Martello Technologies Group Inc

XTSX:MTLO

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group First Quarter Fiscal 2022 Investor Conference Call. Today's conference call will provide information and commentary on financial results for the 3 months ended June 30, 2021. We will hear from John Proctor, President and CEO of Martello; and Erin Crowe, Martello's Chief Financial Officer. Following these remarks, John and Erin will take questions from analysts. If you have questions following the call, you can reach Martello at [e-mail]. First, here are a couple of housekeeping notices. [Operator Instructions] This call is being recorded, and we expect that the recording will be available on Martello's website today. We remind you that today's remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of Martello's news release, which is on their website and on SEDAR. The company's actual performance could differ materially from these statements. We will begin with Martello's CEO, John Proctor. John?

[John Proctor, President, CEO & Director]

Good morning, everyone, and thank you for joining us, and I hope you're all enjoying the summer. It's a very busy and exciting time for Martello. And I'd like to start with yesterday's Microsoft announcement. This is a game changer for Martello. We are one of the only DEM vendors who are invited into this program. We are pleased to work with Microsoft to support their leading Microsoft 365 and Teams market position. Joining the Global Solutions Alliance Program, which is a fairly exclusive invite-only program, gives us a higher degree of access and support from Microsoft to jointly improve the way Microsoft 365 and Teams is delivered to millions of end users around the world.Here is what Microsoft executive, Suzanne Gagliese, had to say about the Martello relationship. Today's hybrid workforce relies on Microsoft Teams to stay connected and productive. And Martello offers a digital experience monitoring solution that helps our customers and partners deliver the best possible Microsoft 365 and Teams user experience. I think you'll agree, this is a strong validation of the DEM market and of Martello. I'm thrilled that Microsoft has asked us to join the Global Solutions Alliance program and that they understand the value of Martello solutions for their customers and the partners. When I say this is a game changer for Martello, I expect it to be an accelerant to the important investments we've already made in product and channel development. According to a study commissioned by Microsoft, companies that join this program can double their leads and increase deal size by 50% to 100%. Based on a review of businesses that have joined this Microsoft program, publicly available performance data suggests positive impacts on analyst forecast, stock liquidity and stock price. Over the longer term, these businesses also experienced consistent revenue growth. We're very encouraged by these positive trajectories, and we also recognize this is not an overnight success. Like any significant initiative, achieving results takes time, effort, persistence and investment. I am confident that we can execute to realize higher revenue growth objectives in the future. Over the last 15 months, we've reinvented Martello and invested in building more channels to market for our products from the Microsoft Global Solutions Alliance to our own MSP program. These are channels that didn't exist a year ago, and our focus is on driving sales pipeline for this new larger set of channels. Today, we have an installed base of 2.8 million Microsoft users and a much larger addressable market. Microsoft wants to work more closely with us because they see the growing need for DEM solutions and recognize that Martello can provide the Microsoft DEM expertise that their clients need. I'll speak more about our outlook shortly, and I look forward to answering your questions about the Microsoft announcement in a few minutes. Now I'd like to hand it over to Erin for a review of financial performance. Erin?

[Erin Crowe, Chief Financial Officer]

Thanks, John. I'd like to echo John's comments and express how exciting this new development in our Microsoft relationship is for Martello. We've invested strategically to expand our channels to market. Over the last 15 months since acquiring GSX, those investments have included integration and product and channel development initiatives, and we're beginning to see their impact with positive Microsoft DEM revenue and user growth trajectories in Q1. Though we have work to do to take advantage of the opportunities associated with this relationship, I'm confident that the Microsoft Global Solutions Alliance program will be accretive to these investments and will accelerate our penetration of the Microsoft 365 market.Regarding performance in Q1 of fiscal '22. Revenues of $4.4 million represent a 32% increase compared to $3.3 million in the same quarter of fiscal '21, reflecting growth from the acquisition of GSX which shifted Martello into the Microsoft DEM market. This growth was partially offset by legacy product revenue declines and the impact of the U.S. exchange rate on Martello’s Monitoring – Mitel UC segment.Our revenue quality continues to be strong in Q1, with the recurring portion of total revenue at 97% compared to 98% in the same period of fiscal '21. Gross margin was 90% in Q1 of fiscal '22 compared to 94% in the comparative period, a slight decline that is due in part to higher hosting costs associated with growth in cloud users. Higher sales and distributor commissions in the Microsoft 365 monitoring segment also impacted gross margin this quarter. Monthly recurring revenue, or MRR, was $1.43 million this quarter, a decrease of 2% compared to $1.46 million in the comparative period. While we saw increases in subscription licenses in IT service analytics and Microsoft 365 monitoring, this was offset by exchange rate decreases primarily in the Mitel UC monitoring segment and the diminishing maintenance and support revenue associated with legacy contracts. Operating expenses of $5.7 million were 35% higher than the $4.2 million reported in Q1 of fiscal '21. The difference is due to 2 key variables. First, the comparative quarter only included one month of GSX operations and related expenses, including amortization of intangibles relating to the acquisition of GSX, which represented approximately $1.2 million of the increase.Second, at the onset of the COVID-19 pandemic in the comparative period, we implemented measures to manage operational risks and uncertainties, including temporary salary reductions and reduced events and travel. As a result, the comparative quarter expenses were temporarily lower than normalized expense levels. We subsequently turned to more normalized pre-pandemic expense levels.Adjusted EBITDA in Q1 of fiscal '22 is a loss of $1 million compared to positive adjusted EBITDA of $0.2 million in the same period of fiscal '21. The decrease in adjusted EBITDA is due to higher operating losses associated with the addition of the full quarter of GSX and the return to normalized operations. Our operations have been focused on developing incremental channels to market. We've built new sales channels this year, our MSP program and the Microsoft program, which didn't exist during the comparative period last year, and we've invested in R&D to drive the future success of these channels.We will continue to invest responsibly in building and supporting the channels to market while carefully assessing the ROI on these investments. The company's cash and short-term investments balance was $6.6 million at June 30, 2021, compared to $8.5 million at March 31, 2021. Net working capital was $3.1 million at June 30 compared to $4.5 million at March 31, 2021. The company believes operations can be funded by cash and other available funding sources. Now I'd like to offer insight into the sequential performance of key revenue streams in Q1. For the first time in our history and as a result of key investments over the last 15 months, the leading driver of our Q1 revenue was Microsoft DEM, which is a revenue stream that includes the Martello products targeted at the Microsoft market, Gizmo and IQ. Sequentially, this revenue stream grew by 6% from Q4 fiscal '21 to Q1 of fiscal '22 and contributed 44% of revenue this quarter compared to 40% in Q4 of fiscal '21. With respect to the remaining portion of Martello's Q1 revenue, 42% was generated from Martello's Mitel UC business compared to 43% in Q4 of fiscal '21 and 14% was from legacy products compared to 17% in the prior quarter. The legacy revenue stream includes Domino and Live Maps, products acquired through the GSX and Savision acquisitions. Legacy product revenue declined by 18% sequentially from Q4 fiscal '21 to Q1 fiscal '22, and we expect these revenue streams to continue to decline. As they become a smaller proportion of our overall revenue streams, their impact will continue to become less in coming quarters.Finally, one of the KPIs we track closely is growth in the number of Microsoft users on Martello's DEM platform. I'm pleased to report that in Q1 of fiscal '22, this number increased to $2.8 million. We remain on track to reach our target of 3.5 million Microsoft users by the end of the 2022 fiscal year. I believe that the investments we've made to integrate GSX and develop products and partner sales channels have resulted in positive trajectories for Microsoft DEM revenue and Microsoft users on our platform.In Q4, we mentioned that we expected these investments will drive revenue growth in the second half of fiscal '22. We remain comfortable with this accelerated growth expectation in our recurring revenue and user count as we develop the partner channel to onboard new small- and medium-sized customers. With this growth, we are anticipating a moderate near-term impact on our gross margins from cost of sales increases associated with increased users on cloud hosted solutions.It's an exciting time for Martello and based on our activities to date, the outlook for the second half of the year is solid. The new level in our Microsoft relationship provides upside to our current outlook, especially in future years. I look forward to the impact of this new Microsoft program in the future. I'll now hand it over to John to close with his perspective on Martello's outlook. John?

[John Proctor, President, CEO & Director]

Thanks, Erin. Last quarter, I spoke of my confidence that we will see a higher growth in the second half of this fiscal year and in fiscal 2023. The sequential increase in DEM revenue the report today is the first hint of that lift in trajectory. With the announcement of our addition to the Microsoft Global Solutions Alliance we believe that the Microsoft DEM business is and will be a significant driver of our future growth. At the same time, I am delighted to announce that last week we allowed a U.S. patent for our Microsoft 365 DEM solution. This not only protects our IP, but also creates a barrier for entry for others looking to take the same path. Though it will take some time to fully realize the revenue impact of this new Microsoft program, the investments we've made in product and partner channel development are expected to bear fruits over the next several quarters.The launch of Vantage DX this fall is expected to boost our sales pipeline as we bring to market an all-in-one single-platform solution for Microsoft 365 user experience monitoring and optimization. As we execute on the Microsoft program, we anticipate this will begin to hit our sales pipeline as early as Q4 of this fiscal year, adding more deals to the pipeline and increasing deal sizes. It will take time for this to show up in our revenues, typically 3 to 6 months, but we're confident this new level of engagement with Microsoft will have a solid impact on future growth trajectories. This growth provides upside to our sales and user growth expectations beyond fiscal 2022. We also continue to nurture and grow our relationship with Mitel, and we are working closely with them right now to launch a key new Mitel Performance Atalytics or MPA feature release. A large hospital group with more than 12,000 employees recently deployed MPA to provide greater visibility and control over voice performance during high-volume periods through the COVID-19 pandemic across the hospital groups 95 sites. Many of the partners that have put their hands up to request Vantage DX for their Microsoft 365 customer offering are also Mitel partners, who know and trust us because of our MPA product and our close working relationship with Mitel. To sum up, I've never been more confident in Martello's growth potential in the Microsoft DEM market. Today, we have positioned ourselves to be the leader in this market with key strategic investments. Never has there been such a huge disconnect between our business and the share price of our stock, particularly as we add this new level of engagement with Microsoft, which strengthens our current projections on market penetration. Over the past 15 months, we have reinvented our company to be a leader in a growing market that will only become more critical as companies navigate hybrid or flexible work environment now and in the future. We have tightly aligned ourselves with the business -- with the leading business application provider in the world to provide our solutions to their many customers. We have divested ourselves of nonstrategic business units. And all along, we have managed to maintain the highest quality revenue streams possible with excellent gross margins. We'll look to M&A to expand our DEM capabilities to other key business applications and to increase depth of our Microsoft coverage. We look forward to our share price better reflecting the quality of opportunity and the quality of operation that we have become. Thank you for joining us today, and I wish continued good health to all of you and your families. Erin and I are here to answer your questions. Operator, would you please facilitate the Q&A part of this call.

[Operator]

[Operator Instructions] The first question comes from Kevin Krishnaratne from Desjardins.

[Kevin Krishnaratne, Research Analyst]

Erin and John, just a question just on the Microsoft DEM growth sequentially. You pointed out that was up 6% sequentially. There are a few moving pieces in there. I think there might be maintenance and support as well as subscription. Can you just talk about the growth in Gizmo subscription revenue? Was that sort of in that 6% range, is it higher or lower? Maybe another way to look at this as you do disclose GSX subscription revenue, which was flat sequentially reflecting the sunsetting of Domino. Maybe you can just update there how much of that subscription revenue comes from Gizmo now?

[Erin Crowe, Chief Financial Officer]

Yes. So if I look at the Microsoft DEM revenue, we haven't -- I don't have it off the top of my head, the breakdown between the subscription and the maintenance and support. But I would say the majority of that is certainly subscription revenue. I can find the breakdown for you and when we speak later. But if we look at that and you look at the growth on the DEM piece versus the decrease on the legacy, we really saw like most of the increase in there or all of the increase in there would have been on the subscription side and the legacy, which is a much higher proportion of maintenance and support is where we're seeing the decline.

[Kevin Krishnaratne, Research Analyst]

Okay. Got it. I mean is the Domino -- I'm just trying to, I guess, get a sense of the GSX revenue, are you seeing a much faster decline than expected in the Domino then? I know you pointed to 18% on the combined Domino and I can't recall on Live Maps or whatever at...

[Erin Crowe, Chief Financial Officer]

Yes. So no, I would actually say we're not seeing like a higher-than-expected decline on Domino. I think Live Maps is actually -- if you look at the legacy piece, Live Maps is a larger proportion of that legacy piece than Domino is today. And so we're seeing the decline more, I would say, on the Live Maps side.

[Kevin Krishnaratne, Research Analyst]

Okay. Okay. Maybe just continuing on with Gizmo subscription trends there. You again signaled the confidence 3.5 million users by year-end. And obviously, on top of that, you'll see some upside from the Microsoft partnership that you announced yesterday. But just going back to the 3.5 million, can you remind us sort of the visibility on those adds where they're coming from? Is that land versus expand? Are you relying on partners? You added think 100,000 subs in the quarter. Do we expect another similar level in Q2 and then bigger adds Q3, Q4? Just kind of walk us through the trajectory there that you're expecting out of that side of the business.

[Erin Crowe, Chief Financial Officer]

Yes, sure. So I would say the user count will track fairly closely with what we've discussed before, right, which is seeing a solid back half of the year. So we do expect that the growth on that user count will come from a variety of factors. It will come from organic growth on the direct business. It will come from growth through the partner channel and possibly towards the very end of the year, perhaps some opportunities in pipeline that we're seeing through the Microsoft relationship. But those are really the drivers on that growth. I mean it's about a 25% growth from where we are today through to the end of the year. So -- and that will track closely to what we expect to see from a DEM perspective as well.

[John Proctor, President, CEO & Director]

Also, most of these are land, they're not expand. They're certainly new. Some of these are new. So we -- the partner program is still relatively new. So these are our direct sales rather than partner. And this is why the Microsoft piece is interesting. We've had to do all the heavy lifting to set up a partner program because you can't partner with Microsoft and not be ready. So we've done all the heavy lifting. We've invested in sort of all the mechanics we needed to do this. So this is part of sort of the stepping stone we announced the partner program in advance, knowing that we were in negotiation with Microsoft. So these are obviously linked. But this is why we -- the partner program announcement was so important because we knew we were tracking towards is Microsoft, and we had to have both pieces ready -- we had to have that Microsoft Partner program ready to go.So heading into sort of Q3, we see the pipeline generating -- being generated by the partner program, particularly the Microsoft channel. I mean that's a massive sales force that now gets compensated for selling Martello. And then as we said in the -- on the call, we hopefully potentially see closing some of these Q3 pipeline deals in Q4. But I think, again, I see Q3 is primarily generating pipeline down this massive Microsoft channel.

[Kevin Krishnaratne, Research Analyst]

Got it. Certainly, it sounds exciting and look forward to that as we near the end of the year. Maybe just a last one on the MPA. I was encouraged to hear your commentary on the hospital related win. When I look at the Mitel business, that would -- on a sequential basis, it was down 3% to 4%, even accounting for FX, it was down a little bit. I know it's not -- hasn't been as big of an area of focus. So again, it was nice to hear the commentary there. Where do you see the business trending? Maybe you can give us an update on actual MPA users? Are those -- how are those looking if we look at MPA users sequentially? Is there anything to note on pricing? I just wanted to understand what happened in this quarter again, just sequentially on the trends there.

[John Proctor, President, CEO & Director]

Yes. I mean MPA users is flat. That's not unexpected, right? People are still trying to work out what will return to work look like. A lot of the companies that came out of the gate and said, "We will never return back to the office." Well, that actually wasn't true, right? I think some big Canadian companies that made that statement and they now have people in the office. So that means that when they go back into the office, there is an expectation that they will see a phone on a desk. So I think a lot of companies still figuring that out. And part of that uncertainty means Mitel's sitting there when they pitch black phones on desks. People are saying, well, let us work out what going back to the office looks like and then we'll get back to you. So we see that fairly flat at the moment. There, again, we see sort of analytics being a key piece, and we've had that conversation with Mitel, they see part of that as well. So they know they've got work to do to maintain sort of their presence on the market. They know they've got a capability that people are using. They have all the same capabilities of Zoom, RingCentral, 8x8, Cisco, et cetera. And we are a key part of that. So I think I don't see us -- I see it staying fairly flat for the foreseeable next quarter until sort of we see people heading back to the office.And like I said before, I think a number of companies that said we will never have an office presence again. A lot of them have realized they jumped the gun and you free a cultural and many other sort of socialization reasons, you want people back in the office. But I do think the time line for that decision is holding us fairly flat at the moment with Mitel.

[Kevin Krishnaratne, Research Analyst]

Okay. Maybe just one more related question. Can you give us an update of the headcount of the company, maybe R&D, sales and marketing and G&A at the company level? And how do we think about the level of headcount that might be focused on Mitel, I don't know if you think about the business that way, but I'm just trying to get a sense of where your headcount is at and on the Mitel side. How to think about maybe the profitability of that side of the business, and then I'll pass the line.

[John Proctor, President, CEO & Director]

Yes, I'll kick that off and say our headcount is 107 at the moment. The number on Mitel is relatively small, right? It's a very mature product. It's a mature team that's been working on it for years. So they're very comfortable. Same thing with sales, right? It's one sales engineer, one sales guy and one partner manager for that whole program, which given -- it's around $7 million or so. It gives us pretty good margins in terms of turning that out. And again, most partners are with it. So that's part of it. It's -- if I look at one of the challenges is if I look at -- I'll pick on a fairly well-known model of crossing the chasm right? The Mitel product has -- the MPA product has crossed the chasm many years ago. It's a very mature product. It's being maintained as being looked after.If I look at DEM and iQ they are just crossing the chasm, which gives sort of unique challenges in terms of explaining the product to customers, explaining the value to customers, et cetera. So again, part of that is we will maintain Mitel. We will look at that small amount. That being said, now that the guys who work on the R&D for Mitel, that's not all they do. Yesterday, I saw a great screenshot of some part -- a new part of the Mitel technology, integrating into iQ, right? And they were extremely happy they've managed to do that. But that brings strength to the iQ product for the Mitel distributors because now they can see this network path analysis, into the Mitel product. So like I said, is we will keep doing those pieces. We'll keep maintaining that product. And it might all come back and want to do something really exciting and different and there's a business case associated. We may grow the team, right? But at the moment, there is no short-term plans for that unless there's a very strong business case to Mitel to change it up. I think I'll hand over to Erin for some of the sort of specific other numbers you were looking for.

[Erin Crowe, Chief Financial Officer]

Yes. So just if we look at our overall headcount, about 40% is -- these are round numbers, obviously, but about 40% is R&D, just under that would be sales and marketing and then the balance would be on the SG&A side.

[Operator]

The next question comes from Christian Sgro from Eight Capital.

[Christian Sgro, Research Analyst]

So for my first question here this morning, I'll sort of stay on trend with Kevin's previous question. It looks like a lot of the hiring has been done in the Q1 quarter. There was a step function sort of increase in R&D. So my question is more forward looking. Do you see R&D and sales and marketing as, let's say, filled out with some of the recent hiring or maybe one or both of those areas, should we expect some additional headcount through the year? And how do you think about in combination with the market opportunity?

[Erin Crowe, Chief Financial Officer]

Yes. So I'll start with this and pass it over to John. I think when we looked at this year and the initiatives that we had in front of us, the focus early in the year was really to bring on the R&D capacity that we needed to drive some of the pieces that were necessary for sales down the road, right? So we've talked about the cloud-based multi-tenancy. There's some MPA work going on. So there were some pieces that we knew we needed to add early to really get the product to where it was ready for the partner program and the launch of Vantage DX. So that was our focus in Q1. Our plan then was to ramp up sort of sales and marketing a little bit more in the back half of the year or the last couple of quarters. So that was how we were thinking about the year going in. And if you look at sort of our objectives and our plan, that's laid out in that same way. So I'll pass it over to John to talk a little bit more about the thinking.

[John Proctor, President, CEO & Director]

Yes. And this is part of sort of -- when I look at the investment we had to make, it's almost like a manufacturer, right? We had to build the manufacturing plant and start building the widgets to create a supply chain. And this is the same with any sort of partner program. We had to build the partner factory. So everything from having sort of the right sales force constructs to, as Erin said, the right product, to having partner managers, people who fully understand how to work with a monstrous organization like Microsoft and what it takes. And again, having a few people who speak Microsoft because it is -- they have their own language. And if you can talk in their terms, you're much more likely to be successful in navigating that environment. So those are all the pieces we pulled together. And again, to your point of saying we set all these up. And now it's executing. And the reason I like partner models is one to many, right? Direct sales, we will keep going, and we will keep a direct sales force. But the efficiencies of a partner model where you can have a partner manager, much like we do for Mitel, low headcount because we're training their sales team to sell us, and that's part of sort of short-term notice, that's part of the next sort of steps much as we've actually already started some of those conversations with Microsoft and got some of those opportunities going with Microsoft. And there are opportunities in the pipeline already that Microsoft has already pulled it into. They knew this was coming. So their crew have already started pulling us into opportunities, which is great. But I think to Erin's point of saying, we knew this was the plan. We had to make these investments to make sure we're ready because you only get one shot at this, right? If we sort of stumped up to Microsoft and said, "Hey, thank you for the invite. Yes, we're ready to go." And then we probably fell flat on our face, Microsoft would have looked around and have gone, next. And you can't do that, right? You have to be successful. And the reason they've said, right, let's go, let's get this paperwork signed.Let's get you into the program is because we passed all those hurdles and they did. They scrutinized us, they scrutinized our product. They looked at everything from our marketing to our communications to collateral to say, are you guys ready for the big leagues. And they said, yes, you are. Let's go. So again, we had to make those investments upfront and get that going.

[Christian Sgro, Research Analyst]

Next question. Congrats on the partner announcement yesterday, the Microsoft announcement. You mentioned that there's a little bit of if not a ramp period. There might be some time to when Microsoft, the partnership hits full stride. Are there some milestones we could think of there? It sounds like Microsoft understands the product and the benefits well. So is it them taking it to market, taking some of the marketing off of your hands or more just seen through what customer demand is like? Like what would be some of the, let's say, the variables that could accelerate or stall Microsoft really picking up steam in the partner program.

[John Proctor, President, CEO & Director]

Yes. And again, you go back to measurement. I mean, as Erin said, we'll see our user count. I mean, it's still our user count, much of it's sold through Microsoft. So you'll still have those metrics to track, and you'll see those pieces come in. And we do see sort of this lift in trajectory coming along, right? We see that happening. But for us, it's -- I mean, they have specific groupings, like, even 2 weeks ago, and obviously, we couldn't -- we weren't announcing this, even 2 weeks ago, Microsoft was saying, all right, these are the specific verticals within Microsoft that we see early. We see these are the focus areas going and then they have their own specific sort of, call it, flexible workspace team that we will be engaged with because, again, Microsoft clients are having the same conversation with Mitel clients, right? What will the return to office look like and how -- what can that -- how can Microsoft help? Well, we just stepped into that forum. And there's an awful lot more of those conversations happening with Microsoft, then with Martello. So it's being able to support through.So I think, as I said, -- we'll see those conversations accelerate in Q3. One of my challenges is making sure that we can be as successful as possible on every one of those conversations. But for me, it's the -- watching that uplift, watching the trajectory of pipeline grow and being able to manage that successfully and continue to be successful with Microsoft.

[Christian Sgro, Research Analyst]

That's perfect, John. I'll ask just one more question today. Maybe we're 2 months into I guess Q2 here. Like are there any -- I wouldn't ask for an update on the Microsoft user count, say, but are there any -- is there any commentary you make on trends into the quarter? Is the direct sales team contributing to much of the new deals just now? How are you seeing the partner channel sort of pick up their pace into Q2? Anything to give us a sense of how everything is going to be through the summer.

[John Proctor, President, CEO & Director]

Yes. I mean, I was a little bit concerned we'd see a sort of significant summer slowdown, mainly because I thought the U.S. might -- and I think I had a conversation with a few folks on this. I thought the U.S. might do a European type shutdown. We've not seen that. The conversations, I mean, a couple of deals that we thought would close in Q1, are pushed to Q2, those are now coming through. So it's really part of that. But then the same thing that the partner is developing pipeline, right? We've got that piece going. So I think Q2 will still see -- we are primarily direct sales. I don't think we'll see sort of the partner piece making a significant difference in Q2. It will still be mostly Martello heavy lifting direct sales. But as I said, so far, we're not seeing the slowdown that I potentially expected. And I do see -- I see Q2 being a good, if not reasonable quarter for us coming forward.

[Operator]

[Operator Instructions] The next question comes from Daniel Rosenberg from Paradigm Capital.

[Daniel Rosenberg, Analyst]

Congrats on yesterday's announcement. I just wanted to follow up on the channel partner and different sales channels we now have. I was wondering as these channels ramp up, as we look to exit fiscal year '22, what does the mix look like from the pipeline you see today versus what do you expect it to be a year from now? Will one channel dominate or will one overshadow another? Just any color there would be helpful.

[John Proctor, President, CEO & Director]

Yes. I mean, great question. Daniel. So I mean, if I go back a year ago, we had probably had 2 channels, right? That was it? That's all. So it's a bit like going back and sort of having a TV with rabbit ears, right? There's only so many channels you can watch. We just got cable, right? We just got connected and there's so many things we can do now. So yes, I do see that mix absolutely shifting. I see channel -- I'm not going to come out with a number of -- I see this much channel is much direct. But I certainly think we'll see much more channel down this. And then same thing with Vantage, right? We've got the Mitel channel. We can activate Vantage down the Mitel channel. Paessler is doing well. Their relationship with Paessler is doing well. The relationship with Mitel, as we said, is still -- it's flat. But it's still extremely high-quality revenue from a margin perspective. But I think -- the other thing and I kind of glossed over it a little bit is what we're seeing in terms of -- we are the first Microsoft DEM solution through the door to this program. So we've just become the primary DEM partner for Microsoft. And the other thing, and I kind of -- I mentioned it, but didn't sort of stress it. We've now got patent protection on our 365 monitoring technology. That's as much as I've glossed over it or mentioned it early briefly. That's actually quite a significant step, and there's an awful lot of work went into that. And I wasn't absolutely convinced we get it. But when you do that and you're the first one in the program and you've got a patent, you become a bit more of a heavyweight than the size of the company would suggest. So I think all of these lead to that point on, I do think the channel will become bigger, much bigger. But at this stage, I'm not ready to give sort of percentage in terms of I see this much percentage in direct and this much percentage partners.

[Daniel Rosenberg, Analyst]

Okay. And then maybe one for Erin. So as channel begins to ramp, can you just remind us of how -- what costs are associated with that growth opportunity? How it will impact the COGS line or if there's any differences in sales and marketing expense related to a sale through the channel partner versus direct, et cetera?

[Erin Crowe, Chief Financial Officer]

Yes. So I'll start with the last part of that question. I think when you look at the sales that are done through our partner program or through a channel strategy. Obviously, there is a slightly lower cost associated with those, and that's part of the -- obviously, the benefit of that program, right? It's a lot more work by the partners and less work from our end, obviously. So we do see that, that's a more efficient sales channel, obviously. When we think about margins, that's an interesting one right now. So we have talked before about the fact that we're investing to -- in the cloud-based multi-tenancy to drive down our cost per user. We have done some work on that, and we actually have seen a decrease in our cost per customer for -- on the cloud. What we are seeing though, of course, as we go through our cloud-first strategy is that we're seeing more customers that are going to the cloud, right? So we have a lower cost per customer but more customers, and that's where we're seeing a little bit of that difference on the margins for the GSX business. And we'll continue to see -- as we go forward and we have more customers on the cloud, we'll continue to see some of those hosting costs in the cost of sales line. However, this cloud-based multi-tenancy piece and I talk about this with our R&D team all the time, right? It's a continuous improvement process, and we will continue to drive cost efficiencies on the cloud-based multi-tenancy as we go forward as well. So hopefully, that answers your question.

[Daniel Rosenberg, Analyst]

That's good. And maybe just on MRR. So you have some logos churn earlier in the year or at the end of last year. But with the pipeline you see now, is this kind of a bottom of where you see it? Or is there still some of that churn to overcome for next quarter? When do you see a bottoming of that number?

[Erin Crowe, Chief Financial Officer]

Yes. I mean, I think -- so I would expect that we are at or near that point. I mean our legacy -- if you look at the MRR, it's really driven by the fact that the decline in legacy on a dollar basis is higher than the growth on the DEM side. But we're really -- we're now seeing some good traction on the DEM growth and the legacy continues to decline as a proportion of our overall revenue. So by the end of this fiscal, legacy is going to be less than 10% of our overall revenue. So I think that when you think about MRR, I would say that, yes, we certainly expect to see that number ramping up from here as DEM growth outpaces the legacy declines.

[Operator]

The next question comes from Gianluca Tucci from Torrent Capital.

[Gianluca Tucci]

Can you just speak to the genesis of the Microsoft deal? How did it come about? How long have you been in dialogue with them? And how much like R&D work went into accomplishing this?

[John Proctor, President, CEO & Director]

Sure. I'll kick this off and go months and months, like it certainly didn't happen overnight. The point there is you have to be invited. So we closed a couple of sort of deals with Microsoft, certainly one in Canada and one in Hong Kong, which kind of got their attention. And we're already a gold partner. So they already knew were you could buy Martello from Microsoft. That was kind of -- we were there already.But that meant we suddenly -- we were on their radar. We got a higher profile. And then we got folks on the team who have relationships with Microsoft. So those conversations got going. We kind of knew sort of all the pieces we had to achieve to get there. So again, whether it's partners, whether it's marketing collateral or even, as you said, R&D, which is a cloud-based multi-tenancy, right, we needed to have all of those pieces in line to be able to step through this piece. And really, if I look at sort of Microsoft, they've got this group called Modern Workplace who are already engaged with us and would be there. And then the other thing is they got the Microsoft Customer Success group, they're engaging their direct customers. They want to drive Microsoft 365 adoption, and they want to drive Teams. So again, we had to have -- like I said it was also making sure that the solution we provide had a big focus on Teams. And we find quite often that we -- the first conversation we get with a lot of clients is Teams-driven, right? They're having challenges with Teams. Teams isn't doing what they wanted to do or they're having trouble implementing Teams. So that will often lead a conversation. Then they find out all the other things that we can do for them in Office 365, whether it's SharePoint, OneDrive, Outlook, whatever else it is. And then it's snowballs. And suddenly, they recognize the value we represent. And I think this is -- becomes key, but all of that didn't happen overnight. And so I'll use the same analogy, right, is where -- go back to your point, where did the money go? The money went on building a program that Microsoft would accept into this fairly small club. And it's certainly less than 1% of partners get pulled into this program. So again, it's -- I'll hesitate to use the word elite, but it's certainly a very small club that get invited to play at this program. And as I said on the call earlier, we couldn't afford to fail at the first step. We had to make sure that when Microsoft scrutinized as we were ready. So that took money, it took time and it took effort and the R&D team, as Erin said, they're 40% of our company, and they have worked their as**** off to get this done. But then the same thing having the right sales guys who understand Microsoft, you can talk that also had to be built, having a partner program, partner portals, partner registration, all these things had to be built as well. So it wasn't just R&D. It's having all those mechanisms and processes to get through. But we are very pleased we got there and very delighted how it got done.

[Gianluca Tucci]

Okay. So I guess my question is like they thoroughly audited all aspects of the technology and company.

[John Proctor, President, CEO & Director]

I mean they scrutinized. I mean, certainly, they went through, I wouldn't say audit. I think it's a bit of a tough. That's a harder term. But certainly, we had to submit material. They wanted to play with the product. They wanted to do it. They know a couple of the Microsoft MVPs have written reviews or e-books on our product. So again, it's good.

[Gianluca Tucci]

Okay. Great. And I guess my last question here is on the product road map. I think Vantage DX is scheduled for Q2, correct me, if I'm wrong. But how do you see that impacting or accelerating the pipeline?

[John Proctor, President, CEO & Director]

Yes, it is. And it's on track, as you said, for Q2. The key there is really pulling this piece together, right? It's the one-stop solution for everybody. It makes a number of things in a way simpler. You built something that a Mitel partner can say, "Yes, all I got to do is install this one thing. And now I can see MPA and Office 365 altogether." And it's not -- and it's one product and having to try and install 2 different products. I'm not having to try and configure 2 different sort of probes or 2 different analysis systems. It's one. So that's kind of the sort of the value proposition there is to make an IT teams life easier and simpler and -- from a partner perspective, also make their lives easier. So we see that picking that up. And then also, that's the other piece of saying, you can now go to people who already have previous products and offer them the uplift advantage. And that's also part of the approach. It's not just going to new customers, saying or new partners saying, we've got this ,it's going back to sort of customers of current products, whether it's stand-alone Gizmo which will be called Vantage and a module advantage, but also making it very obvious, it's very simple for them to uplift into this new version.

[Operator]

This concludes the question-and-answer session. I would now like to turn the conference back over to John Proctor for closing remarks.

[John Proctor, President, CEO & Director]

Thank you. And on behalf of all of us, thank you for your interest in Martello. As mentioned earlier, you can register to receive our upcoming newsletter in the Investors section of our website. And a recording of today's call will be available on our website later today. At any time, you can reach out to our Investor Relations by e-mailing [e-mail]. Thank you for attending the call. Have a great day, and look forward to hearing from you.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.