Martello Technologies Group Inc

XTSX:MTLO

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group First Quarter Fiscal 2024 Investor Conference Call. Today's call will provide information and commentary on financial results for the 3 months ended June 30, 2023. We will hear from John Proctor, President and CEO of Martello; and Jim Clark, Chief Financial Officer. Following these remarks, John and Jim will take questions. 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, executive]

Thank you. Good morning, everyone, and thank you for joining us today. Before Jim and I review the first quarter of the financial year, I'd like to highlight the impact of actions we've taken to manage cash as we grow the Vantage DX business against the headwinds of legacy product revenue declines.

We have discharged [ AuguStar ] debt in full and refinanced the remaining balance of Wesley Clover International, which is the investments owned by Martello's Chairman, Terry Matthews. Terry's confidence in us is strong, extended the maturity date of our debt to 2026 to give us more runway to develop Vantage DX, while Legacy product revenue fully sunsets. Our operating expenses have dropped by 15%, and we've seen a 69% improvement in our adjusted EBITDA loss in Q1. This is a result of the cost optimization exercise we undertook in fiscal 2023 and ongoing monitoring and optimization of that spend.

Now, I'll talk about Martello's business in Q1. You'll recall that Martello has made up of 3 distinct business lines in very different stages of growth. The Vantage DX Microsoft Teams and 365 Monitoring Platform, which is launched in 2021. That's the first line, and we are focused on developing the market for this software and have now more than 1 million users onboarded so far. The second is the stable Mitel Performance Analytics business. The software we provide to Mitel customers continue to generate a high-margin recurring revenue base. And the third is creating a headwind for Martello of top line revenue. Our sunsetting legacy products, which by design, are declining. We are actively pursuing the best fit to retain certain legacy customers on existing or new products.

The end of Q1 for Martello marked the start of a new fiscal year for Microsoft, and we are very aligned with our strategy. Microsoft has placed a focus on flexible work with initiatives like Teams [ phones ], Operator Connect Mobile taking center stage. They are also increasingly driving transactions through their marketplace. Vantage DX is a Microsoft preferred solution on their Azure marketplace. Vantage DX helped Microsoft with their objectives, and as a result, we've seen an uptick in Microsoft contact reaching out to us in Q1. In that quarter, we added 45% more Microsoft contracts to our database than in the previous quarter as Microsoft sellers reached out with potential sales opportunities.

Our partner strategy is similarly well aligned to Microsoft strategy. I mentioned on Martello's last earning calls that we would be onboarding a new partner. I'm pleased to share and announce that CGI, an IT and business consulting firm has become Martello's partner. They are using Vantage DX as part of their Microsoft 365 managed service offering and in their consulting practice. This allows them to diagnose Microsoft 365 and team issues for their large customer base more efficiently.

Our partnership with Microsoft Operator Connect Partner, our Orange Business Service, or OBS, has expanded to close a managed service offering. OBS has recently spoken about their collaboration and employee experience strategy and identified Vantage DX as a key component. Richard Heaps, the head of collaboration for product management at OBS, was posed to saying that tools such as Vantage DX are becoming more and more essential because employees today need the best tools and the best experience. And if we don't get that, they'll go and work somewhere else. In his view, when you add Vantage DX to a team's deployment, you can troubleshoot more efficiently across the whole path. It gives OBS greater visibility compared to the tools that come natively with Microsoft or other vendors.

At the same time, Teams mobile phone is heating up with increased focus by Microsoft as part of its flexible work initiative. Operator Connect Partners are looking at this, and there is interest in ensuring the reliability of the handover between fixed and wireless on these calls. Vantage DX can help address this issue for Operator Connect Partners moving into Teams mobile phone while also providing greater visibility in the whole team's calling power for better troubleshooting. We're seeing more conversations with Operator Connect Partners as a result.

Q1 was an eventful quarter in our Mitel business as we launched an important new release of NPA that support software and voice quality monitoring, which is critical to Mitel's hybrid workplace strategy. We hit the road to Mitel's major partner events in Q1, demonstrating these capabilities to Mitel's leading partners globally and connecting with key Mitel executives.

Finally, at this section, I'm exceptionally pleased with after diligently repaying our Vistara debt over the last few years. As I mentioned earlier, we were able to discharge the remaining amount in full subsequent to Q1 refinancing this debt with Wesley Clover through our Chair and Terry Matthews, who agreed to extend the maturity date to 2026. We thank both Vistara and Terry for their unwavering faces. This refinancing has given us runway to grow the bond business while managing this decline of legacy products.

Our team is very focused on driving Vantage DX MRR growth through the acceleration of direct and channel sales as well as the retention and expansion of existing clients. I'll speak more about this in a few minutes when I close with my perspective on Martello's outlook.

For now, I will hand over to Jim to provide a more detailed review of our financial performance in the first quarter of the fiscal 2024 year. Jim, over to you.

[Jim Clark, executive]

Thanks, John. Good morning, everyone, and thanks for joining.

Before I discuss the financial results from the first quarter of fiscal 2024, I'd like to share my perspective on the company's performance. Our annual operating plan prioritizes net new Vantage DX revenue growth both through direct sales and channel partners, including Microsoft, Orange Business Services and CGI with more than 1 million users already on Vantage DX and Microsoft recommending the platform to its customers and partners, we continue to lay the foundation to grow market share. At the same time, we continue to manage the headwinds of legacy decline impacting top line revenue.

I am pleased to have recently discharged our debt obligations to Vistara and refinance with Wesley Clover International with repayment extended to August 28, 2026. This gives us greater runway to develop the Vantage DX business alongside Microsoft and other partners while closely managing Legacy product decline.

Let's move into the financial discussion. As always, we posted our financial results and the related press release to SEDAR, where you can review them in more detail at your convenience. For Q1, revenue was $4 million, representing a 4.2% decrease compared to Q1 of fiscal 2023. As Vantage DX revenue grew year-over-year and Mitel revenue remained stable, sunsetting legacy product revenues climbed by 25% causing the net decline in revenue.

Vantage DX is Martello's key modern workplace optimization business. In Q1 of fiscal 2024, Vantage DX monthly recurring revenue grew by 232% compared to Q1 of fiscal 2023, both from net new clients and the conversion of clients from legacy products to the Vantage DX solution. There were more than 1 million Microsoft users monitored by this Microsoft recommended platform. Total Vantage DX revenue in Q1 of fiscal 2024 was $0.51 million compared to $0.15 million in Q1 of the prior year.

Sunsetting Legacy product revenue declined by 25% or $0.57 million year-over-year. The ongoing decline of Legacy product revenue is proceeding as planned. The company is executing a strategy to convert certain Legacy customers to the Vantage DX platform.

The Mitel business line remains a stable and profitable source of recurring revenue and cash. Revenue in this segment was stable in Q1 of fiscal 2024 with marginal favorability from currency conversion. The Mitel business line represented 45% of total revenues in Q1 of fiscal 2024. That compares to 42% in Q1 of fiscal 2023.

Revenue was 99% recurring in Q1 of fiscal 2024 compared to 99% in Q1 of fiscal 2023. Gross margin as a percentage of revenue was 88% in Q1 of fiscal 2024 and compared to 89% in Q1 of fiscal 2023. The marginal decrease is due to the increased cost of inventory related to higher Mitel hardware sales and an increase in third-party software subscription resale in Q1 of fiscal 2024 compared to the same period of 2023. This is partially offset by lower hosting costs in Q1 of fiscal 2024 compared to Q1 of the prior year.

Monthly recurring revenue was $1.31 million in Q1 of fiscal 2024 compared to $1.38 million in the prior year, a 3% decrease that, that is again attributable to declining subscriptions to related maintenance and support on sunsetting legacy products. MRR is a non-IFRS measure and it represents the average monthly recurring revenues earned in the fiscal quarter.

I'm pleased to report that the cost optimization exercise undertaken by management in Q2 of fiscal 2023 has resulted in a 15% decrease in our operating expenses, bringing them down to $4.29 million in Q1 of fiscal 2024. The cost optimization exercise included headcount reductions combined with lower vendor spend. As management, we continue to closely monitor and optimize our spend.

The net loss of $1.21 million in Q1 of fiscal 2024 represented a 2% improvement compared to the net loss of $1.23 million in Q1 of fiscal 2023. Importantly, though, when we exclude the accounting entry for the fair value of the Fed dev loan, the improvement in net loss is 47%. Adjusted earnings before interest taxes, depreciation and amortization loss improved by 69% to $0.2 million in Q1 of fiscal 2024 compared to $0.65 million in Q1 of fiscal 2023. Again, this is attributable to the cost optimization exercise I've already discussed. And just as a reminder, adjusted EBITDA is also a non-IFRS measure.

Martello's cash and short-term investments balance was $3.73 million as of June 30 compared to $2.2 million at March 31. The post Q1 equity raise and debt refinancing has significantly improved our working capital.

So to close, execution of our annual operating fund will result in net accretive growth with Vantage DX firmly positioning itself as the market leader out of the box Microsoft Tools performance monitoring SaaS solution. Martello's NPA solution, coupled with growing interest from Mitel and Mitel partners and Vantage DX make this segment an exciting growth opportunity. The additional runway provided by the extension of our primary debt to 2026, together with the cost optimization steps we took in fiscal 2023 will allow us to execute on our annual operating plan and move towards positive adjusted EBITDA.

I will now hand it back to John to close with his perspective on Martello's outlook. John?

[John Proctor, executive]

Thanks, Jim. As I mentioned earlier, our focus is to grow Vantage DX MRR while retaining and expanding as many legacy customers as we can. In this, our partnerships with CGI, Microsoft and Orange will be key and we have developing sales opportunity pipelines with all of these partners.

I'm very confident that we are in the right market at the right time. Microsoft team is a large and growing market of 300 million users and IT teams globally are facing escalating pressure to manage teams performance for a mix of remote and office-based users. We've looked at some aggregating monitoring data coming out of Vantage DX and we found that, on average, 3% of teams call failed to report quality due to problems in the IT infrastructure supporting teams. What's interesting is that more than 60% of the issues disrupting teams calls are within the organization's control. If you know where they are, you can fix them. The Vantage DX tells you when and where the problems are happening, so you can fix them. And 3% actually isn't being significant.

In a 5,000 employee organization and to note here, our biggest client is 400,000 users, so you can scale it up. But in a 5,000 employee organization, it means 3,500 bad calls each month. 3,500 times of the customer couldn't access your support team or your sales team couldn't easily demo your product prospect. There is a real financial impact to a company's productivity and customer experience when you have core failure.

I also see some opportunities for upside in the medium term. I've spoken about Teams mobile phone, our promotion to top-tier partner status, and that's another important driver of upside. It places us in a much smaller group of partners with access to joint marketing activities. And more importantly, it provides Microsoft sellers with a high incentive to sell our products to their customers. We're doing everything we can to increase the velocity of our Vantage DX sales cycle. We introduced the [ like to ] trial to reduce the time each prospects spend evaluating the product and introduce pay professional services for those who require extended trials. We're pursuing targeted account-based demand generation strategies to drive more prospects into our pipeline.

The headwinds I see for revenue growth in the near term, our legacy product revenue decline, which we know is distorting the top line as well as the challenges many in the tech industry are facing today with enterprise software sales. Sales cycles are longer. There are more checkpoints in every sale than [indiscernible] and large enterprises have increasingly robust evaluation processes, including security views, which consume time and resources in the sales cycle. We are mitigating these factors in several ways to ensure our sales cycle is as efficient as possible.

Mitel continues to be a strong and valued partner, and we do see upside in this channel in the future, particularly as they expand their installed base with the Unify acquisition due shorter later this year. We remain laser-focused on growing Vantage DX MRR by executing on our Microsoft and channel and channel [indiscernible], targeting key legacy customers for conversion to Vantage DX, maintaining a regular cadence of product innovation and continuing to build a pipeline of direct sales opportunities and also streamlining our sales process to accelerate times revenue. We are appropriately resourced today to achieve these objectives and we'll continue the disciplined cash management that Jim has spoken about earlier.

Jim and I are here now to answer your questions. Operator, would you please facilitate the Q&A part of this call.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to John Proctor for any closing remarks.

[John Proctor, executive]

Thanks, Ariel. Just a couple of bullets. First of all, the CGI -- becoming a partner is exciting. As I've sort of discussed before on these calls, when you start moving into partners, it creates a barrier to entry to anybody else to move on. There's a cost for anybody from Orange to Microsoft to CGI onboarding a partner. So once you have become the tool of choice inside that environment, it's a barrier for anybody else to move in on that space. So we're quite very pleased with CGI becoming a partner. We're now currently onboarding them. There are opportunities in the pipeline we're talking to them about. So that is very good news. And of course, we're discussing that for the first time on this call, but more news, obviously, will follow on that as we progress the relationship.

At the same time, Rogers is now a partner. That 1 is progressing as well. So certainly, from a Canadian perspective, CGI and Rogers means we're starting to progress definitely in that space with the partners. And Roger has been a very early adopter of Microsoft Operator Connect. So they also talked about the expansion of that environment that I mentioned earlier.

So there's some good news on that space. And particularly now as we talk about the financing, we're keeping the cash in the company as much as we can. We're tracking steadily towards EBITDA positive and then from there, will leapfrog our way on to cash flow positive. So these are all good news story. And then MRR, yes, we've got some headwinds and certainly the legacy decaying as we've mentioned before, that is the plan. We always knew the legacy was going to decay. We accept that the growth then. And as the top line, this Vantage DX as that grows, that growth will outbalance the legacy decline. And that's clearly the tipping point as we go through.

But as Jim mentioned, we're very confident of cash flow. We're conscious of costs. So we're keeping those very tight as we progress this path towards being cash flow positive, and that's key for the foreseeable future.

So thank you all for your attendance. Thank you for your interest in Martello. The recording of today's call will be available on our website later today. If you do have any follow-on questions, you can reach out to our Investor Relations any time by e-mailing [e-mail].

Thank you all for your attendance. Back to you, Ariel.

[Operator]

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