Customers in the cloud: Megaport

Vincent English is the CEO of Megaport. Megaport was started by Bevan Slattery about five years ago in 2013. Bevan is a serial technology entrepreneur. He's responsible for companies like Superloop, NextDC, and also obviously Megaport.

What it calls itself is a software-defined networking business. If you want to know what that means, listen to the interview because Vincent explains it fairly clearly and in full, but basically, they connect customers to cloud services using a platform that's a subscription-based service. He says it's like subscribing to Netflix. You pay a subscription, and then with them you pay also for usage as well as the subscription costs. 

They're growing pretty quickly. They're still burning a lot of cash, five or six years after they started, burning $5 million a quarter; they've got $37 million. He reckons if they slow down their pace, they could get to break even within $37 million, but they want to keep going at this pace, which means they'll have to raise some more cash before they get to break even.

But the revenue is growing quickly. It grew about 21% in the December quarter, which he said is relatively typical in terms of their revenue growth. So, it's a rapidly growing business, he reckons there’s no-one like them in the world. They're all over the world. They’ve got locations everywhere, so it's an Australian based global business, technology connecting companies to the internet to the cloud-based services and the internet, and growing quickly.  

Here's Vincent English, the CEO of Megaport. 

Listen to the podcast or read the full transcript below:

Vincent, Megaport was set up by Bevan Slattery in 2013 as according to Bevan, the world's first software defined networking company.  Could you, just to begin, explain what software defined networking is?  Because that's obviously the core of your business.

Sure.  Software defined network is three acronyms and it's made up of three different components.  I suppose we'll in reverse order, start with the network.  The network is a physical network where we install equipment inside various datacentres around the globe, we’re in over 250 datacentres today.  Each one of those datacentres are connected via fibre inside the CE so there's a physical connection from each datacentre connected to our equipment connecting all of the datacentres together and then inside certain locations where the cloud onramps present themselves, which is over 115 locations, we physically connect into the cloud environment.  What you've got is a physical network with dedicated path sources, and protected paths that connect the network together. 

The second component is the software where we use the software to present in the portal, a user interface where the customers can actually order and provision services pretty much in real-time or within 60 seconds. The software we have on our equipment not only integrates and runs and manages the network but it's fully integrated into each of the cloud environments, so it eliminates the number of steps a customer has to connect to the cloud environment.  It's a bit like ordering a Netflix or downloading a song.  It eliminates the number of steps so the end IT user can connect into the cloud environment and consume the services in pretty much an easy one-two step three and click and connect into the services. 

The third component which is ‘defined’ means that the information or the data that the enterprise is moving across its equipment and into the cloud environment and around, the data actually traverses across that physical network that we have on a dedicated path and turns up in the location it needs to be as opposed to best efforts internet where packets of data turn up in various different order and then try to be reassembled at the endpoint.

The traffic passes through a dedicated protected network across a physical network using our software to manage that and making the user interface much more simpler and easier to use for the customer.  That's a true definition of what software defined networking is.

Can you explain to us in simple language what exactly the service that you provide your customers is?  Because I presume it's more than simply cutting out a couple steps. 

Correct.  I mean that's just I suppose that's the enabler right, that’s I suppose what a software defined network is.  But from what does the customer consume or what is the customer looking to?  A customer typically is looking to, it’s about connectivity.  This is about dedicated protected connectivity or network as a service where a consumer can consume connecting to an end destination, but can do it pretty much on a pay-as-you-go model, and it's consumed the same way a customer for example goes to a…or Microsoft, and consumes the cloud product on a pay-as-you-go model, now the networking is consumed the same way where you connect to that service from a different location. 

The enterprise or the business doesn't have to buy its own circuits, it doesn't have to pay for capacity that may or may not use over a period of time, and it matches how the cloud consumption models.  The end enterprise knows what it's going to spend on its network the same way as it knows what it's going to spend inside the cloud environment in terms of how it's going to use its cloud and applications and storage. 

It helps the enterprise manage its costs, it gives them dynamic ability to flex up and down if they need more than one gig or 2 gig capacity, they pay for what they use, and they can actually flex it and change it around to consume to connect to more than one cloud provider or more than one other service provider across the network.  It gives the end enterprise from an IT perspective and the person who’s managing the data inside an organisation much more choice, flexibility, cost efficiency, and most importantly, choice of services.

Do you actually act as a kind of broker of cloud services?  Because I know that customers can connect to any cloud that they want to.  Do you just connect them to the cloud that they choose, or do you actually broker those services? 

No, the end enterprise – we’re not a broker.  We provide an ecosystem and a platform so the end customer actually chooses what they want to connect to from the portal from their own desktop or from their interface into the portal. 

So if they need to connect to AWS, they select the location they are in, where they have access zones, now they can connect where they want to connect to AWS, what location in the dropdown menu what location to connect to AWS, what speed, you type in your AWS account number, and it goes off and provisions that virtual circuit across the physical network into AWS, consumer then logs on to their AWS account and all of a sudden they're live in the cloud environment. 

If they want to do the same thing for Microsoft Azure, for Google, for Oracle, they can do all that.  They've got full control of how they want to connect to an end destination like a cloud provider, and how they want to consume that.  So we've provided the gateway or the access or the physical network that they can traverse and connect to.  We provide the endpoint into each of the cloud providers so that batch will manage that connectivity for them so they can move the data from their own infrastructure into the public cloud provider and vice-versa. 

Think of it as a conduit or a network that we're providing for the end customer to get to that end destination. Otherwise, they would have to build all that physical infrastructure themselves, which is not easy to do when not all the cloud providers are in any one location.

What do you charge?  I presume you charge by the port, do you?

Yes, there's two mechanisms for charging.  First of all, a customer needs to have a port on our network, so that's like a subscription charge.  It's typically $500 per month for a port.  Think of it like a Netflix subscription charge whether you turn on the TV or not, you pay the subscription every month. 

And then you have the consumption component where a customer then all of a sudden found that port wants to connect to an end destination or a cloud service provider.  And the duration of time that they're connecting to that service is on a pay-as-you-go model or a usage model.  The customer, the longer they're on it, the more capacity, the more connectivity they use.  The more they consume, the more they pay, the less they consume, the less they pay, if they don't use it, they don't pay. 

They're able to manage their workloads and their day-to-day activity and their operation activity for movement of data into the cloud environment and they only pay for what they consume, and that's the usage component.  There's two kind of revenue streams, one is the actual port which gives you access to the entire universe of the network, which is global, and then the actual consumption component is the more you connect to or the more you use on the network, you pay for that as you go.  Which that's the cost that you can control as an enterprise.

As I said at the start, Bevan Slattery says that that was the first software defined working business in the world.  I presume it's no longer the only one.  I presume that others have gone into the field.  Is that right?

Yeah.  There's various different flavours, and that's to be expected.  I mean, I think as anything you start out first and you're the first mover in the market, it’s to be expected that there will be at some point in time those that follow, and that's certainly starting to happen.  We're seeing it in some regional pockets that we originally had one or two competitors in that space and we've just been very clear with our customers about the value proposition that we offer and how we're actually enabling a lot more cloud providers.  We see that as a very strong value proposition for us. 

But not just in any one country like in Australia or in four or five cities in a region.  We're in 250 locations across 115 cloud environments, across North America, Canada, we're in Europe and UK and Netherlands, Ireland, Sweden, Germany, and then Hong Kong, Singapore, New Zealand and Australia and continue to expand.  That becomes more relevant as more and more businesses want to be able to use the software defined network or the network, not just for a localised pocket or a city where we have someone coming up. 

We have seven of the largest cloud providers integrated on our network, and that's something that takes 3 to 4 years to build up those relationships and put that in place.  Like I said, we’re across 19 countries and quite a lot of sites, over 100 sites in North America expanding an extensive network.  That's taken time to put in place and build up the relationships. 

We've taken advantage of our first mover advantage and allowed that to go ahead.  We've got various different flavours of SDN players, SD-WAN coming up on the fringes, and they all have a part to play in it, I just think the fact that we've been really focused on what we're capable of doing and the value proposition that we have and what we're bringing to customers and I think that's resonating.

You've been going for five years, or at least the company was formed in 2013.  Yet you're still burning a lot of cash.  You had a first mover advantage and the revenue has been increasing quite rapidly lately, but can you take us through what's going on with the cash situation, why you're burning so much cash still?

Yeah, okay, I think that's expected.  We've been very clear and transparent about what we've been trying to do.  Investors and shareholders have come on, and understand our game plan, it's not to slow down on network growth and that takes capital. 

Also, in our development we brought out a new product…which is everything we’ve talked about has been a layer 2 direct connectivity model with the cloud providers.  We've now got a layer 3 product which allows us to multi-cloud and cloud to cloud which is more important where your customers are able to move data from one cloud provider to another to make use of applications. 

We’re very clear on the amount of capital that we need to continue to invest, and we are the number one SDN provider in the world and we actually need to continue to invest in that going forward.  We've been very clear on what we're doing and think that's why the staffing and the information we put out and the leverage and investing in our people is one of our biggest costs that we have and then also the technology.  We're not going to slow down in that regard.  And yes, there is a fair bit of cash burn, but we have a line of sight on where we're going to come out with that, and we've been very clear on that with our analysts and shareholders. 

I think it's important not to slow down and not to take advantage of the opportunity that we have in front of us as a global player and to position ourselves for over the next 12 or 18 months that we come out with for the next couple of years and be a much stronger and have much more market share going forward.  This about investing in the growth, Alan, as opposed to the short term, you know, profitability.  And yes, there's a strong cash burn, but that's something everybody's bought into.  That's the reason we're doing it.

Yes, I understand.  You've got $37 million in cash in the bank at the end of the quarter, and you burnt $5.6 or something million in the quarter.  Do you think that $37 million will get you to break even or not?

If we slow down, it'll get us there.  If we decide to keep going at the pace we're going it won’t.  It’s that simple.  I think that's probably the short answer and most of the analysts that are covering us have come to this, we're all on the same path, we're all on the same conclusion.  We've talked about 2020 being the financial year where that'll come through, the profitability and I think we haven't changed our position on that.

The reported revenue for the quarter was above $8 million, which was an increase of 21%.  Obviously, that 21% increase in revenue for the quarter is a huge increase.  Is that the sort of general growth you're getting?  Or as that a one-off boost?

No, that's been consistent.  We've had double digit growth, somewhere between 18 and 22% for the last 3 or 4 quarters, on our monthly recurring revenue.  At the quarter ending in December significantly in our US North America business, we hit the $1,000,000 monthly recurring revenue build at the end of December.  That's up from just under half a million at the end of June, so nearly 100% growth in our North American business in six months or the previous two quarters.  I think that's a testament to the hard work and the investment, we’ve committed money we’ve invested in over the last 18 months into the US business and that’s now starting to ramp up and scale.  The revenue has been consistent.  A lot of the indicators that we share or KPIs that we share over quarter on quarter in our market updates have been more about our customer uptake, our ports and services, and they're leading indicators which drive the following quarter's revenue generation and build revenue.  It's pretty much a consistent high double-digit run rate for the last 3 quarters and it's expected to continue for the next quarter or so.

Yeah, you've got a long list of performance indicators, metrics, which are quite interesting, I'll get onto those in a moment but one of them doesn't seem to be churn.  You talk about monthly return and revenue which in the December quarter was $2.7 million, but what if anything, is your churn?

Our churn is very low.  We cover churn on ports, so we measure churn on ports.  The consumption model is built so the customer can decide what they want to use and consume, right?  So that’s flexible, that’s elastic, we don't measure churn on that. 

If you haven't got a port, you can't consume services, so we measure port churn, and it's typically kind of 0.1% a month, so it's very low.  For $500 for a port on our network, and even if the business didn't use it, the enterprise knows that it can turn up services in 60 seconds.  It's actually a very good redundant service to have, even if you had protective services yourself on your own network and your own business. 

We find that some of the churn is related to customers who may be moving from one location to another will take two ports.  They will use and consume port number 1 to move all the data to the other location, and then the second port continues to use the information or use the access in the second location and the other location gets shut down, or other infrastructure that they no longer need have gone.  That seems to be the number one user case as to why we have churn on some ports.  But right now, we're not seeing it, we do measure it internally, we don't disclose it, except when I’m asked questions, I'm quite happy to talk about it, but it's not something that is one of the major KPIs we push out, but it's very low, it's extremely low.

Are you up talk to us about penetration and market share?

A little bit.  Other than that there's not really much to compare it to in terms of market share and penetration.  I guess that's one of the reasons we push some of the KPIs that we have in our market updates, I suppose is twofold.  One, it's part of an education process because there's nothing really to compare it to out there, so we try to educate by saying these key metrics is what we look at as part of the business to show progress and how it’s directly linked or there’s a direct correlation to driving revenue and growing the business, so that's important when we push that out. 

That's that education and understanding that our potential investors or shareholders or analysts in general can understand what our business model is.  I suppose you know, the only thing that we do compare, sort of, we do reference sometimes is the Cisco Cloud Index which talks about the overall side of, I suppose, the cloud market which we’re an enabler for customers to consume that which is anywhere from 230 billion to nearly 400 billion I suppose, market size. 

Of the top seven cloud providers that we have on our platform, they account for over 75% of that revenue that's being generated.  We find more and more services that customers are connecting to those cloud providers, we're one of those enablers to growing that.  That's how we’re measured and how we look at it. 

There isn't anybody else quite like us out there is that we can compare to get market share for connectivity.  I suppose you could compare to a telco provider or anybody else that provide circuits, but it's not really the same, it's really end to end or that point to point connectivity.  Whereas we talk about connecting customers ultimately to the end destination which is where the application is and the compute is and bypasses all of the networking elements that an enterprise would typically look for, so that's the power of the software that we’re managing.

When your salespeople go into a company to pitch, you must be pitching against someone else.  There has to be some other alternative that those customers can choose.

I presume they could consume Netrium, where you’d have to buy multiple circuits, and it takes multiple vendors, so you would do vendor management.  It also takes anywhere between 60 and 90 days to provision circuits from a telco provider, and if the customer is in the same datacentre as a Megaport and you order a cross connect which can take anywhere from a day to a couple of days, you can start consuming cloud pretty much within the next day. 

The difference here is we shorten the length of time that the business needs to get to the cloud, they don't have to go and procure multiple services, multiple vendors, and don't have to deal with the long lead time, and so basically the user experience or the customer journey from a connectivity point of view is night and day compared to the traditional way of connecting via network or a circuit versus actually connecting over Megaport. 

And that's the real difference that's bringing to the table and if you're a technologist or an IT person, who let's say these people are empowered within their organisation to manage the data on behalf of their business, they don't want to be waiting 60-90 days for a circuit to come up.  They're under pressure to actually make things happen and keep their business running. 

So Megaport enables that easy decision making, the ease of use, that you know what you're paying for, you know you can manage your costs, you know where you can connect to, and you've also got scalability.  If I really want to connect to a Microsoft today and I want to connect to a Google or an Oracle tomorrow or in the next 6 months with other projects, you can do it all from the one interface, and from the one port without having to go out anywhere else. It's the ease of use and the ability to scale your IT infrastructure and manage your public cloud and your own equipment from the port is what's really important as opposed to having to wait for that long lead time and the cost factor.

What do you think the potential for this business is?  Potential revenue, potential customer base?

We're going like I said to the half year, we're up $8.3 million in the quarter so it's going to circle like probably $15.3 or $15.4 million for the half year is the revenue for the first half.  And we’ve predicted somewhere around $33 to $34 million for the end of this year ending in June.  We're on an exit run rate somewhere between $3.6 and $3.8 million in June, so it puts you on a run rate of close to $40 million and exiting the year. 

We believe in our company that we're still only in first gear, in terms of the first stage or we're in the first innings, sort of to put it in cricket terms.  There's a long way to go on this and there's still in terms of cloud adoption and businesses getting to use more and more cloud, they’re getting more comfortable.  I think cloud providers have spent a lot of time really finessing their applications and what customers want to use for. 

I think that's allowed the credibility where business know that this is not going away, we're going to actually continue to consume cloud and we're in the middle of that, enabling all of that to happen.  I actually believe that this business exiting this year will continue to grow into 2020 and that's where we talked about the break-even point and where we're going forward from there, but we see it continuing to grow.  We've got a lot of headroom in front of us and how we can scale the business, so it's exciting times.

Yeah.  Okay, great to talk to you Vincent, thanks very much.

Okay.  Thanks Alan.

That was Vincent English, the CEO of Megaport.