Megaport : Quarterly Activities/Appendix 4C Cash Flow Report

Appendix 4C and Quarterly Activities Report

Quarterly report for entities subject to Listing Rules 4.7B and 4.7C

Quarterly activities report

21 April 2022

March 2022 Quarterly activities report

Megaport Limited (ASX: MP1) has today released the March 2022 quarter Appendix 4C and Quarterly activities report.

In 3Q FY22, Megaport drove strong underlying Monthly Recurring Revenue (MRR) growth, up $0.6M and 6% QoQ. Foreign exchange headwinds from a strengthening Australian dollar resulted in reported MRR growth of $0.3M, 3%, to $9.5M in March 2022. Total revenue for the quarter was $27.9M, up 5% compared to 2Q FY22. Annualised recurring revenue at 31 March 2022 was $114M.

During the quarter ended 31 March 2022, Megaport sold 1,577 new services, up 6% QoQ for total services of 25,936. Average number of services per port of 2.88 is a record high and indicates increasing usage of our network by customers driven by value added services from Megaport Cloud Router (MCR) and Megaport Virtual Edge (MVE) making it easier for customers to enable multi-cloud and cloud-to-cloud IT architectures on the Megaport platform.

The company sold 19 MVEs, increasing 48% QoQ for a total of 59 sold MVEs with initial sales through Cisco's Global Price List and the indirect sales channel closing in the quarter. On 31 March MVE hosted active SD-WAN services for all five Megaport SD-WAN technology partners.

Performance Highlights

3Q FY22 highlights:

• ● MRR for the month of March 2022 was $9.5M, an increase of $0.3M, or 3% QoQ.

• ● Revenue for the quarter was $27.9M, an increase of $1.4M or 5% QoQ.

• ● Customers at the end of the quarter were 2,541, an increase of 86, or 4% QoQ.

• ● Total Ports at the end of the quarter were 9,012, an increase of 489, or 6% QoQ.

• ● Total VXCs at the end of the quarter were 14,706, an increase of 993, or 7% QoQ.

• ● Total MCRs at the end of the quarter were 670, an increase of 67, or 11% QoQ.

• ● Total MVEs at the end of the quarter were 59, an increase of 19, or 48% QoQ.

• ● Total Services1 at the end of the quarter were 25,936, an increase of 1,577, or 6% QoQ.

• ● Average Revenue per Port in March 2022 was $1,049, a decrease of $25, or 2.3% QoQ.

• ● At the end of March 2022, the Company's cash position was $88.8M.

3Q FY22 saw continued growth in MRR, up $299K and 3% QoQ, to $9.5M in March 2022, a result heavily impacted by foreign exchange from the strengthening of the Australian dollar. Underlying MRR2 grew $585k for the quarter, an increase of 13% over the growth achieved in 2Q. Strong Customer growth continued in the quarter with the Company exceeding 2,500

1 Total Services comprise Ports, Virtual Cross Connections (VXCs), Megaport Cloud Router (MCR), Megaport Virtual Edge (MVE) and Internet Exchange (IX).

2 Underlying Growth in MRR is the QoQ growth in MRR excluding the estimated impact of FX movements.

Quarterly activities report customers. Of contracts closed in the quarter, 46% were on terms of 12 months or greater, indicating continued reliance on Megaport's services as an integral part of IT architectures.

Megaport Cloud Router drove increased multicloud connectivity on Megaport's platform and grew with 67 MCRs sold in the quarter, an increase of 11% over 31 December. At quarter end, 14% of Megaport's customers had adopted MCR and 37% of customers connected to more than one cloud providers.

Product Updates

On 14 April 2022, the Company launched its full suite of products and services in Mexico, the 2nd largest IT spending market in Latin America and the 25th country enabled on Megaport's global platform.

Megaport's partnership with Kio Networks supports the initial launch of two core metros, Mexico City and Queretaro, with support for on-demand connectivity to the leading cloud service providers. Alejandro Rios Huerta, Chief Technology Officer of KIO Networks, commented, "KIO Networks is delighted to offer our customers a fast and easy way to connect on-demand to cloud services inside our data centres in Mexico. Megaport's leading global Network as a Service platform gives our customers the network agility, flexibility, and scalability they need to optimize their hybrid cloud and/or multicloud strategies."

The Company launched Megaport ONE in January 2022, a white-label, multi-tenant SaaS platform for data centre, managed service, and network service providers, to orchestrate, network, and enable connectivity and cloud services. Megaport ONE is the culmination of integrating services from the acquisition of InnovoEdge in August 2021. After completing the full integration of InnovEdge services and the alignment of InnovoEdge's talent base into Megaport's innovation and product groups, the company also announced the appointment of Jim Brinksma as Chief Technology Officer on 9 March 2022. Mr. Brinksma was an InnovoEdge co-founder and CTO.

Please refer to the 3Q FY22 Global Update lodged with ASX on 21 April 2022 for a more detailed business update.

Quarterly activities report

3Q FY22 Cash Flow Commentary

Operating Activities

Receipts from customers were $29.0M (previous quarter: $28.7M), an increase of $0.3M or 1% QoQ. DSO remained stable QoQ at 23 days.

Product manufacturing and operating costs comprise costs for data centre power and space, physical cross connect fees, bandwidth and dark fibre, network operation and maintenance, and channel commissions which directly relate to generating service revenue. Network operating cash outflows were $12.4M (previous quarter: $10.3M), an increase of $2.1M, or 21% QoQ. Product manufacturing and operating costs marginally increased by $0.4M, revenue increased by $1.4M resulting in a gross profit increase of $1M and a stable gross margin of 62% QoQ. The cash outflow increase is primarily due to timing of payments to a strategic partner, accounting for a cash outflow of $1.8M in 3Q. There were no significant network expansion costs.

Advertising and marketing payments were $0.9M (previous quarter: $0.6M), an increase of 0.3M or 65% QoQ. During the quarter Megaport launched Megaport ONE, a white label multi tenant SaaS platform, announced Megaport's entry to the Mexican market and continued to drive activities associated with the build of the Indirect Sales Channel. Travel and conference activities accelerated in 3Q as the global Covid-19 restrictions continue to ease. Key events in 3Q included the annual Pacific Telecommunications Council (PTC), a global annual event where Megaport joins other ICT industry leaders to network and showcase our innovative products.

Payments for leased assets were $2.0M (previous quarter: $1.8M), an increase of $0.2M or 12% QoQ. This represents the principal and interest cash outflows related to the contracts that are classified as "Leases" under AASB 16 Leases.

Staff costs paid were $14.3M (previous quarter: $13.2M), an increase of $1.1M or 8% QoQ. The increase primarily relates to the addition of new staff in the quarter as well as full impact of the 2Q hires that included staff acquired along with InnovoEdge Inc. Headcount increased by a net of 35 QoQ.

Administration and corporate payments were $4.6M (previous quarter: $6.7M), a decrease of $2.1M or 31% QoQ. 2Q included the annual insurance prepayment of $2.8M, 3Q includes $1M annual licences renewal of our key business support systems that include Salesforce and HRIS.

Investing Activities

Capital expenditure was $5.4M (previous quarter: $4.1M), an increase of $1.3M or 31% QoQ. $2.5M of this quarter's payments relate to core and capacity upgrades of existing network, $2.1M vendor financed equipment purchases in support of network capacity expansions. Other spend in 3Q relates to purchase of inventory stock to ensure that the business operations are not affected by ongoing supply chain issues experienced as the world continues to deal with the Covid-19 pandemic.

Quarterly activities report

Investment in intellectual property was $3.6M (previous quarter: $3.2M), an increase of $0.4M or 13% QoQ. 3Q spend includes $0.6M spent on continued development of the VantageTransact the PartnerVantage portal, and $0.5M spent on Megaport ONE. PartnerVantage is Megaport's scale up, scale out channel partner program that was initiated in March 2021 and launched in 2Q. Megaport ONE is a while-label, multi-tenant SaaS platform for data centre operators (DCOs), network service providers (NSPs) and managed service providers (MSPs) to help their customers connect and control their infrastructure and operations in one place. Both investments are aligned with Megaport's strategy of growing the business via channel sales by supporting Megaport's indirect partners to resell Megaport services.

Financing Activities

There were no options exercised in the current quarter (previous quarter: $3.5M).

Proceeds from borrowings of $1.9M (previous quarter: $1.3M) represent the latest drawdown under the vendor financing facility (refer to item 7 below for more details). $8.6M of the $35M vendor financing facility was undrawn as at the end of the quarter.

Repayments of borrowings was $1.3M (previous quarter: $1.8M), reflecting the instalment payments of the amount drawn under the 0% vendor financing facility (refer to Item 7 below for more details).

Cash Position

Cash and bank balances at the end of the quarter were $88.8M.

Payments to related parties of the entity and their associates

The amounts included in item 6 relate to the remuneration of directors and their associates, and the shared services and network operating services provided by companies controlled by or associated with the Chairman.