While
-A weaker-than-expected third quarter for
-Earnings potential delayed rather than reduced
-Large barriers to entry for Megaport Virtual Edge product
-Accelerated sales expected after short-term pain from a new sales strategy
-Sales acceleration is considered key from here
Shares of global network-as-a-service provider
Nonetheless, brokers remain focused upon the long-term opportunity given the long runway for growth in cloud/multi-cloud demand. Goldman Sachs also points to efficiency benefits from network 'softwarisation' and the company's product lead.
Essentially,
Last week's third quarter update by the company was weaker than brokers within the FNArena database expected, causing a fall in the average 12-month price target to
Annual recurring revenue was up 3% quarter-on-quarter in Australian dollar terms, while cash operating costs increased by 1.6% and capital expenditure climbed by 23%. Given chip and supply chain issues, the company brought forward around six months of capital expenditure and inventory increased by around
The results were dragged down by currency impacts, which halved revenue growth on translation back to Australian dollars. Also, time spent by the direct sales team in training channel partner sales teams on the Megaport Virtual Edge (MVE) product weighed, points out Morgans.
While
Training up partners for MVE
The combination of building a market leading product like MVE in a relatively new market takes time and effort to educate partners and customers, explains Morgans. The relatively new market refers to a software-defined wide area network (SDWAN), which allows enterprises to securely and intelligently direct traffic across the WAN toward trusted software-as-a-service and infrastructure-as-a-service providers.
The broker notes all the top five SDWAN players, covering around 70% of the market, are selling and have live MVE's, meaning they have completed first sales. While these partners have huge sales engines it generally takes time and effort to build sales momentum.
The training effort will create a substantial first mover advantage and network effects, which will ultimately result in large barriers to entry, explains the analyst. Nonetheless, investors require proof of scalability, so sales acceleration is considered vital.
Are sales set to accelerate?
Morgans expects direct and indirect sales should accelerate quarter-on-quarter and revenue should accelerate in the fourth quarter and again in FY23.
Meanwhile, Citi points out that not only is the partner channel taking longer to kick in, but also MVE has a longer sales cycle, because it is a more complex product. As a result, the broker reduces its FY23 and FY24 revenue forecasts by -6% and -8%, respectively.
Will extra capital be required?
As cash burn was higher than Citi expected in the third quarter, is additional capital over the next two to three years needed?
The analyst doesn't see balance sheet issues and predicts FY22 will be the peak year of cash burn with
Meanwhile, Goldman Sachs expects earnings (EBITDA) breakeven during FY23. Despite -
The broker, not one of the seven brokers updated daily in the FNArena database lowers its target price by -34% to
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