a very busy man.  He’s actually CEO of another public company called Superloop.

That’s right, he is, exactly.

That’s where he spends most of his day job.  We catch up obviously very regularly, whether it’s on calls a couple of times a week and obviously this is a very dynamic and global business.  We make sure not just with Bevan but also some of our other board members that we communicate a lot, we keep in touch and make sure that everybody’s up to speed on what we’re doing and some key decisions we’re making because it’s such a dynamic world we’re living in and we have to keep moving at a fast pace.  It’s just the way we roll.

And as you say, Bevan is a serial entrepreneur.  He started Pipe Networks and sold that to TPG for quite a lot of money, I think it was $370 million or something in 2009.  So I’m just wondering what the end game – if it’s possible to discuss that – the end game with Megaport is?  Are there obvious buyers of that business, are they already knocking at your door or what?

[Laughs] I guess I can’t comment too much on it.  All I can say is that our remit and our business is all about executing on a business plan that we’ve already got.  Shareholders have already invested in our business today and are supporting us to deliver on this plan and to deliver on the execution of what we’re doing and that’s what we’re focused on, that’s what my job is.  So, right now it’s trying to make this company to be as big as it can be in the foreseeable future.

That was Vincent English, the CEO of ASX listed, Megaport.