Martello Technologies Group Inc

XTSX:MTLO

Earnings Call Transcript 2020-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group Third Quarter Fiscal 2020 Results Conference Call. [Operator Instructions] And the conference is being recorded. Today, we will hear from John Proctor, President and CEO of Martello; and Erin Crowe, Martello's Chief Financial Officer. On the first part of the call, we will provide insights into the company's performance in the third quarter of the 2020 fiscal year. After that, John and Erin will be available to answer your questions. Martello's fiscal year ends on March 31st, so today's results focus on the period ending December 31, 2019.First, here are a couple of housekeeping notices. If you'd like more information about Martello after today's call, you can reach Martello at [e-mail]. 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 results news release as well as their MD&A. It is on their website and on SEDAR. The company's actual performance could differ materially from these statements.We'll start the call with a review of the numbers from Erin Crowe, Martello's CFO. Erin?

[Erin Crowe, Chief Financial Officer]

Thank you. In Q2 of fiscal 2020, Martello continued to focus on increasing monthly recurring revenue while moving towards positive adjusted EBITDA. I'll provide more details on our progress on these objectives this morning. Before we take a closer look at the numbers, I'd like to share a short bit of background on Martello. Martello is in the business of making increasingly complex IT environment simpler to manage. We're a global technology company providing solutions that make critical real-time cloud services like voice over IP, video streaming and business applications perform better. Martello has thousands of customers in more than 175 countries around the world.Here are the highlights of the third quarter fiscal 2020 results. Monthly recurring revenues or MRR increased by 15% over the same quarter of fiscal 2019 to $990,000 for the third quarter of fiscal 2020. I'm pleased to report that in December 2019, we attained $1 million of monthly recurring revenue. Although MRR is a non-IFRS measure, it offers insight into the predictability of Martello's monthly revenue stream. Total revenue in the third quarter of fiscal 2020 was $3.4 million, an increase of 9% compared to the same quarter of fiscal 2019. The recurring portion of total revenue was 88% in Q3 of fiscal 2020, which was higher than 75% in the same period of fiscal 2019. This can be attributed to growth in Unified Communications Performance Analytics revenue and the acquisition of Savision with 85% of revenue recurring in Q3. Martello's organic revenue from sales of UC Performance Analytics software to the Mitel channel grew 25% in the 9 months ended December 31, 2019, and 9% for the 3 months ended December 31, 2019, compared to the same periods in fiscal '19.Our gross margins remained strong and consistent at 92.8% for the third quarter of fiscal 2020 compared to 93.9% in the same period last year. The loss from operations in Q3 2020 was $1.4 million as compared to a loss of $1.3 million in Q3 2019. This is a decrease from the Q2 fiscal '20 operating loss of $1.45 million. Adjusted EBITDA, a non-IFRS financial measure, which assesses operating performance before the impact of costs associated with acquisition activity and other noncash costs, amounted to a loss of $840,000 in Q3 2020 compared to a loss of $270,000 for the same period in fiscal 2019. This loss is lower compared to the Q2 fiscal 2020 adjusted EBITDA loss of $990,000, representing a sequential improvement this quarter. The loss from operations and adjusted EBITDA loss are the results of investments made to-date in sales, sales operations, marketing and support services to create the foundation for future revenue growth. We believe these investments are now stabilizing. The company had $6.3 million in cash and restricted cash on hand as of December 31, 2019, compared to $6.6 million at the end of fiscal 2019. We're confident that Martello retains sufficient available cash and working capital to fund organic growth over the next year as the company focuses on moving toward positive adjusted EBITDA.As Martello continues to invest resources into developing integrated SaaS solutions that leverage our SD-WAN technology, SD-WAN and link balancing sales declined 29% compared to the same period in the prior year. This is expected, and we believe that the development of these integrated solutions will drive recurring revenue growth in the future.I'll now hand it over to John Proctor, our CEO, to discuss Martello's strategy.

[John Proctor, President, CEO & Director]

Thanks, Erin. Hello, everyone, and thanks for joining us today. It was also great to see many of you at our Investor Day in December in Toronto. Today, I'll provide an update on our progress and a perspective on Martello's outlook. First, I am delighted that Martello reached an important milestone in Q3 of fiscal 2020 in December when we attained $1 million in monthly recurring revenue, which is a great achievement by our sales team. At the same time, I'm pleased we made progress toward positive adjusted EBITDA in Q3 of fiscal 2020. This means that Martello has now built a stable, robust and scalable platform upon which to accelerate revenue growth. The significant investment we've made in this platform should begin to stabilize going forward. We are now focused on leveraging our solid gross margins, predictable revenue streams and stabilizing expense base to move forward towards positive adjusted EBITDA. While there is now greater predictability to Martello's revenue and our operating expenses, certain onetime and acquisition-related costs could from time-to-time, disrupt this progress.I'd like to provide an update on the development of integrated digital experience monitoring and optimization, or DEM, solutions. Martello's DEM solutions help businesses control the performance of their most critical cloud services, from Office 365 to unified communications, to ensure a superior digital user experience. Martello has some key competitive advantages in this market. First, we have 10 years of experience monitoring millions of Mitel IP phone users, and we have access to hundreds of channel partners that are already clients of Martello's products.Second, by developing a unique vertically integrated technology stack, Martello can offer benefits in a single platform that would otherwise require multiple products from multiple vendors. Martello reached a milestone with the completion of its first integrated solution in February 2020. This integrates UC Performance Analytics with digital experience monitoring, offering Mitel partners a complete service-oriented view of their entire UC and IT infrastructure. Martello is now demonstrating this solution to potential customers.We are making progress on the development of an integrated SD-WAN solution designed to improve voice quality performance. We expect that trial of this solution will be complete later this year. While we are investing in this integrated product development program, we continue to grow revenue streams from our existing product lines. We also recognize that the channel is critical to selling all of these products and solutions. And therefore, we are investing in building our channel network. We look forward to meeting many partners at the channel partners event in March. I'll now speak a bit about sales activity. As I mentioned, we are investing in building our channel. And I'd like to speak a bit about how we are aligning our sales strategy with the model. Martello is prioritizing a channel sales organization, and that meant making certain resourcing decisions in Q3 to support this focus. We expect that the addition of a Senior VP of Channel Sales in the coming months will help accelerate Martello's opportunity in the channel. We continue to diversify our revenue and client base globally. We onboarded new partners in Egypt and Australia in Q3 2020 and continue to see steady business in North America, Europe, Asia, Australia and the Middle East. Hospitality continues to be a strong vertical for Martello with many hotel properties in Asia, United States, Europe and the Middle East renewing or initiating subscriptions in Q3 2020, all from recognized global hotel brands. We've also seen continued growth in education. Universities using our products include University of Massachusetts Boston, Bermuda College and Carleton University. In Q3 of fiscal 2020, we won significant deals from multibillion dollar global media and telecommunications company, the municipal government of one of the largest counties in the U.S. and a U.S. energy company serving more than 1 million customers. We're seeing growing interest from managed service providers like Onepoint in the Netherlands and Richweb in the U.S. in our iQ IT Operation Analytics software.And now I'd like to talk a bit about our partnership activity. We continue to develop and deepen our partnerships with Paessler, Microsoft and WatchGuard. And I'd like to talk a bit more about detail about our ongoing work with Mitel. Even as we diversify our revenue base, such that this channel now represents 56% of revenues, we are growing this business by working closely with Mitel. You might recall that in January of 2019, we completed an amendment to our commercial agreement with Mitel, in part to expand the core platforms Martello's software will support.In the next release of UC Performance Analytics software, I'm pleased to note that we will now support the MiVoice 5000, which is used by many Mitel customers in France. This opens the French market to us and an associated new revenue stream. Recurring revenue from sales of Mitel Performance Analytics grew by 25% in the 9 months ended December 31, 2019, as compared to the same period in the prior year. As we continuously improve our products and address additional Mitel platforms, we know that our addressable market here continues to be significant.And finally, I will talk about Martello's acquisition activity. We continue to pursue acquisitions that are accretive to our objectives to increase recurring revenue and grow our suite of integrated DEM solutions. Our M&A discussions are very focused and progressing well. We look forward to updating all of you shortly.To wrap up, I want to leave you with my perspective on Martello's outlook. I believe there are 3 important pillars to Martello's strategy to generate value for you, our shareholders. The first is our focus on high-quality, high-margin recurring revenue growth for greater predictability. The second is our commitment to moving forward towards adjusted positive EBITDA. And finally, we are focused on developing integrated DEM solutions, which we expect will make Martello a recognized vendor in this market in the future. I'm pleased that we are seeing positive progress on all 3 of these pillars: a 15% increase in MRR year-over-year, a decrease adjusted EBITDA loss and progress on integrated DEM solution development and customer trials.Erin and I will now answer your questions. Operator, could you please facilitate the question-and-answer part of this call?

[Operator]

[Operator Instructions] Our very first question comes from Jeff (sic) [ Gianluca ] Tucci with Echelon Wealth Partners.

[Gianluca Tucci, Research Analyst]

I guess I'll start by asking about the degree of cross-selling across the divisions in the quarter and how the company is getting better at this over time.

[John Proctor, President, CEO & Director]

So the cross-selling part -- one of the key pieces there is our Mitel channel piece. And as I mentioned, one thing we're really excited with is this iQ MPA integration, which allows the thousands of customers that bought MPA to bring iQ into their environment, so they can actually start monitoring MPA and the IT environment. So the -- this is a step. It's not a pure cross-sell. It's not where you have, "Hey, you bought X, now would you like to buy Y." It's the fact that iQ actually pulls the MPA into its environment as well. So it's a more significant step than that, which has required technology development. So I'm very pleased with that piece. And then the same thing with the SD-WAN. Rather than doing a pure cross-sell there, we're on our first trials with actually showing we actually improve that unified communications with the SD-WAN. So that's a fairly significant piece. And the other aspect of this is because we have access to that data, we're not going on with a cold call cross-sell. We're going into these MPA customers saying, "We can actually see the challenges your network has, and we actually have a solution for what you're seeing." So if you think about a Mitel reseller, they may have 20 customers that are -- they're offering Mitel as a service, too. We can pick the 3 that we can see have the worst network performance and go and have a discussion. But to do that, we have to have this integrated solution. So this is why the productization of this has been key and the technology required to do that -- technology development to do that has been important and taken a bit of time. But now we're kicking that off. So I see this cross-sell starting to accelerate. And like I said, it's not a distinct cross-sell. It's an integrated cross-sell, which is harder to do.

[Gianluca Tucci, Research Analyst]

So just as a follow-up to that question, John, like do you have an expected time line for that integrated product to start generating its first early sales in its go-to-market strategy?

[John Proctor, President, CEO & Director]

Yes. The iQ MPA, we're expecting Q1 next year we'll start to see first revenues starting to kick that up -- kick off.

[Gianluca Tucci, Research Analyst]

Okay. Fantastic. And in your press release, you did note some big deals that you've signed in the quarter. I guess in general terms, like can you speak to the average size of the deal and how it's changed or developed over the past 12 to 16 months for the company?

[John Proctor, President, CEO & Director]

Yes. So I mean if you look at sort of the pieces here, it becomes quite interesting. iQ is still a relatively new product. It only came out in 2018, and the initial purchase of that were sort of small, single sale items. So around sort of 10,000 to 15,000 type sales. What we're seeing now is as we've got these bigger -- much larger number of integrations, and those are on our website, you can see how many technologies we integrate with, you now find not only are we upselling those integrations to customers, but at the same time, you've got, for instance, this large global media company in -- has bought -- and this one was a 100,000 plus deal. And we're starting to see those individuals pick up, which -- when you look at that from a quarter perspective, you get 2 or 3 or 4 of those and the numbers make that quarter. The thing to do with that, though, is an adjustment for the sales team. When you're dealing with much bigger companies and dealing with a bigger purchase, the sales team have to understand the procurement process. They have to understand what it takes to close a bigger deal into a bigger organization and that bigger organization's processes. So there's been a sort of adjustment to recognizing that the iQ product has become of interest to much larger enterprises than it did before, and that takes a little bit more work and a little bit more focus and a little bit more understanding of the other end.

[Gianluca Tucci, Research Analyst]

Okay. Perfect. And I guess just the last one from here and I'll requeue. But can you give us an update as to your current penetration into the Mitel channel? And any early benefits from the Paessler, Microsoft co-sell partnerships that, I guess, are still in its early days?

[John Proctor, President, CEO & Director]

Yes. I'll start with Mitel. I mean the exciting thing for us is we finally -- and it's -- again, we talk about barrier to entry, why nobody else does analytics for Mitel. If you think about it, from signing the agreement last year to getting our analytics and our tooling wrapped around the 5000 has taken a year of R&D. So unless you're already in that system and you've already got the processes, you're not going to do that as an external company. So that's a great piece for us. And we're now offering that in France. In fact, the sales kickoff is this week in Europe. So Terry Matthews is there. Our team is there. So our co-chair is there with the whole Mitel, the Mitel CEO, kicking off with the 5000 in France can now use our analytics software. And there's a revenue stream that we expect to start picking up again, probably heading Q1 next financial and moving forward. So we still see that penetration going. And again, if you look at the rate of our sales of MPA, it's higher than Mitel sale of its system. So it reinforces our thesis of our company as companies have more complicated networks, they need our software more to understand the unified communications environment. So penetration -- all of the Mitel systems keeps going. Our attachment rates are increasing. And we've still got another system to go. We agreed not just for the 5000. There's another system as well that we're now also going to bring to market. So we have a couple more revenue streams of Mitel systems yet to go on their phone systems. Paessler is good. I spoke to the CEO of Paessler only last week. They are -- same thing. 1 April, they will start a full OEM relationship with us. In other words, their whole sales team is going to be offering iQ with their product, PRTG PLUS, going forward as of 1 April. And it's a fully OEM relationship, so similar to Mitel. So my overheads for selling iQ down the PRTG channel are very, very small, and they've got a very large sales force who will be offering this. So again, that'll be yet another new revenue stream kicking off our Q1 FY '21. So that's great news in that respect.Microsoft is huge. They're a very, very large organization. We started conversations with them, and we're focused on very 2 key markets. And we depict 2 specifically because they're close. One is Europe because, again, we have somebody who can focus with Microsoft in Europe on that and the same then in Canada. And specifically, Toronto and Montreal were 2 focus areas for us: one, because we have Microsoft relationships in both those areas; and two, because close to us here in Kanata, where we can have a sales guy. Because, again, like a very, very large organization unless you stay focused on them, they have a whole bunch of other companies clamoring for their attention. So you've got to put the horsepower in to make that work.

[Operator]

[Operator Instructions] Our next question comes from Todd Coupland with CIBC.

[Todd Adair Coupland]

I wanted to have you talk about the timing to positive EBITDA. What's the goal at this point in time?

[Erin Crowe, Chief Financial Officer]

Yes. So I think on the adjusted EBITDA side, we've talked for the last couple of quarters about the fact that we are focused on driving towards that positive adjusted EBITDA. We did make some improvements this quarter. We certainly see that our operating expenses have stabilized at this point. And that as we generate the additional revenue that's coming in, that that's true EBITDA leverage that will drop to the bottom line and therefore drive that positive adjusted EBITDA. So we are -- I think that we're headed in the right direction, and we certainly see ourselves getting to adjusted EBITDA positive at some point in the not-too-distant future.

[Todd Adair Coupland]

Okay. And when you think about possible acquisitions that could be added, how does that impact that goal?

[Erin Crowe, Chief Financial Officer]

Yes. So acquisitions could certainly disrupt that goal temporarily. But I think it doesn't change ultimately that we need to stay focused on driving that positive adjusted EBITDA. I mean there may be a blip. Absolutely. That is -- that would not be abnormal, I think, as you're going through an acquisition. But it doesn't change -- it doesn't take our eye off that target.

[Todd Adair Coupland]

Okay. And my last question is you're talking about a few different opportunities, new products coming, new partners or partnership opportunities like Mitel or Microsoft. Is there any revenue growth outlook commentary you can provide us to give an idea on what level of growth we should expect over the coming year? That'd be helpful.

[Erin Crowe, Chief Financial Officer]

Yes. So I think in my natural conservative way, I'm going to say no. I mean we've been pretty clear that we're not providing guidance. So I think we have certainly spoken today about some of the opportunities that we see in front of us. And we absolutely have expectations that revenue will be seen from those within the next couple of quarters. But I think at this point, it's too early to give any specific numbers or growth projections.

[John Proctor, President, CEO & Director]

And Todd, I just want to finish up on that. I think the -- for me, that monthly recurring revenue becomes the key stabilization. I mean we can all sit and look at the volatility of the market at the moment. The amount of work we've put in, in getting that, crossing that $1 million monthly recurring revenue barrier, if you look at where we were sort of 24 months ago with that number, that's a fairly significant point for us to achieve. So I'm very pleased in how we've transitioned. When we've acquired a sales team, one thing we focus on is transition him to saying, "No, no, no. I get 1x and I get numbers." But monthly recurring revenue is a stabilization point. So that's -- of these results, I'm extremely pleased with that metric because, again, it gives me that stabilization factor and gives for the market that predictability of our revenue moving forward.

[Operator]

Our next question comes from Kevin Krishnaratne with Paradigm Capital.

[Kevin Krishnaratne, Analyst of Technology]

I had a question for you on the Mitel channel growth there. The organic growth this quarter was around 25%, very solid, but slightly lower than what you'd seen in the past couple of quarters. And I'm wondering if that had anything to do with the channel reorg, how you see that pacing over the next couple of quarters. And just any thoughts you could provide on that metric.

[Erin Crowe, Chief Financial Officer]

Yes. Thanks, Kevin. So interesting point. One of the things that happened actually in Q3 of last year is that we had some onetime perpetual license deals with Mitel that bumped the revenue in Q3 last year. And if you were to sort of look at the trending on the Mitel revenue, so it was up in Q3 and then it dropped again in Q4. So I think -- as a general statement, I don't think we see an overall decline in the growth rate there. I think this quarter there's a bit of a blip just because of what happened last year.

[Kevin Krishnaratne, Analyst of Technology]

Sorry, that -- so if you're looking at subscription revenue versus subscription revenue Q3 of this -- of '20 to '19, that -- how did that compare to the subscription revenue growth in Q2?

[Erin Crowe, Chief Financial Officer]

Yes. So it was about -- if I look at subscription Q3 this year versus Q3 last year without a calculator in front of me, it's about a 20% -- just over 20% growth.

[Kevin Krishnaratne, Analyst of Technology]

Okay. And just with regards to the opportunity going forward, you've -- you mentioned that you've opened up the MiVoice 5000 and there's another system on the way. Can you remind us -- if you step back and look at Mitel overall, they've got something like 65 million to 70 million phone systems worldwide. How much coverage do you have across -- if you were to take all of the -- all Mitel systems, what type of -- in terms of the coverage of your opportunity to ultimately sell into?

[John Proctor, President, CEO & Director]

So I mean we're looking at attachment rates here, and this is where we make the point of saying, "Our attachment rate on average is around 20% across the different systems." We monitor all of them. So some it's higher, some it's lower. But if I look at that, it's an average of 20%. And that's -- and again, if you think about it from the growth perspective, that means we still got 80% of the Mitel installed base that we are growing -- still growing into. So this becomes kind of key. And even today, I'm seeing feedback from Europe. There's a U.K. partner who's looking for some capabilities that MPA software has, and they want to bring it to all their customers, particularly the remote access. So I still see a lot of space to grow into in the Mitel space, not only, as you said, adding new systems, but even with their current installed base.

[Kevin Krishnaratne, Analyst of Technology]

Okay. Okay. John, maybe the last one for me then, just on the integrated solutions. The few different pieces that you mentioned, number one, I think you're starting to demonstrate some product offerings this month with customers, and then you talked about an SD-WAN solution potentially later on in this year. Can you just speak to those 2 opportunities? And then with regards to those opportunities, how are you thinking about the way that those services might be priced?

[John Proctor, President, CEO & Director]

Yes. So we are literally launching this week at the Mitel kickoff because all the Mitel partners, they're in Europe, the iQ MPA integration, and we're able to demonstrate that. It's not a thought piece. It's not slide where people can go in and actually see and play with the tool set and see how it works and how they can monitor everything from Splunk to any other sort of product, Nagios, all while they're keeping eye on their phone system. So that's kind of key for us. So when we look at that and say, "We're already kicking this off, we've already got partners, and we've already got express interest." So we're now just starting to get the first customers coming onboard with that one.The SD-WAN is the more complex one. We've got a very close Mitel partner who is the test base for this. They run a number of Mitel system -- Mitel phone systems for clients. We've already proved it works for one phone system for them, and they're very pleased with how it's going. What was interesting was they had been looking at a very large SD-WAN competitor. And there are very many. That's a very busy market. But what they found out was it took half an hour to set up our system compared to 4 hours to this large SD-WAN competitor. And for them, that's money. That's a lot of money they can save by using our SD-WAN instead of this other one. So they basically dropped the competitor, and they're using us. But this is not just the fact that we work with Mitel and they want Mitel phone systems. We still have to be a good SD-WAN technology underneath. So that was quite pleasing, and that goes forward. So we want to get through this proof-of-concept with these guys. As a Mitel partner, they're teaching us quite a lot about what they need the system to be able to do. And then being able to use them as a reference-able proof-of-concept to go to other Mitel partners will be the next step after that.

[Kevin Krishnaratne, Analyst of Technology]

Okay. Great. And just a further final comment there. How would you think about pricing models maybe relative to what's out there in the market? How would you go about working with your partners to price to set the end customer? Any thoughts there. I know it's early, but just wanted to hear your thoughts.

[John Proctor, President, CEO & Director]

Yes. So if I -- I'll use iQ the first bit. I mean some of the pricing is just -- is on our website, right? So our integration pricing is actually on the website. People look at that. Obviously, if you're a partner, you're going through a reseller, there's all sorts of discount models. But that one's relatively simple in respect of how that works. The SD-WAN is slightly more complex because we want to price that as a service. We want monthly recurring revenue from that environment. So this is where we're aligning to that Mitel partner system. So if they're offering phone as a service, we want to offer SD-WAN as a service aligned to that business. So that will be how that will be priced. And again, has to be competitive, has to make sense to that solution, but we know we can be price competitive. If I can close deals in places like Vietnam and India for SD-WAN, I'm very, very clear that I can be price competitive in that market.

[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 at Martello, thank you for your continued interest. As I mentioned earlier, you can reach us by e-mailing [e-mail]. Thank you all, and have a great day.

[Operator]

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