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Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group Q3 Fiscal 2021 Investor Conference Call. Today's call will provide information and commentary on financial results for the third quarter of the 2021 fiscal year for the 3 and 9 months ended December 31, 2020. 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 investor@martellotech.com. First, here are a couple of housekeeping notices. [Operator Instructions] The 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 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 a review of the financial results with Martello's CFO, Erin Crowe. Erin?
Thank you. Martello's mission is to become a leading vendor in the enterprise digital experience monitoring, or DEM, market by making each user's digital experience exceptional and productive, whether they are conducting a video conference or sharing a file wherever they may be. Our DEM solutions give IT teams the actionable intelligence they need to prevent performance problems before they can impact users. Martello has more than 5,000 customers in over 175 countries around the world. Martello's financial statements report on 3 key segments: the newly acquired GSX product line; the Savision, our IT operations analytics product line; and the Mitel UC performance analytics line. Today, we are also providing insight into the sequential performance of 2 revenue subsets, which we are tracking, Microsoft DEM and legacy products. This data breaks out and highlights the trajectory and strength of Martello's DEM solutions as well as the impact of legacy products on our overall results. Martello's Microsoft DEM suite includes the GSX monitoring solution called Gizmo for Microsoft's cloud-based business productivity suite and our digital experience analytics solution called iQ. The company's legacy products revenue line includes the Live Maps and Domino products acquired through the Savision and GSX acquisitions. From a strategic perspective, we are focused on providing DEM solutions for Microsoft 365 because businesses are increasingly adopting cloud-based productivity tools to support more distributed and remote work. And Microsoft 365 is the market leader. Although accelerated by the COVID-19 pandemic, the demand for distributed cloud-based productivity will continue as more businesses facilitate work-from-anywhere environments for their employees. To further our DEM strategy, during the quarter, Martello completed the integration of GSX and made progress on several important product initiatives. We're pleased to report strong sequential growth in the Microsoft DEM business line. However, it should be noted that the declining revenue of legacy products continues to partially offset these gains when we look at overall performance. Now I'll turn to the details of our financial results this quarter. Regarding our revenue performance by financial statement segments, in Q3 fiscal '21, revenue of $4.6 million was 61% higher than the same quarter of the prior year. GSX revenues in total contributed 41% of revenue or $1.9 million in the quarter. Mitel UC performance analytics revenue, which was 94% recurring, increased by 5% compared to $1.8 million in Q3 fiscal '20 and contributed 43% of revenues. This compares to 56% in Q3 FY '20. IT operations analytics revenue decreased by $0.23 million or 23% and contributed 17% of total revenues compared to 30% in Q3 FY '20. The decrease in this segment was due to the shift from perpetual to recurring revenue and an expected revenue decline from the legacy Live Maps product. Recurring revenue increased in the IT Service Analytics segment from 85% in Q3 of fiscal '20 to almost 100% in Q3 of fiscal '21. As mentioned previously, we would like to highlight sequential trajectories in the Microsoft DEM and legacy product subsets. On a sequential basis from Q2 to Q3 of fiscal '21, Microsoft DEM revenue grew by 17% to $1.8 million in Q3 fiscal '21. As a testament to our strategic focus on the Microsoft DEM market, this business line generated 40% of total revenue in the quarter compared to 36% in Q2 fiscal '21. In the same time period, legacy product line revenue declined by 16% in Q3 fiscal '21. This decline partially offset DEM growth in the quarter, as I mentioned. Legacy product revenue as a whole represented 16.7% of our total revenue in Q3 fiscal '21 compared to 21% in Q2 fiscal '21. This legacy product revenue requires minimal support; and over time, the impact of this declining revenue stream on overall performance should diminish. Regarding the quality of our revenue streams, the recurring portion of total revenue was 96% in Q3 fiscal '21 compared to 94% in Q3 fiscal '20. Monthly recurring revenue calculated as average monthly recurring revenues in the quarter, or MRR, was $1.49 million in Q3 fiscal '21, a 64% increase over Q3 fiscal '20 MRR, excluding the discontinued NPM segment. The increase in MRR is due to the addition of GSX revenues, which contributed $610,000 of MRR in Q3 as well as an increase in royalties from UC performance analytics. These increases were partially offset by reduced maintenance and support revenue related to the legacy Live Maps product. MRR is a non-IFRS measure and represents average monthly recurring revenues earned in a fiscal quarter. The MRR measure offers insight into the predictability of Martello's current and future revenue streams. Gross margin remained strong, decreasing slightly to 93% in Q3 of fiscal '21 compared to 94% in Q3 fiscal '20. The slight decrease is related to minor changes in product mix and associated cost of sales. The company divested the assets of the NPM segment in Q2 of fiscal '21 for total proceeds of $830,000. The results of the NPM segment are reported as discontinued operations for all periods presented in our financial statements. Adjusted EBITDA, which is a non-IFRS measurement, was a loss of $260,000 in Q3 of fiscal '21 compared to a loss of $830,000 in the same period of fiscal '20. The improvement in adjusted EBITDA is attributed to the sale of the NPM segment in Q2 fiscal '21 as well as the implementation of temporary measures related to COVID-19, including reduced travel and event expenses and reduced salaries for a portion of the reporting period. The company continues to make strategic investments in product development, customer success and partnership development to accelerate DEM growth and MRR, which may impact short-term operating results. Operating expenses increased by 53% to $5.45 million in Q3 of fiscal '21 compared to $3.6 million in Q3 fiscal '20. The increase reflects $2 million in operating expenses from the GSX acquisition, including $340,000 in amortization of intangibles. Excluding the impact of GSX, operating expenses decreased by $100,000 or 3%. Loss from operations increased by $300,000 to $1.13 million compared to a loss of $0.84 million in the same period of fiscal '20. Amortization of GSX intangibles increased the expenses, while revenue increased and was partially offset by other operating expenses relating to GSX. In addition to the items above, the company incurred higher interest expense in Q3 FY '21 as compared to Q3 FY '20 due to a higher rate and balance on the term loan facility established earlier in the year. The Q3 fiscal '21 net loss of $1.46 million has increased from $1.3 million in the same period of fiscal '20, primarily as a result of the items outlined above, offset in part by the fact that there is no loss from discontinued operations in Q3 fiscal '21. Now I will highlight performance year-to-date. Year-to-date, total revenue increased by 48% to $12.4 million compared to $8.3 million for the same period in the previous year. Gross margins reported year-to-date were 94%, stable compared to gross margins of 94% reported for the same period last year. Adjusted EBITDA year-to-date was a gain of $0.24 million compared to an adjusted EBITDA loss of $2.3 million for the first 3 quarters of fiscal '20. Finally, the company's cash and short-term investments balance was $4.05 million on December 31, 2020, compared to $5.9 million on March 31, 2020. Although there is significant global economic uncertainty resulting from COVID-19, which may further impact operations, at this time, the company believes operations can be funded by available cash and other available funding sources. Our long-term DEM strategy will continue to require investment over the next several quarters to capture the market opportunity available to us, which may impact short-term operating results. With the Microsoft DEM portion of our revenue growing quarter-over-quarter, we expect the product innovation and channel expansion will drive continued growth in this revenue line and that our goal to increase Microsoft DEM end users by 60% exiting fiscal 2022 is attainable. I'll now hand it over to John Proctor for a discussion of Martello's strategy and outlook.
John? Thanks, Erin, and good morning, everyone, and thank you for joining us today. Today, we are in a stronger position than ever to accelerate growth in fiscal 2022. I'm pleased that the GSX integration is complete and that we have made significant progress in DEM product innovation during the quarter. In the 2 quarters since acquiring GSX, we've seen the pipeline for Microsoft monitoring grow and the number of Microsoft users on Martello's platform increase. As Erin has noted, we're seeing solid sequential growth in Microsoft DEM, while Martello's overall revenue across all business lines continues to be very high-margin and almost completely recurring. As many of you know, Martello began as a provider of UC performance analytics software to Mitel. Our Mitel business line continues to be a source of high-margin recurring revenue, and our partnership with Mitel continues to grow. Without our experience with Mitel, we would not have been able to identify and recognize the market opportunity of digital experience monitoring. With our ongoing relationship with Mitel, we have built more than 10 years of experience and developed expertise in managing the performance of real-time cloud services, including unified communications. Now we are applying this knowledge and experience to the broader cloud-based productivity market and specifically to the dominant market leader, which is Microsoft. In the last several quarters, we've seen shifts in customer priorities and buying patterns in response to COVID-19. With digital transformation plans accelerated, businesses are typically pushing forward to deploying Microsoft 365. After implementation, the focus shifts to user experience where challenges, such as Microsoft Teams interruptions, escalate the need for better tools to proactively deliver a reliable and consistent user experience. Martello is seeking out these businesses with a focus on large enterprises with more than 5,000 Microsoft users. We now have a number of these large enterprise opportunities in our pipeline, and typically, they close with 12- to 36-month subscriptions. Martello's R&D activity is focused on growing and defending the Microsoft DEM market. This includes the development of cloud-based multitenancy. Cloud-based multitenancy allows managed service providers, or MSPs, to view and manage multiple customers from a single instance of Martello's software rather than logging into multiple instances. With this innovation, Martello can onboard MSPs and their customers more easily and cost effectively than before. We expect this to drive additional revenue growth in fiscal '22 and beyond. Today's workforce is becoming more distributed than ever as employees are untethered from the office. Martello is setting itself apart from competitors by adding new work-for-anywhere capabilities to its DEM platform in fiscal '22. These new tools will help IT teams to quickly pinpoint whether problems are related to the cloud provider, ISP or the user's network for better support of remote or work-from-home employees. I'd like to close with my perspective on Martello's outlook. I am pleased with the upward revenue trajectory of the Microsoft DEM business line. While revenue growth has continued to be offset by declining legacy product lines, we believe that our focus on accelerating this high-margin recurring Microsoft DEM revenue will bring success. Martello's addressable market continues to grow. Microsoft 365 has more than 200 million monthly active users. And Microsoft Teams users grew by more than 150% from March to October of 2020. As I've said before, I do believe that Martello has the kind of market opportunity in front of it that companies rarely see. The evidence is mounting in our growing sales pipeline and is already reflected in Microsoft user growth on Martello's platform. Continued execution will act as a catalyst for the revaluation of our stock, which I continue to strongly believe is undervalued. In the last year, sales and marketing approaches have become completely virtual and our customers' buying patterns and needs have shifted. The investments we're making are addressing these shifting patterns, and with this approach already yielding early results with growing Microsoft DEM revenue, I'm very confident that our strategy will be successful in fiscal '22. I'd like to thank you for joining us today and wish continued good health to you and all of you and your families. Erin and I are now here to answer your questions. Operator, would you please facilitate the question-and-answer part of this call.
[Operator Instructions] The first question comes from [ Christian Seguro ] of Eight Capital.
Thank you for parsing out the Microsoft DEM growth, a good sequential lift this quarter. My first question here, I wanted to talk about Microsoft user growth. So the forecast of 60% through to the end of about '22, that suggests a solid trajectory, 1 million new users in the next 12 months or so. So could you talk about how this might be front or back-end loaded? And what we could expect for growth beyond this period?
I'll start. I mean, what we're seeing here, [ Christian ], is it's quite an interesting thing and I kind of mentioned on my call, is we've seen there's been a real rush into Microsoft 365, which kind of puts out the fire, right? If you're the remote guys, you need Office 365, you get this going. And effectively, you can almost draw a graph and actually did draw this out. And then there's the honeymoon period, which is the, we bought Office 365, we're all good. But over time, you start to get the challenges, and it's interesting we've had conversations with Gartner on this. You get what's called the silent user, the guy gets fed up, which is, I'm not going to complain, it doesn't work all the time but I'm not bothered. It's -- I'm just not going to raise a ticket on that and create a problem. But over time, that starts to become pervasive and you start to become a problem. So you can almost draw the line between acquiring Office 365 and now really needing to use -- understand the user experience. So what we're actually seeing is the lag between the acquisition of Office 365, the realization that this doesn't work perfectly, as nothing does, and then the hunt for a tool that solves the problem, which is where we come in. So really, that's kind of the part we see in that sort of that, like you said, position. And then there's a lag from we bring you on board or our partner brings you on board, and then we start to spin up the user base. And we think this is where the indirect channel will really ramp up for us in FY '22, which should accelerate the growth towards the end of that period. But that's kind of the lag cycle we see. And as you said, yes, much as we can take on a client who's got, say, 10,000 users or we spin up a partner, the slight lag is the time to then onboard that customer, start to spin up the users, get them all -- get them seated and then start to see the revenue. So there is that lag cycle that we are starting -- we start to understand quite clearly now.
Great. That's helpful. And I'll ask a question off of the back of that response. Maybe some commentary around what you're seeing in the partner channel. Any work with MSPs? How are you seeing them get excited about Microsoft growth and the ability to sell in Martello's products?
Yes. There's a number of good pieces there. I mean we know we've got one large partner. We're heading towards a large number of users there. They're looking to onboard 800,000 of their users onto our platform. Multitenancy is a key component of that transition. So that's really, there's a lot of R&D investment in that because that solves that problem. It also improves our margin in that space. But again, I'll give you a good example. We had 2 global MSPs meet with us this week, and the problem was we had to almost do it simultaneously. They're both so keen to get it done this week because they recognize this as a differentiator. And again, if you sort of look at where Gartner's thoughts are, there's a lot of work on SLAs. Gartner has already pushed out the position that they will go to -- we will go to experience level agreements, XLAs, which then you need a tool to measure the experience again, which is us. So I think a lot of MSPs are picking up at this. The other people are the CSPs, the cloud service providers. That's another group where they're offering this Office 365 offering. And if you don't have the user experience, then you're going to get out differentiated by somebody who does.
Got it. I'll ask one more question here. And maybe turning more to the OpEx side, still related to the full integration of GSX and maybe with staffing levels returning to normal in October. Would you say the OpEx profile in Q3 reflects a good run rate going forward, maybe some additions to R&D and sales? Or is it -- or would you say there's any unusual items to point out.
No. I mean I would say that -- so if we look at Q3, we normalized our expenses partway through Q3. So Q4 will be more of a true sort of, I guess, normalized OpEx on a go-forward basis, but there's nothing sort of extraordinary, I wouldn't say, in Q3 to point out. I think the thing to bear in mind is that as we continue to invest in growing the business, we will need to scale appropriately, obviously, with strong EBITDA margins. But I would say Q4 will be more of sort of that baseline normalized OpEx.
That sounds great. And the revenue growth and how you report that operating leverage.
[Operator Instructions] The next question comes from Daniel Rosenberg from Paradigm Capital.
I had a question regarding the gross margin profile. I was just wondering if you could provide some color on the dynamics moving forward, as we're kind of coming out of some lockdowns in COVID? And what that means for you from a headcount standpoint as you're looking at this growth opportunity? And how should we think about gross margin through that vein?
Yes. So I think when we look at the -- different profiles, right, of the different product lines, the Mitel business gross margin has been very strong all along. We don't see any real change there. On the GSX side, we knew GSX came in with a slightly lower gross margin, but again, slightly lower. We will continue to invest, obviously, as we -- as the revenue grows, we will continue to invest in headcount, in the customer success and other pieces. But we don't expect any significant erosion on the gross margin as a result of that, right? It's all got to be very measured, and it's growing as the revenue grows. So yes, I don't see sort of the COVID impact or anything else changing our profile drastically as we move forward.
Great. And you mentioned in your strategic outlook a number of product initiatives. I was wondering if there's -- the impact of that, does it -- is there any impact on your pricing model or how you're thinking about pricing the GSX Gizmo product?
Yes. So Daniel, again, great question. So yes, I mean, some of the key things we're looking at is this real user monitoring, which allows us to go all the way down to, completely down to the endpoint. The reason that's important is when you have an IT team that's trying to troubleshoot Office 365, they actually want to see how well the user is operating in that remote location, whether it's Starbucks or whether it's the house. We will give -- be able to give that level of visibility. The other thing is advanced network performance monitoring. Same thing, which is being able to see all the way down to the endpoint and say, actually it's the ISP or actually it's your home network or actually it is the points in between. And being able to visualize that is actually -- we've got the first beta trials out. People are liking it because it's very user-friendly in terms of understanding that network. So those are both significant pieces. What we'll see is a couple of things, is we'll look towards some tiering in terms of pricing because, again, not everybody wants everything. So again, making it that. And I think we're looking very closely to align with Microsoft. People are very comfortable with how Microsoft, for example, tiers Office 365. So aligning ourselves with that so it becomes simple for the CSPs and MSPs to bundle, is kind of the idea and focus at the moment. But the other thing we're also seeing is integration with the iQ product. There is some news that will be out shortly on that. We've had some independent reviews of that of how strong it is. And by the work we're doing to integrate that, it, again, is another great differentiator because, again, some of our competitors are out there. And we -- I'll give you an example. We are up against with a very large Fortune 50 company. We're up against one of our competitors. One of our key differentiators there is the depth we have in Office 365. They might be broader, but that's not the problem they want. The problem they want to solve is understanding Office 365 where we're much deeper. Being able to layer on top of that the real user monitoring and the network path visualization gives them that just more sort of granularity of the problems they are facing as an IT team. So we will see that bringing these products together. We will see some tiering in terms of pricing and just continue to bring value. The other thing for the MSPs and CSPs is they've sold Office 365. So what are they bringing as new? What are they able to upsell to these clients? How do they increase their own revenue? So being able to bring that to market to be able to say, we have something that you can now upsell into the Office 365 client base that you already have is also something they're very interested in.
And then in terms of the multitenancy aspect of the solution, a rollout of that to your 2 MSPs, how fast would that be? Or would it be staged? Or do you -- are you lining up people currently? What does the rollout of kind of the upgraded product look like?
Yes. So we've already started that. We've got one of our -- the big partner, I mentioned, the 800,000 client. One of our Q4 activities is everybody that they -- that we onboard in Q4 from that partner goes on to the multitenant version. So that is already in progress. We have some clients who will always want on-prem, particularly sort of government or financial institutions that run Office 365 in a hybrid environment. They will always want the on-prem. So we'll have a bit of a hybrid legacy going forward, and that's reasonable. But really, as you said, the multitenancy, we're starting that now. And the aim, certainly in FY '22 is for all these MSPs, it will all be cloud-based multitenancy. The other thing we're also looking at is doing some advanced positioning. If we can put some pieces out into significant geographic areas, when we come to proof of concept, we've already got robots, Gizmo robots, and we've already got iQ instances spun up inside cloud environments geographically. So our ability to offer proof of concepts really simply by just saying, log into this cloud instance, put in your Azure details and we've spun up iQ. And we -- I mean it will be that simpler to do it, which then allows the MSP to onboard their own clients, their own partners, which is great. But it also means our margins will go up because we become much lower touch than we have previously.
Great. And lastly for me, just in terms of the legacy business lines, there's a near-term impact. Any changes in the run rate of what you're seeing of how much -- what percentage of revenue the legacy lines represent that seems to be steadily going down as GSX is growing, but any changes in that trend?
No. I don't think we'll see any big changes in the trend. I mean the timing of all the renewals will sort of impact the timing of when we see this decline. But I think over time, we expect that by the end of fiscal '24, the legacy piece will really be meaningless at the end of the day, like the dollars will be so small by then. So we see that decline happening sort of gradually over the next couple of years to the point where it's a negligible amount.
[Operator Instructions] The next question comes from Gianluca Tucci from Torrent Capital.
Impressive DEM growth and strong metrics. Could you talk a bit about the trajectory that MRR is on, say, in 12 months from now as you achieve and perhaps exceed that stated 60% growth targets?
Yes. Sure. We can speak to that. I think the key for MRR, right, is the continued growth in the DEM, in the Microsoft DEM space. We've talked about the trajectory for the legacy, which will continue to have an impact on our MRR over the next year or 2, right? As the DEM grows, there will be a bit of a drag on it as a result of the legacy piece. And we continue to expect that Mitel growth to be moderate as it has been. So if you think about that over a period of time, right, that MRR will grow on that same trajectory. We've also talked about the 60% growth on the user base. That's obviously a leading indicator from an MRR perspective, but when you think about Microsoft DEM, the MRR will follow that 60% user growth as well.
Perfect. And as a follow-on to Daniel's question, could you just talk to us about how the sales cycle differs us from, say, on MSP to that of a traditional like enterprise IT department? And like if you can compare and contrast the 2 sales cycles?
Yes. I mean -- yes, I can. I mean, what we see here is the lag. I mean if you look at the MSP approach, as we spin up these MSPs, it takes time for them to onboard. And again, the bigger the MSP, the longer it takes to onboard a new product like us and get them to understand it. So having one already is significant. Adding more, and as I said, we're in multiple conversations with them reaching out at the moment. So getting that spun up will be key. Then, as I said, they deciding if they're selling with a new Office 365 installation, are they upselling, what does that look like? And I think what we're really seeing here is there -- as you said there, the sales cycle then becomes, as they onboard these customers, then we start to spin these up. So there's a lag from announcing a win into spinning up their customers and onboarding. And if you look at sort of where we're going with the big partner, where there's 800,000 users, we're onboarding around 30,000 to 40,000 a month. What that is based on their speed as well because they have an input on that, it takes them as well. So we would like to go faster. I think they would as well. But there's only so many you can do at that pace. So there is a lag on that. So it takes us about a year at least for something of that scale to see full MRR coming in. But it's money that's coming, right? Once we've got that deal going and we know we're going to do 800,000 users, that's money that's coming. So again, it's quite pleasing to see these spin ups. But I think this is where, what we're also looking for is going to some smaller sort of CSPs and VARs as well. Those guys will be a little bit faster. So instead of having sort of the big long lag between the big, sort of big guys, getting some small CSPs, small VARs in there as well, just start to fill some of these sort of lag times up with other revenue.
That's great color. And just lastly from us here. Could you talk about how the recent SolarWinds hack could emphasize the need for a DEM strategy like Gizmo across all industries?
Yes, sure. And again -- so with the -- I mean, I'll give you first example, is the SolarWinds hack has affected us. We had one very, very large client who basically said, "I can't talk right now." We're in the final stages of pricing, and they basically put the phone down on us to say, "We've got so much to deal with at the moment with the SolarWinds hack, we can't talk right now."And correct, they did. That wasn't a -- that was a very fair assessment. They, in the last 2 weeks, have come back to us saying, "Yes, we put the fires out. We still need DEM. We'd like to continue the conversation now." So that was the lag I talked about. That was kind of the -- that was not just sort of COVID IT lag. That was a real-world cyber incident lag as well, which happened. But they've come back to us. They put the fire out, they're now back. What this also comes to is, as you said, sensors, right? DEM, can it be used as a sensor to understand the environment. So really, we're still not a cybersecurity play. I'm not going to pretend that we have -- we're in the cybersecurity play. Nobody is really looking at us as a sensor at the moment, mainly because we're in sort of the application layer, not necessarily the data layer to see what's going on there. Could people see anomalies in terms of certain behaviors, absolutely. But there are so many other sensors out there doing that. So we're very much focused. What I do see, though, is sort of the potential for the NOC, SOC collaboration coming down the path. And we're having discussions certainly with one partner on that, certainly one large potential client, where they see the NOC, SOC amalgamation. And that just means we'd sit alongside, right? So we basically give color to a cybersecurity incident and event, we would give color to that and let may them ensure the business productivity. Because if you sort of come down to sort of the ultimate purpose of DEM, it's making sure that everybody in the business is productive with the products they've bought. And it's as simple as that. So that's still something that most companies do while you're putting out the cyber fire, are people still being productive and can you measure that? And the answer is, with our solution sitting alongside, which is effectively measuring the life beat of the company while you put out the fire, you can give that perspective to the CEO while you're busy dealing with the cyber incident.
Well, that's very interesting. I'm pleased with the trajectory here, guys, so keep up the momentum.
This concludes the question-and-answer session. I would like to turn the conference back over to John Proctor for closing remarks.
On behalf of all of us, thank you again for all of your interest in Martello. As mentioned earlier, you can register, receive our upcoming news letter in the Investors section of our website. And the recording of today's call will be available on our website later today. You can reach out to Investor Relations at any time by e-mailing investor@martellotech.com. And on behalf of the team at Martello, thank you, and have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.