Martello Technologies Group Inc

XTSX:MTLO

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group Second Quarter Fiscal 2022 Investor Conference Call. Today's call will provide information and commentary on financial results for the 3 months ended September 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], 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. I hope you and your families are all keeping well. This last quarter has been a busy one for Martello. Since I spoke to you last in August, we have made some important announcements. Our last earnings call came 1 day after we announced Martello's selection to the Microsoft Global Solutions Alliance program. This elite invite-only program gives us a higher degree of access and support from Microsoft to jointly improve the way Microsoft 365 and Teams delivered to millions of end users around the world. We had another game-changing announcement in Q2 with the launch of Vantage DX. This single platform solution for monitoring and optimization of Teams user experience, and I will speak more about the impact and progress of these 2 initiatives in a moment. Today, we have an installed base of 2.9 million Microsoft users, a large and growing addressable market in Microsoft Teams users, and a second consecutive quarter of Microsoft DEM growth. Microsoft themselves want to work more closely with us, because they see the demand for DEM solutions and recognize that Martello can provide the Microsoft expertise their clients need. I will speak more about our outlook shortly, and I look forward to answering your questions in a few minutes. Now I'd like to hand over to Erin for a review of financial performance. Erin?

[Erin Crowe, Chief Financial Officer]

Thanks, John. I'm pleased that the investments we made in acquisitions and technology integration over the last 17 months have resulted in a second consecutive quarter of Microsoft DEM growth in Q2. This segment is now close to 50% of our total revenues. I'll now comment on our financial performance for the second quarter of fiscal 2022, which ended on September 30, 2021. Revenues of $4.4 million were slightly higher than Q2 of fiscal '21. While there was growth year-over-year in the Microsoft 365 Monitoring segment, this was partially offset by Legacy Product declines, and we experienced an impact from foreign currency conversion in the UC Monitoring segment. Revenue quality continues to be strong. The recurring portion of total revenue was 98% in Q2 of fiscal '22 compared to 96% in Q2 of fiscal '21. Gross margin was 92% in Q2 fiscal '22 compared to 95% in the prior year. This slight decrease was the result of lower gross margins on Microsoft 365 Monitoring due to higher hosting costs on cloud customers and sales and distributor commissions. Monthly recurring revenue, or MRR, was $1.44 million in Q2 of fiscal '22, an increase of 1% compared to 1.42% in Q2 of fiscal '21. The increase in MRR is due to an increase in subscription licenses in IT Service Analytics and Microsoft 365 Monitoring. MRR is a non-IFRS measure and represents average monthly recurring revenues earned in the fiscal quarter.Operating expenses of $5.1 million were 7.8% above the $4.8 million reported in Q2 of fiscal 2021. Investments in sales, marketing and R&D contributed to the year-over-year increase in addition to increased compensation costs compared to the same period last year, as management implemented measures in the prior year to manage risks and uncertainties related to COVID. In addition, other increases include market research, software and other office costs and professional fees as well as lower government incentives.Adjusted EBITDA, which is a non-IFRS measure, was a loss of $0.3 million in Q2 of fiscal '22 compared to a gain of $0.3 million in the same period last year. The decrease in adjusted EBITDA is due to higher operating losses associated with the return to normalized operations. The Q2 fiscal '22 net loss of $1.7 million compared to a net loss of $0.9 million for the same period last year, as a result of the items outlined a moment ago as well as higher losses on foreign exchange, partially offset by lower financing fees, adjustments to interest expense on the Vistara term loan and a gain from discontinued operations in the prior year.The company's cash and short-term investments balance was $4.8 million at September 30, 2021, compared to $8.5 million at March 31, 2021. Net working capital was $2.7 million at September 30, 2021, compared to $4.5 million at March 31, 2021. The company believes its current cash and credit lines are sufficient to fund ongoing organic growth.Now I'd like to offer insight into the sequential performance of key revenue streams in Q2. For a second consecutive quarter, and as a result of key investments over the last 17 months, the leading driver of our revenue in Q2 continues to be Microsoft DEM. This revenue stream includes products targeted at the Microsoft market, including Gizmo and iQ. Sequentially, this revenue stream grew by 7% over Q1 and contributed 47% of Q2 revenues. This compares to a contribution of 42% in Q1 of fiscal '22.With respect to the remaining portion of Martello's Q2 revenue, 41% was generated from the Mitel UC Performance Analytics business compared to 42% in Q1 of fiscal '22 and 13% was from Legacy Products compared to 14% in the previous quarter. The Legacy Products revenue stream includes Domino and Livemaps, products acquired through the GSX and Savision acquisitions. Legacy Products revenue declined by 9% or $60,000 sequentially from Q1 of fiscal '22, and we expect these revenue streams to continue to decline. As they become a smaller proportion of our overall revenue, their impact is becoming less material to our business.Finally, one of the KPIs we track closely is the growth in the number of Microsoft users on Martello's DEM platform. In Q2 of fiscal '22, this number increased to 2.9 million from 2.8 million in Q1. Based on fiscal '22 year-to-date results, we're now targeting to reach 3.5 million users in the first half of the next fiscal year. John will speak to this metric in more detail in a few minutes.I'll now hand it back 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 increased growth rates as we move into fiscal 2023. Sequential growth in Microsoft DEM revenue for a second consecutive quarter is evidence that we are on that path. We are focused on generating increased demand for our Microsoft DEM products and on converting its demand to sales to realize higher revenue and MRR as efficiently as possible. We continue to believe that our addition to the Microsoft Global Solutions Alliance will be a significant driver of future growth.As I mentioned earlier, in September this year, we announced the launch of Vantage DX to optimize the overall Microsoft 365 and Teams user experience. I am pleased to say that as we predicted, we are seeing increased demand for our solutions, particularly for businesses implementing hybrid work models with Microsoft Teams. While it will continue to take some time for new opportunities to show up fully in our revenues, we're confident that Vantage DX, together with our new level of engagement with Microsoft, will have a positive impact on growth trajectories beyond fiscal 2022. We were also delighted to announce that just a few weeks after launching, Vantage DX won the prestigious Network Innovation Award from Tech Target. And Martello was also recognized by Gartner in an October report as 1 of just 4 vendors providing Microsoft 365 monitoring solutions.Our relationship with Mitel remains solid, and continues to provide high-quality recurring revenue. Just last week, our latest NPA release was launched in Mitel's channel. But I also want to touch briefly on the recent announcement of a strategic partnership between Mitel and RingCentral subsequent to Q2. The partnership makes RingCentral the exclusive UCaaS provider to Mitel's customers. It's important to note, however, that we are not losing any revenue as a result of this announcement. Customers switching to RingCentral are not currently monitored by Martello's software. The Mitel system's being monitored by NPA today, largely on-premise, do not include the systems which are targeted in the RingCentral deal. Mitel, however, is now expected to focus resources on on-premise. As a result, we don't expect this announcement to have a near-term impact on our NPA business with Mitel. Finally, I would like to mention the recent amendment to our credit agreement with Vistara Growth and the associated private placement. Together with Vistara, we amended the agreement to achieve more growth-oriented terms and flexibility such as the ability to partially prepay, which we didn't have before. To demonstrate the incompetence of insiders and bolster the balance sheet, we've undertaken $2 million private placement with the first tranche of $1 million closing last week. The amendment, together with the private placement improves our financial flexibility and provides additional capital to pursue sales activities in R&D as well as the general working capital purposes. We anticipate the second $1 million tranche of the private placement will be completed in January 2022. To sum up, I am very confident that our Microsoft DEM business will continue to grow and experience higher growth rates as we move into fiscal 2023. We now expect to reach our Microsoft user count target of 3.5 million users in the first half of fiscal '23, because we are seeing timing on key expected deals pushing into next fiscal year. Microsoft is now bringing us into sales and partnership discussions that are better than we've ever seen in the past, both in terms of size and relevance. We are working hard to maximize the upside from our new level of Microsoft engagement.Since launching the Vantage DX, which was only 60 days ago, we have a large number of trials underway. Many of these are related to the emerging challenges of managing Microsoft Teams' performance in more complex hybrid work models, which is the key problem Vantage DX is designed to solve. We truly believe there is a disconnect between our share price and our business, and we are working hard to close that gap with strong execution on revenue growth and retention driven by Microsoft DEM. Thank you for joining us today. I wish continued good health to all of you and your families, and Erin and I are now available to answer your questions. Operator, would you please facilitate the Q&A part of this call?

[Operator]

[Operator Instructions] Our first question comes from Daniel Rosenberg of Paradigm Capital.

[Daniel Rosenberg, Analyst]

I first wanted to follow up on your comments around the RingCentral deal. I was wondering, longer term, are there any opportunities for you to get into that ecosystem? What are your thoughts around that? And then also conversely, on the flip side, any risk around the business that sits at Mitel turning into cloud and affecting you guys?

[John Proctor, President, CEO & Director]

Sure. Daniel, I'll take that. Yes, so when you start with the Mitel RingCentral ecosystem, I think absolutely. If you look at RingCentral, it was only in the last few days, they've announced their willingness and desire to have some interconnectivity with Teams. And if you look at sort of the Gartner Magic Quadrant, there are 2 top right, UCaaS providers. One is RingCentral. The other is Microsoft. But there's a reason RingCentral announced, because if you add up all of the UCaaS providers other than Microsoft on that Gartner Magic Quadrant, Microsoft is onboarding as many as all the others put together. So there's a reason all the others are deciding to play nice with Microsoft, because they can see sort of where that train is running. But the fact they've announced that becomes good news, because we see that, and again, good news for us to be able to say we can integrate that. And I think as you sort of highlighted, the Mitel piece where we have that relationship, previously, we'd have to sort of try and work at how do we navigate into RingCentral to have a conversation. Now it will be fairly easy to go through our Mitel contacts there. So I would say it's not a focus at the moment, but certainly, there's potential in the future, which that didn't exist. So that's good news. Your other point about what are we doing with Mitel. So we have had a number of conversations with Mitel post announcement. They're really going to focus on sort of the products where we are, which is great for us. Before they were obviously trying to do both. They were trying to do the cloud business and this on-premise business. And there's a fairly good reason why they gave their cloud business or the part of the cloud business, they gave away to RingCentral, because it hasn't been overly successful from what we gathered. But that means now that we've got the company's -- much more the company's attention and the leadership on the part where we are. So I mean, whether it's attachment rates, whether it's us increasing. And as I said, we did an NPA release that did things. And there will be certain parts of the world that we'll want to keep on-prem. Everything from cruise ships to hospitality will not want to go to the cloud. So that on-premise business is going to be alive and well for a little bit. The other thing, and we're seeing this is when you've got organizations that want redundancy, they don't want everything on the network. Because if the network gets hit, and we've seen a lot of that recently, you want to be able to still communicate. So some people are still saying, well, I need 2 different systems. I don't necessarily want my phone system and my data system running across the same network. So again, that's where Mitel will be looking. And if you've got that sort of desire to be sort of that resilient, you want an analytics tool that gives you the understanding of how resilient it is. So I see that this is a good thing for us. Just again, as I said, we're not rushing into sort of forging that relationship with RingCentral. We'll let Mitel and RingCentral sort of dust settled and then we'll see where we think the best fit is.

[Daniel Rosenberg, Analyst]

Okay. And then turning to your guidance for user growth. I was just wondering if you could provide an update on your channel strategy, both inside Microsoft and with external channel partners outside of that. How do you see things scaling? Because not long ago, you had a lot of confidence about achieving 3.5 million this fiscal year. So I'm wondering what changed and kind of how you see things today?

[John Proctor, President, CEO & Director]

Yes. So it's interesting. I mean we're still not -- we're still relatively new into this Alliance Program with Microsoft. And Microsoft is huge. And you move at the speed of Microsoft. What is interesting is there's a number of things that we do that are fairly unique to Martello that Microsoft is starting to pick up. And I'm going to use an example, we started sort of navigating Microsoft and having conversations and trying to work out which partners they recommend, we work with, et cetera. And in one case, we were speaking to a Microsoft Teams with responsibility to a certain sector in Canada. And when they were talking they said, you do get there's an RFP on the street for the problem you solve right now.And again, we were not aware, because we weren't -- hadn't been brought into that ecosystem. And they said you need to speak to 1 of these 3 partners that is going to be pushing forward into that opportunity. When we got hold, I mean -- and literally that day, Microsoft introduced these 3 large systems integrators. And they spoke to us straight away, because Microsoft introduced us, and I'll come back to that point in a minute. And they said, the timing is tight, because the bid is due in 2 weeks. But low and behold, because of our relevancy and what we delivered, we went in on the bid with at least 1 of them. So that speaks to an environment that we haven't had access to before. And it's a good point of saying, if Microsoft hadn't introduced us to those large systems integrators, we would be trying to work at how to navigate in and what door we should knock on and whether somebody will pick up the phone from a very small tech company. Because Microsoft is now introducing us into these pieces, you get a certain credibility that we didn't have in the past. So I see that. And what that also means, though, is we've become more focused to come back to your sort of partner numbers. We've become very focused on these are partners that will drive growth. These are partners that are inside that Microsoft ecosystem, that will really -- could really find a benefit from Martello. So we've become a little bit more narrow focused in terms of our sort of who our partners should be rather than sort of a bit more -- less of a shotgun approach. And that's also to do with things like what we're seeing, the development path of the Vantage DX. One of those things is how Vantage DX connects into, and I'll install a whole bunch of people by saying the traditional phone system. So whether you look at call it the PSTN network or direct dialing or what it is, whatever you want to call it, Teams is being connected into that more traditional phone network. And we can see both. And that's really important and very unique, because we have this sort of history of working in the telephone world, and we have this history of working in the Microsoft network world. We can see both sides of that literal conversation. And that's a unique feature that Microsoft is extremely pleased about, because it derisks any Teams' conversations they're having with people, who are worried about connecting the 2 up. So that's, again, a great place to be. But again, stepping through that, finding the partners that are offering that as a service has become an absolute focus for us in the near term. And as I said, it's sort of narrowing our focus on Microsoft partners, which means, yes, we've had to just revise that number slightly over time. So I wouldn't say revise the number, but sort of the time line, because it means we're just going to be more specific on who we're talking to.

[Daniel Rosenberg, Analyst]

Okay. And lastly for me. When I look at the segmented revenue, so Mitel, you mentioned some foreign exchange impact. But previously, we had thought of this as kind of a steady type revenue stream, a slight growth. Has that view changed given we've seen a few quarters now of a little bit of a decline?

[Erin Crowe, Chief Financial Officer]

No, I don't think so. I mean I think we see -- like when we look at that Mitel revenue, it's -- I mean there have been small declines primarily driven by FX impacts. And within the revenue stream, when we look at it in U.S. dollars, it's not moving much at all. So I think we still believe that's a good steady eddie business. The percentage change quarter-over-quarter is very, very small, and we could see it up by the same amount next quarter easily. It's really just -- it's just a matter of foreign exchange. And then occasionally, we have some hardware sales to them. So there's pieces like that, that will move it around. But -- but no, I think our view is still the same on the Steady eddie business.

[Operator]

[Operator Instructions] Our next question comes from Christian Sgro of Eight Capital.

[Christian Sgro, Research Analyst]

The first question I wanted to ask is on the case of the legacy roll off. And a lot of amount of focus that feeds into the overall revenue. I was just wondering, maybe 2 things. First, if there's any seasonality there? And if we could expect this pace to either accelerate or slow down in the near term as we think about the revenue profile?

[Erin Crowe, Chief Financial Officer]

Yes. So on the legacy piece, I would say from a seasonality perspective, Q3 is a large renewal quarter on the legacy business. So that would typically -- this quarter that we're in right now, would typically be a quarter where we would see some decline based on the renewals, although actually, our renewals have been fairly steady again this quarter. Other than that, though, like I think the decline really we would see it continuing at about the same pace over these next couple of quarters. And our expectation really is that it will be in that less than 10% by the end of this fiscal.

[Christian Sgro, Research Analyst]

That's very helpful. And I'll ask maybe on the Vantage DX product. I know it's fairly new offering, but is there any early feedback there? And I'm wondering if there's any change from your lens on the either go-to-market or pricing in the future with this offering?

[John Proctor, President, CEO & Director]

Yes. I'll obviously start out, Christian. So yes, it's kind of interesting. I mean, we've had our first-ever client that said, "No, I like to look at it. I don't want a trial. I just want to buy it." That's fairly new, and we've actually moved that one fairly fast. And that's new for us. We always had to move people into trial. The other thing, and again, I was going to sort of slightly deviate off script at the end, but I'll mention it now is we have more trials going on now and more requests for trials in the pipeline than we have ever had in the years I've been at this company. That's significant. That's because we pull this thing together, exactly, of the acquisitions, if you look at Savision and the GSX acquisitions with sort of the expertise of Mitel NPA underneath. We pulled together Vantage DX. And it is the product we thought it would be.And I think that's significant. So yes, we're getting that very positive feedback. As I said, client -- 1 client already that just said, no, I don't want to trial. I know -- I can see what it is. I've seen you demonstrate it to me. I want it now, which was new for us. So that's good news and sort of volume of trials going on as well as the requests for trials is also excellent. So we've got that. And then pricing, so there's a number of pieces there, which is, if I look at sort of the conversation we've had with partners and with others, they all want the same thing. And why that's important is if I go back and look at sort of when we had the iQ product running and we had Gizmo running, there were a lot of nuances what clients asked for, right? We had to keep saying, okay, well, this client wants iQ, but they want it like this with these integrations. You end up sort of doing bespoke for each and every customer, which is not only a pain, it's also expensive and cost of deal goes up.What we've done now is everyone gets the same thing. There is 1 product, right? It just -- it is what it is. You get Vantage DX. What we can do though with in Vantage is there are 3 versions of it, and they are priced accordingly in 3 different tiers. And when you look at those tiers, they come with different capabilities and our ability then to say it's really simple here, the 3 tiers of Vantage, you can pick them. And we've aligned those somewhat into Microsoft. If you look at Microsoft Office 365, same thing, there are tiers of Microsoft Office 365. So it's quite -- if you have an E5 license, which is one of the top Office 365 licenses, you probably want the best version Vantage you can get because it will give you the most information across that. And clearly, you're willing to pay for the most expensive version of Office 365. And again, we look at that and say, it keeps it simple and that's what the partners like it. And again, if I look at that, I'll go back to the RFP example that I mentioned before with Daniel, the -- when we spoke to these big systems integrators, that was the one thing that we were -- they said, well, how do you price that? And we told them, well, that's simple, we can put that into our RFP. So again, you're not messing around and you make the partner's life easier with a very simple pricing system. So all of that is -- many of those pieces are extremely good news, not only from an efficiency of sales, but also from a simplicity in the partnership discussion.

[Operator]

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

[John Proctor, President, CEO & Director]

Thank you. On behalf of all of us, thank you for your interest in Martello. As you heard, we are seeing momentum for the Microsoft environment. We are feeling extremely enthusiastic about Vantage DX and getting that feedback from clients. So again, Martello is delighted with what we have achieved in the last 6 to 12 months, and we believe we're extremely well positioned going forward. However, as mentioned earlier, if you want to keep upcoming newsletters, please reach out into the Investor section of our new website, and the recording of today's call will be available on our website later today. You can also reach out at any time to Investor Relations by e-mailing [e-mail]. Have a great day, and thank you for your time.

[Operator]

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