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Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group First Quarter Fiscal 2023 Investor Conference Call. Today's call will provide information and commentary on financial results through the 3 months ended June 30, 2022. We will hear from John Proctor, President and CEO of Martello; and Jim Clark, Martello's Chief Financial Officer. Following these remarks, John and Jim will take questions from analysts. If you have questions following the call, you can reach Martello at investor@martellotech.com.
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.
Good morning, everyone, and thank you for joining us. I hope you and your families are all keeping well, and I am joined this morning by Jim Clark, Martello's CFO.
Before turning to my recap of the quarter, I wanted to briefly reiterate core components of our growth strategy, discuss our tightened focus on cost optimization plan and the insider-led debt financing that we announced last evening in our Q1 financial '23 results press release.
We are pleased so far with the uptake on our flagship Vantage DX Modern Workplace optimization software. Microsoft's Modern Workplace solutions are focused on driving a seamless communications and collaboration experience for employees, whether they are at home or at the office.
The Vantage DX has been developed to address this ecosystem, which includes 270 million users of Microsoft Teams. It is a broad – sorry, it's a subset for the broader digital experience monitoring market that allows us to specialize deeply. Vantage DX is the Microsoft-recommended optimization solution for monitoring the Microsoft Teams user experience, and we see a very strong opportunity for Martello in this specific segment of the market.
Members of our Board are just as excited about the potential, so much so that our Co-Chairman, Terry Matthews, has provided new debt financing totaling USD 1.5 million, aligned with the terms of the current debt, but subordinate to it. This gives us an excellent runway to grow our Vantage DX business to provide positive cash flow without diluting our shareholder base.
We are concentrating much of our resources on building our Vantage DX pipeline and accelerating our sales cycles from lead to bookings to revenue through strategic sales motions in direct and indirect channels.
When the quarter concluded, we had 352,000 users on Vantage DX, which is a 60% increase over last quarter and close to 1 million users under trial. With the help of Jim, we have begun to optimize our operational KPIs to focus our entire operation on filling our pipe and shortening our trial periods, which are longer than we want them to be.
This tightened focus has also allowed us to examine our overall business and optimize our cost structure. As a result, we have been able to reduce our overall expenses by about 20%, which will really begin to show up in the third quarter of fiscal 2023. We expect that the operational focus we are developing will get us to profitability faster.
The competitive differentiator we have created in monitoring Microsoft Teams voice performance has allowed us to develop new sales channels with Vantage DX through partnerships. Last quarter, we announced our Orange Business Systems, a large global systems integrator and Microsoft Operator Connect partner with significant operations in Europe. This quarter, we announced Datacom, a Microsoft partner focused on Asia Pacific, where the deal already closed. The pipeline continues to expand with both of these partners.
Our Microsoft partnership continues to be a valuable pillar in our Vantage DX growth strategy. We have a significant pipeline of Microsoft Co-sell deals, which allows us to leverage Microsoft resources on these accounts to get to the right people faster than we otherwise could.
And finally, I want to highlight the 3-year renewals we signed with Mitel in Q1 for MPA. MPA is important for Mitel Solutions, and it forms a solid $8 million annual recurring revenue base from which we can expand. We are focused on driving more adoption of MPA through Mitel's communication and collaboration solutions, developing support for additional Mitel platforms and seeking additional opportunities of Vantage DX cross-selling within the Mitel relationship.
I will speak more about our focus and outlook shortly after Jim provides a more detailed review of our financial performance in the first quarter. Over to you, Jim.
Thanks, John. I will review the Q1 fiscal 2023 financials in some depth in a few moments. I want to highlight for our investors the tightened focus we have adopted subsequent to quarter end in order to drive customer and shareholder value. John and I will speak about this in more detail in today's call. On to the financials for quarter one. As always, we have posted our financial results and the press release to SEDAR, where you can review our financials in more detail, if you wish.
Revenues were $4.2 million, representing a 5% decrease compared to $4.4 million in Q1 of fiscal 2023. The decrease is primarily related to unfavorable currency conversion and a slight decline in legacy maintenance and onetime Mitel product revenue, partially offset by an increase in our software subscriptions. On a constant currency basis, revenue decreased by 2% year-over-year. The recent dynamics in global currencies, coupled with Martello's shifting revenue mix to the modern workplace optimization highlights the importance of continual assessment of options to mitigate.
Gross margin was 89% in Q1 of fiscal 2023 compared to 9% in the same period of fiscal 2022. The slight decrease is attributable to higher hosting costs associated with the cloud migration of the product suite. The recurring portion of total revenue was 99% compared to 97% in the same period of fiscal 2022. The increase was attributable to the growing mix of software license subscriptions with lower sales of hardware associated with the Mitel business line in the prior year.
As Martello's CFO, a few of my key focus areas are financial and business controls, driving value to the front of the business and simplicity. Let me share an example of simplicity. Based on input from external and internal stakeholders and the market online evolution of Martello's products and services, Mitel is now reporting under 2 lines of business. First line of business is modern workplace optimization. This is Martello's dominant business line representing 58% of total revenues in Q1 of fiscal 2023. This includes revenue from our flagship product, Vantage DX and associated software focused on Microsoft. The second line of business is Mitel Performance Analytics, which represented 42% of revenues.
In Q1 of fiscal 2023, monthly recurring revenue was $1.38 million compared to $1.43 million, representing a 4% decrease. This is primarily attributable to unfavorable currency conversion, coupled with marginal declines in Mitel Performance Analytics and support and maintenance on legacy products. On a constant currency basis, monthly recurring revenue was relatively flat year-over-year. And as a reminder, monthly recurring revenue is a non-IFRS measure, representing average monthly recurring revenues earned in a fiscal quarter.
There were 352,000 Microsoft users on the Vantage DX platform as of June 30, 2022. That is a sequential 60% increase compared to Q4 of fiscal 2022. The total number of Microsoft users on all Martello products totaled $2.66 million compared to $2.76 million in Q1 of fiscal 2023. The company is focused on driving Microsoft user growth through sales of Vantage DX through direct sales activities and channels such as Microsoft and Operator Connect partners. This includes upgrading legacy monitoring customers and converting trials to paid subscriptions.
Operating expenses decreased 12% year-over-year to $5 million in Q1 of fiscal 2023 versus $5.7 million in Q1 of fiscal 2022. The decrease is primarily attributable to lower headcount and vendor-related costs and other cost optimization actions. As we announced recently, the cost optimization measures will fully impact operating expenses in Q3 of this year, resulting in a 20% reduction. The net loss of $1.2 million represents a 47% improvement compared to the net loss of $2.2 million in Q1 of fiscal 2022. The improvement is attributable to the items explained above plus lower income taxes.
Adjusted EBITDA loss, which is a non-IFRS measure, improved by 32% to $0.7 million in Q1 fiscal 2023 compared to a loss of $1 million in the prior year. The improvement in adjusted EBITDA performance was related to lower operating expenses, as discussed above. The company's cash and short-term investments balance was $5.7 million at June 30, 2022, compared to $4.9 million at March 31, 2022. Subsequent to quarter end and announced last evening, the company closed an additional CAD 2 million funding via an insider-led subordinated loan.
Net working capital was a negative balance of $7.2 million at June 30, 2022, compared to $2.3 million at March 31, 2022. This decrease in working capital is attributed to the $10.2 million Vistara loan being reclassed as current liability based on IFRS. The loan matures in May 2023. As part of management's tightened focus and related cost optimization measures, we are enhancing the business management constructs, metrics, and discipline that will support our accelerated path to positive cash flow and profitability. I will now hand it back to John to close with his perspective on Martello's focus and outlook. John?
Thanks, Jim. As I mentioned earlier, we continue to be focused squarely on the opportunity to optimize Microsoft Teams and Microsoft 365 user experience, working closely with Microsoft and key partners like Orange and Datacom will create efficiencies of more disciplined management of the core KPIs that measure time to revenue with the goal of accelerating this cycle. The board and management team are excited about the demand of Vantage DX coming from our Microsoft relationship. We are working with Microsoft on pro-selling activity every day now, and our pipeline is growing for this activity as well as the sales motions of Orange and Datacom.
Working with Jim and the rest of the organization, this emerging demand has allowed us to focus operationally on the key drivers to success, namely setting the pipeline and accelerating our time to revenue cycles. By doing this, we have been able to redeploy resources and optimize our cost to execute. This has positioned us well to generate sustained cash flow quickly as we gain sales momentum through our partners at Vantage DX. The Mitel MPA solution remains a solid long-term recurring revenue base from which we can build sustained growth of our Vantage DX solution.
Our deepening partnership with Microsoft is an important differentiator and assets from our fellow and one we will continue to nurture and develop. Jim and I are now head on to answer your questions. And operator, could you please facilitate the Q&A part of this call.
[Operator Instructions] Our first question comes from Christian Sgro of Eight Capital.
First, I wanted to ask on your churn in the legacy product segment. Could you talk about the percent of revenue that's related to legacy products at this point in time? And then if you expect that to churn and maybe what piece to the next couple of quarters?
Sure, Christian, it is Jim here. There's a couple of elements to this. But to start with, our legacy products make up around 11% of our current revenue. The churn that we speak about, I would look at it in 2 buckets. One is the legacy products themselves. And one is with one of our client SoftwareONE, the business itself is fading it and that was a decision that they made in terms of how they thought our product fit with their portfolio. So I think there is 2 components to that, but I hope that answers your question.
That is helpful color. I will move on to the partner channel. It sounds like you are seeing some early success in some of the newer partners that you have onboarded; so just your comments on the go-to-market with these partners and any early contributions in the quarter that we could look out for?
Well, I will take it. Obviously, the most important partner for us is Microsoft. What is nice in the last, I would say, just 6 weeks, we have seen Microsoft bringing opportunities to us. And why that is important is prior to that, we have got Microsoft Co-sell opportunities, but these are opportunities we have found and then brought Microsoft into the conversation to help us push it along. What we're now seeing with Microsoft is they're bringing opportunities to us and we're tracking those specifically because as those grow, that could become quite dominant, but this is also part of us navigating the giant Microsoft ecosystem.
So it is taking time. It is taking months for us to get there. But once you get that going, once you get the Microsoft machine churning, it is going [ around ] same sort of thing, huge machine. We have got through that. We have got some large deals with those guys in the pipe working through. They [ bid ] us on a couple of large opportunities, which is great. And again, it is really sort of moving those pieces along with a big machine.
Datacom are particularly interesting as well, mainly because of their position. They are the largest homegrown IT company in Australasia, over $1 billion in revenue. What they want to do is also not only in services around it, but their ability to install. So they take quite a lot of load off us. If I look at sort of Microsoft, that is very much sell-through sort of expectations that we will support all the way through the deal and will help through the install.
Datacom want to take all that on and basically as a value-add to what their services are offering. So that particularly and as I said, we have already closed our first deal with Datacom. And I think that one will be a great one to watch. But for me, the giant partner for us is Microsoft, and we are starting to see that pick up just alone in the last 6 weeks.
That is helpful. I will ask one more question before passing the line. Just on the commentary around accelerating the sales cycles, I was wondering what strategies you might have there to accelerate maybe the time to value or customer signing? And then is a big part of that converting your trial users to paid customers. How do those conversations go and how do you work through those relationships?
Yes. So the bottom line is the product went GA in December. So we have learned an awful lot. And I think we said before in these calls, the first couple of installs, the sort of January, February have the usual sort of expected challenges and it was everyone for -- myself, everyone down to R&D, solving problems with a client as quickly as we could, working overnight, we did that and got it solved because we learned things. Having learned those lessons, it means we have got a better handle on how installs, et cetera, et cetera, things to do and our ability to scale as well as we took on some of these bigger clients.
But added on top of that now is what we are also seeing is what clients are starting to really expect out of the box and we have got some new pieces coming. So for example, at the moment, once we install the product, we then go back to the clients, we help them set up with some of the dashboards they need. In September, that will come out of the box. So that -- again, go to your point about time to value. That means as soon as we install the product – in other words, install the product, get some credentials in it, they will have dashboards straightaway as opposed to.
Now at the moment, it takes us a few days to get those dashboards spun up based on what we need to know within the client's environment. So again, that time to value will accelerate.
So there is a focus like that. And then there is more automation as we go through in that respect. The other nice thing is being integrated with Microsoft getting sort of Microsoft input on where they see the product should go, one of those key things is, and we talked about Operator Connect, I do not know if you saw the Microsoft release that came out. I think it was about 3 weeks ago, 4 weeks ago.
They talked about where Teams is. One thing they mentioned on there is they have got 12 million users now through our connecting Teams for the PSTN network. I think I have mentioned this to you specifically and I think as well to Daniel, this is why we did the session border controller route, and we have made our connections there.
Microsoft wants to dominate that space. And I think this is where we have our unique differentiator because we alone, of all of the people in this space, can see both the Internet, the network, and the phone side. So as Microsoft try to continue to move and dominate even with the 12 million Teams users, that number is going to grow, we become more and more important to that side.
And if you look at the Operator Connect part, I think this is -- as they sign more and more companies, Orange is already an Operator Connect partner. But as they sign more, I think -- a quarter ago, it was 24, now it is already 36 Operator Connect partners. Those guys are going to want us to help troubleshoot that environment. And again, just to reinforce, we do not optimize Office 365. We optimize the environment Office 365 runs in, including Teams. And as you make that environment more complex, the more you need our product to help them troubleshoot.
[Operator Instructions] Our next question comes from Daniel Rosenberg of Paradigm Capital.
My first question was just around the dialogue you are having with potential customers. I was wondering if there is any shift in conversation and we have seen some companies to hire increases and concerns around recessionary spending, has there been any change in what you are seeing on the front line.
Yes, I think the easiest way to say is they have got people coming. They are all looking at its modern workplace. What does it mean? People coming back to the office, people doing at home, and I think, I mean, we have seen Apple's announcement and all those people are saying, we want people back in the office 2 to 3 days a week. So generally, that you have that aspect and particularly sort of with Microsoft, they have got what does that mean in that space for us. And it means with that hybrid work environment, you have got to understand, give the same level of quality of service, whether the person is at home or in the office. So that is where we sit, but on the other side of that, which is we watch the economy like everybody else does. We are watching potential recession. And I think I have said this before, right? We have to do defensive and offensive measures.
The defensive was cost cutting, making sure we accelerate our time to cash flow positive. That is important and stepping through EBITDA positive on the way there. So we are accelerating that. But the offensive is doubling down in the Office 365 space right being more effective and more focused there, we get the legacy churn. But that is not where the growth is going to come. We cannot fix a legacy churn. Those products are aged. They are used in the environment. But then it also comes into budget challenges. So when we hit sort of the procurement conversation the curing goes, "Oh, well, we are going to have to." So there is a bit of a slowdown on procurement, which we are watching closely.
But again, that is why we have done a defensive measure, to make sure that we are resilient to any slowdown in the pipeline because much as we can accelerate the time to value, if procurement then goes year well, we are going to slow this down to the next financial quarter or we want to buy this next financial year. We have a hard time working with that. We can go in and sort of or potentially offer discounts, but only where they make business sense overall to us.
And then on the user front, is there anything onetime occurring that happened in the quarter? Or kind of previously, you have looked at $3.5 million as a target. Is that still on the table? Or do you think it might be taking a longer time to achieve those targets?
Well, the onetime change, Daniel, that I touched on was with SoftwareONE. So with SoftwareONE phasing out, we are going to experience about a 400,000 user decline on that piece. And of course, we are scaling Vantage and we are offsetting a good chunk of it. And we obviously, as we scale the business, given where we are with our life cycle fancies, I am sure everyone can appreciate, it is early days and we are getting phenomenal traction out there. But in terms of the onetime, I would mention the SoftwareONE piece.
And Daniel, to that SoftwareONE were a client that came or partners that came with the GSX acquisition. They are on legacy product by nature, they want to move to Vantage, but they cannot. Again, I think it goes back to your previous question. We would love them to move fast to Vantage. If they are interested, they rent. So they are looking at the demonstrations. They are trying to see where it fits, but that will not sort of overlap as an off-board of the legacy products. So that is kind of a challenge for us. But again for me, the 60% growth in Vantage is key. We see the uptake on Vantage. We are focusing our resources there. I am not focusing on the legacy products that software wise churning out because the revenue growth and the overall growth of Martello have tight advantage.
Okay. So then on the cost side of the equation, just as you approach Q3, should we expect the cost reduction to be kind of linear as you hunt towards $2 million annualized.
In cost reductions, it is a great question on linear. The goal, as John touched on it, is the cost reductions are a onetime action that was taken to get us a little more right of line with performing financially at a level that is expected. But the truth is, we have plans where the growth is going to have us grow our cost base probably in a linear fashion. The scalability of the business, if you think about the software industry, I would expect the cost in certain areas to actually go down as a percentage of revenue dollars over time because we are still in that very early stage of standing up the software and making significant investments and making sure that it is understood. It is marketed well and that we have got a great process for trials and delivery. So I would say that we are going to improve that over time with the volume of users and customers coming on board.
But in terms of the Q2 versus Q3 when you expect to be having the full impact seen, is that kind of a linear function or it is just mostly going to come in Q3? Or how should we expect to see that?
I am sorry. Okay. In terms of the Q2 versus Q3, I would say there is going to be a bigger impact in Q3 simply because the cost that we are reducing will be phasing out. They are not falling off in kind of a step fashion. They are going to be phased out naturally. So Q3 will have a much bigger impact than Q2.
And lastly, so just on the overall strategy here, you are trying to accelerate growth, control costs with the goal of profitability. Is there a target or time line or aspiration that you are shooting for when we could expect to be EBITDA positive or cash flow positive?
We -- for all the right reasons, we avoid forward guidance. I would say what we are doing right now is there is a philosophy here of continuous improvement. I think that is an important foundational [indiscernible] for us to consider. This is about continuous improvement. So there are -- the 10 pegs are in place in many, many areas. And as we scale the business, we are looking at it from a continuous improvement lens. And therefore, we are able to project out into the future what we are going to be able to achieve both with our customers and financials and operational with our product. At this time, I am going to avoid giving any forward guidance on that. But rest assured, we have a plan to achieve that.
Maybe I will sneak just one more in here. With the revenue trajectory as it is, when do you think the growth business will overshadow some of the legacy declines we are seeing. And I understand that you guys are facing some [ effects ]here. But setting that aside, when should we see growth overshadow the legacy lines?
Well -- and again, if I look at growth from a percentage perspective, I think the growth is outstripping on a percentage basis already in the legacy business. I think it is the scaling of the growth, so that the volumes are at a level where they can offset in its entirety, the volume declines. Again, I think at this time, I am probably going to defer from answering that question. What I will say is we have a plan, and we are very, very confident that we are going to be in a position of net growth in the coming quarters.
This concludes the question-and-answer session. I would like to turn the conference back over to John Proctor for any closing remarks.
Thank you. And on behalf of all of us, thank you for your continued interest in Martello. As mentioned earlier, you can register to receive our upcoming newsletter in the Investors section of our website. The recording of today's call will be available our website later today. And also if you have any questions on today's call, you can reach out for Investor Relations any time by e-mailing investor@martellotech.com. Thank you to all, and speak to you all soon. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.