Martello Technologies Group Inc

XTSX:MTLO

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group Third Quarter Fiscal 2023 Investor Conference Call. Today's call will provide information and commentary on financial results for the 3 and 9 months ended December 31, 2022. We will hear from John Proctor, President and CEO of Martello; and Jim Clark, Martello's Chief Financial Officer. Following these remarks, John and Jim will take questions from analysts. If you have questions following the call, you can reach Martello at [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]

Good morning, everyone, and thank you for joining us today. Before Jim and I review the quarter, I'd like to briefly touch on developments subject to quarter end and progress on our growth strategy.

We launched Vantage DX, the market-leading SaaS platform to optimize the Microsoft Modern Workplace just over a year ago. In that time, Vantage DX has become a preferred solution on the Microsoft Azure marketplace. And subsequent to Q3, Martello was elevated to Top Tier partner status, the highest partner level in the likes of ecosystem. This elite level provides a higher financial incentive for Microsoft sellers to sell Vantage DX, making a much more attractive product to sell. We are already seeing the impact of this with invitations to exclusive events to build awareness of Vantage DX and growing interest from Microsoft sellers. We have a solid product market fit for Vantage DX, with close to 700,000 Microsoft users on the platform as of December 31 and good revenue growth, nearly 60% quarter-over-quarter.

Customers in government, manufacturing, financial service and other industries choose Vantage DX because it is now the market-leading, comprehensive, out-of-the-box monitoring solution for Microsoft 365. And Microsoft Teams is a clear focus for these customers, many relying on the tools to conduct client calls, which means the downtime of [ performance ] problems has a revenue or cost impact for them. Our recent Martello webinar demonstrated just how important Microsoft Teams is to businesses, with more than 700 enterprise IT professionals joining us to learn how to build an outage response plan with Vantage DX.

Our key objective is to increase Vantage DX's MRR, and channels will be critical to execute beyond this goal. Having reached Top Tier Microsoft Partner status, our sales team is increasingly plugged in with their counterparts at Microsoft to identify accounts where Vantage DX will bring the highest customer or partner value. At the same time, we pursue marketing activities in Microsoft, such as the SaaS innovation in January, which was exclusive to Top Tier partners. Microsoft supports some key sales deals and champions our solution in webinars and in other marketing and sales activities.

Similarly, our partnership with Orange Business Services is giving us access to large enterprise clients who can see a significant return on investment by adding Vantage DX to their Microsoft Teams deployment, avoiding downtime and productivity loss. We've won business with Orange and have [ 7 ] more deals in the pipeline.

We are also accelerating our lead to revenue cycle. There are several initiatives we are pursuing here, including launching a simpler and faster trial process this month that leverages recent product improvements. Product innovation, including the development of Microsoft Teams Rooms, Dashboards, which will launch this quarter, are helping to drive more prospects into and through the funnel. According to Microsoft financial disclosures, 60% of the Fortune 500 use Microsoft Teams Rooms, so these dashboards give us greater access to these businesses.

I want to draw your attention also to comments from our Chairman, Terry Matthews, in last evening's press release. Terry has been a strong supporter of Martello, most recently providing CAD 2.4 million through a private placement in 4 tranches expected to be completed in June. Having founded or funded more than 100 tech companies, Terry has an outstanding track record of capturing a market opportunity and executing. He is steadfast in his belief that Martello is a unique solution that addresses a growing need in the market for Microsoft Teams monitoring.

You will also have noticed an announcement earlier this week that we have undertaken an initiative to streamline our Board of Directors to more closely align with the focus and size of our business. This has resulted in the voluntary resignations of 3 directors: Jennifer Camelon, Mike Michalyshyn; and Co-Chairman, Bruce Linton. All 3 played an important role over the last several years in shaping Martello's strategy and growth, and I wish them the very best in the future.

I'll close in a few moments with my perspective on Martello's outlook, but will now hand over to Jim to provide a more detailed review of our financial performance in Q3. Over to you, Jim.

[Jim Clark, executive]

Thanks, John. Good morning to all. Before I discuss Q3 financials, I would like to share my perspective on the company's performance. In my first 9 months at Martello, I can report with confidence that management is driving laser-focused changes to accelerate growth while maintaining effective control over operating expenses and cash. From sales strategy and process simplification to R&D, quality and scalability, the team has absolute focus on improving the customer/user experience and financial performance.

On to the Q3 financials. As always, we have posted our financial results and the related press release to SEDAR, where you can review them in more detail at your convenience.

Q3 revenues were $4.05 million, representing a 9% decrease compared to $4.45 million in Q3 of FY '22 and a 6% increase sequentially compared to the $3.84 million in Q2 of FY '23. I will speak to the year-over-year decrease in a moment.

Vantage DX revenue increased to $0.38 million in Q3 of FY '23. We reached 689,000 Microsoft users on the Vantage DX platform, representing a 45% increase sequentially compared to the Q2 fiscal 2023 numbers. While we continue to realize strong quarter-over-quarter growth in Vantage DX revenue, the cause of the decrease in revenue is attributable to sunsetting legacy products and services. While this decline was planned, it has been higher than expected primarily due to the off-boarding of a sizable legacy customer. The off-boarding of this customer will be completed in Q4 of fiscal 2023. Management is focused on maximizing the conversion of customers on certain legacy products to Vantage DX.

Gross margin was 89% in Q3 of fiscal 2023 compared to 90% in the same period of fiscal 2022. This marginal decrease is attributable to higher hosting costs associated with Vantage DX growth in cloud hosted environments and the legacy volume decline. On a unit basis, hosting costs continue to improve as the company executes a multiyear action plan, including continued Vantage DX growth coupled with technological advances driving improvements in multi-tenancy.

The recurring portion of total revenue was 99% compared to 97% in Q3 of fiscal 2022. This improvement is attributable to the growing mix of Martello customers on subscription-based software.

Modern Workplace Optimization continues to be Martello's dominant business line, with 54% of total revenues in Q3 of fiscal 2023. Mitel Performance Analytics represented the remaining 46% of revenues this quarter. The Mitel business line continues to provide a steady revenue base that is 99% recurring.

Q3 monthly recurring revenue, or MRR, was $1.34 million compared to $1.45 million in the same period last year. This 7% decrease is attributable to the decline in subscription maintenance and support on the sunsetting legacy products, as I've just described. As a reminder, MRR is a non-IFRS measure representing the average monthly recurring revenues earned in a fiscal quarter.

Operating expenses decreased 24% year-over-year to $4.2 million in Q3 of fiscal 2023 as compared to $5.53 million in Q3 of fiscal 2022. The decrease is a direct result of the cost optimization actions initiated in Q2 of fiscal 2023.

The company recorded an $18.9 million impairment of goodwill and a $0.23 million impairment of intangibles in Q3 of fiscal 2023. This non-cash entry reflects a number of triggering events, including higher interest rates, slower path to net accretive growth and the current low market valuation.

The Q3 net loss of $1.04 million represents a [ 51% ] improvement compared to a net loss of $2.17 million in the same period of last fiscal.

Q3 adjusted EBITDA, a non-IFRS measure, loss was $0.17 million, representing a 78% improvement versus the $0.78 million loss in Q3 of fiscal 2022. This was the result of the cost optimization exercise undertaken by management.

The company's cash and short-term investments balance was $3.25 million at December 31, 2022, compared to $5.02 million at March 31, 2022. Working capital now reflects the move of the Vistara debt from long-term to current, plus the subordinate loan agreement signed with Wesley Clover in August. This is the predominant reason for the change in working capital.

To close, I am confident that management is effectively responding to the strong and evolving market opportunity in our line of sight. I believe that our continued focus in accelerating sales through expanded sales channels, high-value product features and continuing to improve our operational performance will result in achieving sustained profitable growth.

I will now hand the call back to John. John?

[John Proctor, executive]

Thanks, Jim. As I mentioned earlier, we continue to be focused on the opportunity to optimize Microsoft Teams and Microsoft 365 user experience with Vantage DX, working closely with Microsoft and other key partners like Orange. I'm really pleased with the momentum we're seeing with Vantage DX and remain very confident that we are in the right market at the right time. Microsoft Teams is a large and growing market of 280 million users, and IT teams globally are facing escalating pressure to manage team performance for mix of remote and office-based uses.

I see some strong opportunities for upside in the medium term. The most important is our promotion to Top Tier Microsoft partner status. This places us in a much smaller group of partners with access to joint marketing activities, and more importantly, it provides Microsoft sellers with a much higher incentive to sell our product to their customers. We are already seeing the impact of this with more Microsoft sellers reaching out to us. There is also a strong potential to grow our Vantage DX user base and MRR with a well-executed channel strategy. Having developed a partnership with Orange Business Services and Operator Connect Partner, we are learning some key things about how to drive value from these Vantage DX partnerships, which we will apply to the partnerships we wish to develop in the future.

We remain laser-focused on growing Vantage DX MRR by executing on our Microsoft and channel strategy as I've discussed, targeting key legacy customers [ conversion ] to Vantage DX, maintaining a regular cadence of product innovation, continuing to build a pipeline of direct sales opportunities and streamlining our sales process to accelerate time to revenue. We are appropriately resourced today to achieve these objectives, and we'll continue the disciplined cash management that Jim spoke about earlier.

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

[Operator]

Certainly. [Operator Instructions] Our first question comes from Kiran Sritharan of Eight Capital.

[Kiran Sritharan, analyst]

Congratulations on the quarter and the subsequent raise. Let me start here.

My first question is, can you unpack the changes in the go-to-market strategy and the impact on your pipeline? With shorter and [ simulated ] trials, like how does this influence your larger deals like in the U.K. where users may branch many departments?

[John Proctor, executive]

Yes. Kiran, I'll jump on that first. So really, from a go-to-market strategy in the first year of its live Vantage, what we relied on with Vantage DX was always going into a trial with a customer. There were 2 reasons for that. One was there were customers, very sizable, as you mentioned, at least the U.K. government department that we couldn't simulate in our environment. For example, we have a trial now going to the 400,000 user customer. There's no way that we could simulate that in our non-production environment. So it meant we had to install it in a customer to learn something, which we did. And as I look at some of the customers we did trials with, we learned a great deal, and we were very grateful for them to allow us to sort of have a few stumbles before we got this up and running. So that was part of it.

But we've done now, now we've got that sort of under our belt, we can now go to the stage where we've created a full sandbox environment. What we can do with that is give people [indiscernible] a log in and they can go in and look around the tool, play with the tool, look at the dashboards. It's not their data, we're not having to do an [ install ], and I think that's faster. And today, literally today on our website, there is an ability to go and look at that and play with it and register for a trial, free trial of our software for the first time. And basically, that trial is a sandbox. So if you go to -- I'm going to go with an average-sized customer, for us -- which is about 20,000, 25,000 to 30,000 users of our average size customer.

That means for that sort of customer who doesn't want to go through all the hassle of a full trial and install before they get to try it, they can come and do that first, which is obviously a lot quicker. So that's the key step for us. We will still see, I think, big governments, big enterprise, sort of 100,000-plus users who want to do the sort of longer process. But for us, all the customers, it will be a much quicker model for us to get through. And as I said, that free trial, which is literally today came up, is now on our website, which means somebody can come in and request, log into that sandbox and go play with it without any interaction with a human. So again, as I said, it streamlines how we interact with our potential customers, but also streamlines our time to close.

[Kiran Sritharan, analyst]

That makes sense. Now shifting to partners, like what are your partners talk -- saying about the demand environment today? Has there been a shift in the pace of lead generation on that side?

[John Proctor, executive]

It's -- yes, it's interesting. So if I look at sort of -- well, this Orange, because they are obviously an example, we have a number of partners in pipeline. We've signed a couple more that we're going to be talking about in the short-term. We've signed paperwork with a couple more recently.

But certainly, for Orange, they -- the first deal was something -- we would sort of join together on. Now, because they're comfortable with it, they're starting to take us to partners. We've got -- they had to submit an RFP recently for a very large enterprise, they put us into that deal. Those sort of pieces coming as a comfort level.

The other thing that's important with partners is once you've onboarded a tool like ours, there's a cost. So as a partner brings on a tool, there's a cost of doing that to them because it takes time, money and effort to get a new tool into that environment. So the chances of them bringing in another tool like us is very, very small. And that's why getting into these partners is really important because then it becomes a -- effectively a blocker to any new person who shows up and says, "Well, I've got a tool that manages Office 365" so I be like -- Orange could turn around and say, I've got one.

And because of the cost, even if they do something slightly different, and I'm very confident that we are the best out there at the moment, but some people do things slightly differently. You'd have to do something incredibly different, incredibly better than we do to be considered as a place. So that's why getting in front of these partners and locking down these partners onto our tool as a tool of choice is important.

But back to your point is, yes, what they're seeing as a lot of companies start to make this transition to Office 365 and Teams. For instance, we know there's at least 1 organization that we're working with a partner on at the moment. They've started people going back to the office. The challenge is the office wasn't configured for Office 365. So they literally told the people going back to the office, when you're in the office, you need to set Teams to the lowest video quality you can because otherwise, it won't work properly. And when you're at home, it's fine, you can have all the video quality you want. But now we're asking you to come back to the office, the office enterprise network was not configured for Office 365 and Teams in its full glory.

So this is where we see the partners going, and I have a consulting opportunity. If I install Microsoft -- Vantage from Martello, I can tell these people how to get the maximum out of the tool. They're now getting people to use when they come back to the office. So for the partners, it is not just an upsell piece on the tool itself. It's not just a management solution to monitor what's going on, but it can be a consulting opportunity to optimize the environment that Teams is now being asked to run it.

So the 3 potential revenue with streams for partners, as I said, there's a reseller agreement that takes some percentage points, there's a managed service they can wrap around the tool, and there's a consulting ability they can put on to optimize the environment for their clients.

[Kiran Sritharan, analyst]

Great. We'll look out for those new partners. And if I can squeeze 1 more here. Just curious how you're thinking about profitability targets and time lines, and do you expect any more optimization on costs as you [ scale ]?

[John Proctor, executive]

I will -- I'll let Jim take that one.

[Jim Clark, executive]

Yes. Kiran. In terms of the time line, I'll hold off giving any hard projections. Your second part of your question is, yes, we are continually looking at improvements in our operational efficiencies. A lot of that's going to come through adjusting our focus based on the market opportunity in front of us. Very, very dynamic. And we're -- and we've lived through a few years of kind of exceptional dynamics, right, that you need to navigate effectively.

I am confident that we will have and we do have the resources to bring this business to a position of sustained profitable growth, positive cash flow.

[Operator]

Our next question comes from Daniel Rosenberg of Paradigm.

[Daniel Rosenberg, analyst]

My first question was around the legacy declines that you said impacted the quarter. I was just wondering if you could quantify how much that was and how much remains for Q4?

[John Proctor, executive]

In terms of the legacy decline in our -- let me just pull that up. Q2 was really the bump we had in our legacy decline, and that was -- as we said, we had a large partner that came through an acquisition that disengaged with us, and that's going to complete itself in Q4. Our legacy decline in Q3 was about 2%. The big one was in Q2, so we had a quarter-over-quarter large decline that was -- if you normalize it, the decline was really about 2.4% there also. So we took a step down on an exceptional basis based on that legacy partner.

[Daniel Rosenberg, analyst]

Okay. And then just switching to the channel. So I mean, you have 2 large partners in Orange and Microsoft. Can you just talk about prioritization in each of these channels? Are they both ramping? Can you just provide some color on how you'd characterize each of these?

[John Proctor, executive]

Sure. I mean, obviously, Microsoft is the Goliath. What is interesting is for a company like us, you can't just sit back and expect Microsoft will just hand deals over. We're still very conscious that we're constantly jumping up and down, pick me, pick me.

But what is interesting is when you've got this Top Tier status, which only came to us in January, the sellers do pick us. They are taking us into opportunities, they are coming to calls with us. We will be on calls with one client, with a Microsoft seller, they'll hear the pitch and they'll say, oh, we should take you to a couple of other people. So there's certainly -- we cannot, in any way, slow down in terms of our constant sort of drive through Microsoft.

Orange is now starting to turn a little bit the other way where they are bringing us 2 deals so much as the -- we closed a Fortune 100 food company with Orange. We've now -- as I said, they're putting us into RFPs. It's becoming much more of a mutually aligned piece, and certainly from a relationship perspective, they've got comfortable. And again, like any partner, they want to see when they -- we got into this Fortune 100 food manufacturer, how does relationship go? Does the tool make a difference? Does it work? So they want to get that level of comfort, which they now have and then that starts to drive that. Because again, they have a number of tools available to them to bring to clients. But certainly, from a -- for Orange from an Office 365 perspective, we are the tool they have.

We are the tool of choice for them. Microsoft supports us with Orange as well because there is partner managers in Microsoft as well. So I see those. And in terms of prioritization, we see the Operator Connect movement. We see Microsoft's drive on that. So it's really important for us to align into Microsoft's go-to-market. And for Microsoft, that Operator Connect piece where it's like operator connect mobile, putting Teams on mobile phones, sort of that world domination of that unified communications space, so we're making sure we align into that.

And I mentioned Teams, Rooms. A lot of big companies now when you step into a room into a conference room, it's Teams Rooms that's being used. So if you're an IT team, you want to make sure that works. So -- and a lot of people on this call are familiar, we have these robots or synthetic transaction tools, being able to set that up so before somebody steps into a virtual town hall across the company, we can make sure that virtual town hall will reach everybody in the company. We can make sure that that -- all those Teams transactions that are about to happen in half an hour, the IT guys can do a quick check using our tool and say, yes, this town hall will work. Teams will work for the CEO, the CFO, to present across the whole company. We give them that.

[Technical Difficulty]

[Unknown Executive]

Operator?

[Operator]

Pardon me. John, are you able to hear us?

[John Proctor, executive]

Hello? Yes. Can you hear me?

[Operator]

Yes, we can hear you.

[John Proctor, executive]

Okay. Sorry, I seem to have dropped off there. Sorry, Daniel. I was mentioning on -- we've got our Paessler and Mitel partnerships. And if I look at Mitel, they've announced they're looking to acquire the Atos Unify tool. We're already in conversations with Atos to align our Vantage tool into them. Paessler is doing very well.

So again, a lot of those sort of partnerships are solid, and to be somewhat blunt, we haven't [ prioritized ]. We've got a number of partners lining up, and we need to be very clear which ones will drive revenue. So we're not signing partnership for the sake of it, we're looking at partnerships saying which ones will drive revenue in the short-term, and prioritizing those guys. So that's really where we're focused at the moment. We could sign an awful lot of partnership paperwork at the moment with people knocking on our door. The question is which ones will drive revenue? We'll focus on those.

[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, executive]

Thank you, operator. On behalf of all of us, thank you all for your interest in Martello. As mentioned earlier, you can register to receive our upcoming newsletter in the Investor section of our website, and the recording of today's call will be available on our website later today. You can reach out to our Investor Relations any time by e-mailing [e-mail].

Have a great day to all of you, and thank you very much for your attendance.

[Operator]

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