Martello Technologies Group Inc

XTSX:MTLO

Earnings Call Transcript 2021-Q4

[Operator]

Thank you standing by. This is the conference operator. Welcome to the Martello Technologies Group Fourth Quarter and Fiscal 2021 Investor Conference Call. Today's call will provide information and commentary on financial results for the fourth quarter and full 2021 fiscal year ended March 31, 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]. 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 a few words from Martello's CEO, John Proctor. John?

[John Proctor, President, CEO & Director]

Good morning, everyone, and thank you for joining us. I'll hand this off to Erin shortly to discuss our financial performance in Q4 and the full 2021 fiscal year. Before I do, I'd like to offer my perspective on the year. In the midst of a global pandemic, Martello made key strategic moves this year that have reinvented our business and positioned us to compete in the growing market for digital experience monitoring, or DEM. Since acquiring Microsoft 365 DEM provided GSX only just over a year ago, we've reached some important milestones in our plan, which I firmly believe have positioned us for growth in the back half of fiscal '22. I'll speak more about these in a few minutes, but I'm very pleased with the progress we've made towards the launch of our Vantage DX integrated DEM suite. The launch of our partner program subsequent to Q4 is also critical to our growth in fiscal '22, expanding our addressable market to small and medium businesses. I'll speak more about this as well as our outlook and stock performance in a few minutes. Now I'd like to hand it over to Erin for a review of financial performance. Erin?

[Erin Crowe, Chief Financial Officer]

Thanks, John. As John said, fiscal 2021 was transformative for Martello. In Q1, we made our most significant strategic acquisition yet when we acquired GSX, which made us a leader in Microsoft 365 monitoring software. We also divested our network performance management business in Q2, which helped to improve the quality of our revenue streams and allowed us to focus on becoming a dominant vendor in digital experience monitoring and optimization across major cloud platforms like Microsoft and Mitel.Martello has thousands of customers in over 65 countries around the world. We reached a record $16.8 million in revenue in fiscal 2021, driven in large part by the company's strategic shift to providing DEM solutions for businesses using Microsoft 365. I'm pleased that more than 90% of our revenues were recurring in fiscal '21 and that we maintained high margins, also in the 90% range. In order to execute this major shift in strategic focus while maintaining high-quality recurring revenue streams, we raised new capital this year through a combination of equity and debt financing. To be able to deliver record revenue and execute our capital plans in the midst of the uncertainty of the COVID-19 pandemic is a testament to the value of the DEM market opportunity we have pivoted to. Now I'll turn to the details of our financial results in Q4 and the full 2021 fiscal year. All results reported exclude discontinued operations associated with the divested network performance management segment. Regarding performance of Q4 of fiscal 2021. Revenue for the quarter was $4.5 million, a 57% increase over the comparative period of fiscal 2020. The year-over-year increase reflects the acquisition of GSX, which contributed $1.8 million in Q4 of fiscal '21. Revenue continued to diversify this quarter. GSX revenue of $1.8 million in Q4 accounted for 40% of revenue. Mitel UC Performance Analytics contributed 43% of total revenue compared to 59% in Q4 of fiscal '20. IT service analytics contributed 17% of total revenue compared to 28% in Q4 of fiscal 2020. The reduction is due to the diversification of revenue and the declining legacy Live Maps product. The recurring portion of total revenue was 98% in the fourth quarter of fiscal '21 compared to 97% in the comparative period of fiscal '20. Monthly recurring revenue, or MRR, was $1.5 million, a 60% increase over Q4 of fiscal '20. The year-over-year increase in MRR is due to the addition of acquired GSX revenues, which contributed $0.6 million in MRR in the quarter. Note that MRR is a non-IFRS measure and represents average monthly recurring revenues earned in a fiscal quarter. Gross margin as a percentage of revenue was 89% in Q4 of fiscal '21, a decrease compared to 96% in the comparative period last year. The decrease is the result of lower gross margin on the Microsoft 365 monitoring software associated with higher hosting costs and commissions on the GSX products. Operating expenses in Q4 of fiscal '21 were $6 million, a decrease of $0.9 million from Q4 of fiscal 2020. GSX operating expenses totaled $2.1 million, including $0.4 million of noncash amortization of intangibles. Other operating costs decreased from Q4 of fiscal 2020 as the comparative period included $3.4 million of impairment of goodwill and intangible assets and $0.5 million in costs relating to the acquisition of GSX. Excluding these items, operating expenses increased by $0.8 million related to investments in scaling future operations. Adjusted EBITDA, which is a non-IFRS financial measure, was a loss of $1 million in Q4 of fiscal '21 compared to a loss of $0.2 million in the same period of fiscal '20. The increased adjusted EBITDA loss in the quarter is due primarily to higher operating losses as explained. Loss from operations decreased by $2.2 million to $2 million in Q4 of fiscal '21 compared to a loss of $4.2 million in the same period of fiscal '20. The net loss of $1.9 million decreased from $4.5 million in the same period of fiscal 2020, primarily as a result of the items I've outlined above. In the full 2021 fiscal year, here are the highlights of Martello's performance. Revenues reached $16.8 million, a 50% increase compared to $11.2 million in the 2020 fiscal year, excluding discontinued operations. The acquisition of GSX helped to further diversify our revenue streams in fiscal '21. Annual revenue includes $6 million from the acquisition of GSX, which reflects 10 months of GSX revenue. GSX accounted for 36% of the company's total revenue for the year. Mitel UC Performance Analytics contributed 45% of total revenue in fiscal '21 compared to 54% in fiscal '20. And IT service analytics revenue contributed 19% of total revenue compared to 27% in fiscal '20. The recurring portion of total revenue in fiscal 2021 was 97% compared to 95% in the prior year. Gross margin was 93% compared to 94% in fiscal 2020. The decrease is a result of lower gross margin on the Microsoft 365 monitoring, which is associated with higher hosting costs and commissions on the GSX products.The adjusted EBITDA loss was $0.7 million for the year compared to a loss of $2.5 million in fiscal '20. This decreased adjusted EBITDA loss is due to the reclassification of the NPM segment as discontinued operations in fiscal '21 and the implementation of temporary measures to reduce costs early in fiscal '21 in view of COVID risks, including reduced hours and salaries for most employees. Operating expenses increased by $3.4 million to $20.4 million in fiscal '21 from $17 million in fiscal '20. This was due to the addition of GSX operating expenses, offset in part by the impact of reductions in the Q4 of fiscal '20 charges described above. Excluding these items, operating expenses decreased by 2% year-over-year. Loss from operations decreased by $1.7 million to $4.8 million compared to $6.4 million in fiscal '20. Martello completed 2 bought deals in fiscal '21, a concurrent private placement and debt financing. Capital raised was used to fund the acquisition of GSX and to provide funding for scaling operations in fiscal '22. The company's cash and short-term investments balance was $8.5 million at March 31, '21, compared to $5.9 million at March 31, 2020. Net working capital was $4.5 million at March 31, '21 compared to $3.7 million at March 31, 2020. The increase in working capital in fiscal '21 was due in part to net proceeds of $5.1 million from the March 2021 bought deal offering and proceeds from the private placement on March 18. At this time, we believe that our organic growth plans can be funded by available cash and other available funding sources. As we continue to invest in product innovation and the development of new direct and indirect sales channels, we expect that our long-term DEM strategy will require continued investment over the next several quarters to capture the market opportunity available to us, which may impact short-term operating results. I'll now hand it over to John Proctor for a discussion of Martello's strategy and outlook. John?

[John Proctor, President, CEO & Director]

Thanks, Erin. I'll talk now about progress and execution on our growth plan and how reaching these milestones will impact the company's growth in fiscal '22. I'll close with a perspective on Martello's outlook and stock performance. In Q4 of fiscal 2021, Martello communicated its growth plan for the 2022 fiscal year, setting out the activities we will undertake to drive revenue and user growth. To date, we have reached the milestones in this plan on or ahead of schedule, doing exactly what we said we would. Some of these milestones include product enhancements that advances towards the launch of our Vantage DX DEM solution suite, including the integration of Gizmo with our iQ platform. In addition, recognizing the IT demand of hybrid work environments, we developed work from anywhere monitoring and diagnostic capabilities, which are currently in beta trials. We've expanded our addressable market to include small and medium enterprises with the launch of our partner program earlier this month. Managed service providers, or MSPs, are the trusted providers of Microsoft 365 to these smaller businesses. Our partner program is designed to provide MSPs with a value-added solution that is easily packaged as part of their existing Microsoft 365 offer, helping them to develop a new revenue stream. By creating a repeatable model to enable MSPs and investing in a single platform DEM solution, we believe we are well positioned for revenue and user growth in the back half of fiscal '22. Let me speak briefly about our Microsoft DEM user growth target. Martello has updated the calculations of its Microsoft user counts to include both on-premise and cloud Microsoft users on our platform. We believe this offers shareholders a clearer view of Microsoft user growth, and going forward, we will only report the metric based on this calculation. As a result, our base number of 2 million from Q2 of fiscal '21 has been restated to 2.5 million. We've increased our target number of users to 3.5 million in fiscal '22 from the previous target of 3.2 million. There were 2.7 million cloud and on-premise Microsoft users on our platform as of March 31, 2021. We continue to work closely with Mitel to increase the reach of Mitel Performance Analytics, or MPA, through their partner and customer base. After 10 years of building the MPA program together with Mitel, we continue to bring additional value to Mitel's customers with each new product release, whether adding support for new Mitel platforms or enhancing existing capabilities. We recently held an educational webinar for Mitel partners about our Microsoft 365 DEM capabilities as we recognized that many of these partners also sell or provide Microsoft 365 services. We are pleased to see interest from several Mitel partners as a result. While 2020 will be remembered as the work-from-home year, 2021 marks a shift to new ways of working with businesses choosing a range of fully remote, hybrid or fully office-based operations. Businesses have rapidly accelerated their digital transformation plans to meet the needs of a workforce that was suddenly working from home, which brought a spike in Microsoft 365 and Teams adoption. Gartner has said that this acceleration of digital transformation projects will continue until 2024 as businesses address their new post COVID reality. At Martello, we're well positioned to take advantage of the trend. Our software now serves businesses of every size, optimizing the digital experience of their Microsoft 365 users, whether they are working at home, the office or the corner coffee shop. I'd like to now close with my perspective on Martello's outlook and a comment on the stock. While revenues continue to be impacted by the decline of legacy product lines, I'm pleased that the strategic decisions we made in fiscal '21 have brought us to a record $16.8 million revenues for the year. I recognize that the investments and progress we've made on our DEM strategy have not yet been reflected in stock price. I appreciate the patience of our investors, whether in our bought deal, capital raises or on the open market as we execute on each milestone in our plan. I am very confident that the continued execution of our plan will result in revenue and user growth in the back half of fiscal '22, bringing value to shareholders. To sum up, we've achieved record $16.8 million revenues with 97% of revenues recurring and gross margins of 93%, maintaining industry-leading revenue quality while reinventing our business to capture the growing opportunity in digital experience monitoring optimization. We see significant potential in partnerships in the 2022 fiscal year from strategic partnerships like Paessler, the development of MSPs through our partner program. I'd like to thank you for joining us today and wish continued good health to all of you and your families. Erin and I are here to answer your questions. And operator, would you please facilitate the Q&A part of this call.

[Operator]

[Operator Instructions] The first question comes from Kevin Krishnaratne with Desjardins.

[Kevin Krishnaratne, Research Analyst]

A question for you on GSX and the subscription revenue there. The revenue was down a little bit sequentially, $1.12 million versus $1.16 million in Q3. I just -- there's different moving pieces in there. Can you unpack that a little bit? Did you -- did Gizmo, the Microsoft monitoring, did that increase Q-over-Q? And is the decline being driven by a faster downturn. And Domino, it just came a little softer than I was expecting. So I'm just -- I'd like to hear your thoughts on the breakdown within GSX subscription.

[Erin Crowe, Chief Financial Officer]

Sure. So if I look at the breakdown within GSX, I would say that overall, the Microsoft numbers were fairly flat, and I'll get to that in a second. And we did see the sort of expected decline on the legacy side. I mean, overall, legacy declined about 16% quarter -- sequential quarter-over-quarter, which was consistent within sort of the 2 components of that. On the Microsoft side, I think the one piece to bear in mind there is that Q3 was the December 31 quarter end, right? And that is a very, very, very heavy renewal period for GSX. The one thing we did see, we lost one fairly significant customer coming out of Q3, a very unique situation, which did impact sort of -- so we had some new growth, but then we had some -- with all the renewals in Q3, we also had some churn, obviously. So -- and that one larger customer that churned out was -- did have an impact on the Microsoft side. So I think it's -- we are still -- we -- really, when you look at that overall GSX revenue, the overall, I guess, softness, as you said, is really due to that decline on the legacy and the flatness of Microsoft, but recognizing that, that was specific really in these 2 quarters when you put them sequential side by side.

[Kevin Krishnaratne, Research Analyst]

Yes, I got it. The flatness in the Microsoft portion of GSX may have been -- yes, you were exacerbated. You normally grow, but you did -- you lost a significant customer, basically what happened in Q4 versus Q3.

[Erin Crowe, Chief Financial Officer]

Yes, yes, exactly. I mean that's our -- by far, the heaviest renewal month for GSX, like a lot of their contracts are December 31 end dates, yes.

[Kevin Krishnaratne, Research Analyst]

Okay. And a question just related to that on the user counts that you've updated. I know that you gave us the 2.7 million total as of Q4. You had -- you gave a breakdown at Q3 where there were, I guess, 2 million cloud users and 600,000 on-prem. Did the cloud -- can you give us a breakdown of what that is at Q4, the breakdown of the 2.7 million?

[Erin Crowe, Chief Financial Officer]

No. Like we're really looking at it on a blended basis at this point. And the other piece that we're seeing is that we do have some of the on-prem moving to cloud. So we're seeing migration within that group as well. So I think we didn't -- we really didn't look at it on a sort of apples-to-apples basis, like with the cloud and on-prem in Q4, we didn't break it down. We just looked at the whole bucket of Microsoft users, particularly given some of that migration that we see happening.

[Kevin Krishnaratne, Research Analyst]

Okay. Let me ask a different sort of way of asking that question. So the new guidance is 3.5 million users versus the 2.5 million or essentially 40% growth. But within that, you had previously -- you had guidance of 60% growth on the -- on your prior statement of 2 million. So is it fair to say, are you still maintaining your view of 60% growth on cloud and then there's going to be a managed decline or a migration of on-prem into the cloud. Is that a fair comment that your guidance is unchanged?

[John Proctor, President, CEO & Director]

Yes. We're trying to, again, leave those numbers together, Kevin. The reason we're doing this, as Erin said, is we've got clients who are currently on-prem who move into the cloud. So we needed to blend these together because if I report them on one quarter, and they report the next quarter, they're still our client, they just moved on cloud. So we'll see that blended up. So I think that's where you'll see that. We're trying to just pull that all together. And like I said is, the target users is now 3.5 million. And that's why I don't want to break it down into cloud and on-prem because in any quarter, some will transition, and that will sort of not help you try and do that analysis.

[Kevin Krishnaratne, Research Analyst]

Yes. Okay. I appreciate that. Maybe one switching over to the Mitel side of the equation. The subscription revenue was -- as reported, was flat. But I think as you highlighted in the MD&A, there were FX impacts. So if you assume sort of all in U.S., I don't know if that's correct, but it looks like you had 4% growth quarter-over-quarter. The bottom line is that looks to me like it might be a little bit stronger than you've been seeing in prior quarters. I'm wondering if you can just confirm what you're seeing in the Mitel channel on subscriber trends there? Is it kind of reflecting back up? That used to be a business that grew 20% -- plus 20% year-over-year, if you think about that business. I'm wondering how things are looking there now, now that you're coming out -- you've come out of the pandemic.

[John Proctor, President, CEO & Director]

Yes. Mitel's got a number of sort of campaigns running to sort of position themselves strongly in the market. The unified communications, I think you and I talked about this a bit. The unified communications market is a bit of a mess at the moment. Everyone's jocking for position and the juggernaut that's running at them is Microsoft. And I think we will see some of that settle out. What Mitel is doing well is that integration business perspective, so becoming more connected into business. And I think this is where -- and the same thing maturing. And as we see people heading back to the office in whatever version that looks like, they're expecting to see a phone on their desk, right? I don't think we've completely got rid of that. That's not sort of the culture. But at the same time, they've got a number of softphone capabilities. So if I look at things like their conferencing ability, it's very slick. It's very clean. And where we come in is we can measure sort of how good that call is. And when you're built from the ground up, and if I even look at how they're now integrating to Teams, all of this is designed to sort of look at where the unified communications market will fall out in the next couple of years. And I think it's going to be really interesting to watch. But Microsoft -- sorry, Mitel is quite dominant in this space. They've got a number of clients, big enterprise clients that need phones. They've got cloud capabilities. They're well positioned in that space. So we're with them, we're doing R&D. I was talking to the Chief Revenue Officer only a couple of weeks back. We then had a call with all their sales engineers to make sure they understand what unified analytics helps them do. So I think -- are they -- Mitel is working really, really hard to maintain their position in the market. And we're alongside them for that.

[Operator]

Next question comes from Daniel Rosenberg with Paradigm Capital.

[Daniel Rosenberg, Analyst]

I had a question around that user growth. I was wondering if there's any differences in how you see implementation versus scaling the actual users to revenue between the on-prem channel and the cloud channel?

[John Proctor, President, CEO & Director]

Sure. I'll start that. I mean the interesting thing with on-prem is, obviously, we have no hosting costs. If somebody does -- takes it on-prem, for instance, government or large enterprise that has their own cloud environment, that's up to them. So there's a plus on the margins on that side. The downside is normally slightly more complicated because we're working through a third party effectively to get the installation done, et cetera. So it really ends up sort of balancing itself out, that it's a little bit more work to get people set up and running on-prem. It's a little bit harder to push updates, et cetera, et cetera. But the upside is we don't have to pay hosting costs. So it sort of balances out. So I think we will always see some clients who demand on-prem, we have to have that option. And we are -- but we are seeing that push to cloud where people think they are comfortable and safe to do so. So that's what we're really seeing, is sort of that mix. But then we've said before is we're seeing a number of companies pushing forward to Office 365, a number of companies saying, well, hold on, if I push to Office 365 from what I've got at the moment and I buy this version of the Microsoft license, I now get Teams. And then what does that mean to the environment and what tools do I need. So it's interesting if I look at sort of -- that sort of everything from the Gartner Hype Curve to everything it all points in between, it's interesting at what point they realize, I need to understand my system better than I did. And I need to be able to help people quicker and faster. And that's really what it comes down to, is, that mean time to respond. And if I look at some of our partners, particularly some of the MSPs, they're already starting to see the benefits of having this capability to be able to say, "Okay, I can see what your problem is, no, it's not us. No, it's not Microsoft, it's you or it's your ISP." And that solves an awful lot of time quickly, which means people can get back to work faster.

[Daniel Rosenberg, Analyst]

Okay. I was also wondering, in your prepared remarks, you mentioned continued investment. If you could just help us understand that statement. As we look at your results earlier in the year, you achieved being adjusted EBITDA positive. Any thoughts directionally on how that investment is going to impact you? How are you thinking about your margin profile, maintaining it in the near term versus medium term? If you could provide any color there, that would be helpful.

[Erin Crowe, Chief Financial Officer]

Sure. I'll start with that and hand it over to John. But I think when we talk about continued investment, I go back to what we presented really as our growth plan. If you look at the MD&A and you look at the short form prospectus from March, right, we talked about the investments that we intend to make and are making now on the R&D side and also on the sales and marketing side, right, really focused on continuing to improve from a scalability perspective on R&D. And we've now got the cloud-based multi-tenancy, which will help us scale to those smaller-sized businesses in an economical way. And we're focused, obviously, with the launch of the partner program on investing in that partner program and driving those sales as well as continuing to invest in the direct sales program.So I think those are -- those continue to be the key areas that we're looking at from an investment perspective. On the margin side, the work that we're doing on the R&D piece will really help us to improve our margins as we go forward, right? Because a lot of that work is around cost optimization of the hosting piece. I'll turn over to John to talk a little bit more about it, but that's sort of -- when I think about the future, as John talked about, as people move to the cloud, we have the hosting costs, but we're working to really optimize those hosting costs to maintain and improve our margins.

[John Proctor, President, CEO & Director]

Daniel, as Erin said, as we move into this cloud-based multi-tenancy environment, we can create more efficiency in there. It's not as much as we've announced we've done it. It's one of those projects that's never done. It's like painting a large bridge, right? Once we get to one end, we got to go back and start again. The -- we are making it more efficient, which, as Erin said, will improve our margins on hosting. And that's part of the point whether in Azure, AWS or Google Cloud, right? You want to be as efficient as possible in there to reduce the overall -- what you're paying those guys, so we're doing that. And at the same time, and we mentioned with the numbers of 3.5 million users, we've now got our first sort of data scientists on board looking at where we can bring that. And the aim here is really for the MSPs, how do we bring value into the MSP environment. right? What can they do? And what they want to do and we are allowing to do is wrap the service around it. So if they can offer an enhanced service, it means they've got clients willing to pay them, give them revenue for something that they can only deliver with our tech underneath, right? So using our toolbox, they can deliver a service, then we become pretty sticky. And the aim here is, we move from monitoring over towards optimization, right? And that's where all this data comes in because we can see across this whole ecosystem of millions of Microsoft Office 365 users and allow our partners to be able to pull that data in anonymized and secure to allow them to be able to provide a better outcome for their clients by optimizing Office 365. And there's lots of buzzwords flying around, and you can't sort of go to a call these days without somebody mentioning 5G. Well, 5G is really complex, right? There's different spectrums you can use in 5G. Will we see 5G in rural North America? Or will that be Elon Musk satellite system and 5G in the cities, right? All of those mean you've got a very complex system and environment to try and run a dispersed Office 365 environment for the enterprise. So being able to optimize that is going to be the goal for these service providers no matter where they are. If they're in a house in the middle of rural Manitoba or they're downtown Toronto, everyone is going to demand an optimized Office 365, and that's where we will be.

[Daniel Rosenberg, Analyst]

Okay. And then lastly, you mentioned offering services for MSPs. I was wondering if you could provide an update on kind of the relationships you have with MSPs and visibility towards adding channel partners and even Microsoft itself as a partner? Any color there would be appreciated.

[John Proctor, President, CEO & Director]

Sure. I'll start with the partner program. So we've announced the partner program. And the nice thing is, even within the first month, our partner LDI because they lent forward, and I know some of you knew that because you've seen it on LinkedIn, they've already got -- we've already got quotes out to clients, right? So within a month, we're already providing quotes into their client ecosystem. And they've got thousands of customers for us to go at. So we're in a learning process with them, right? They're learning more about the product, they're learning the value proposition, they're learning to articulate that to their clients without us, right? First of all, we go -- we do a bit of handholding as you'd expect, we go with them to client meetings. We help them. But over time, that reduces so we can focus on the next one. So there's pieces there where we're quite pleased. And the speed with which we're getting quotes out into that LDI ecosystem is quite pleasing. And we've got more in the pipeline. I think even much as this is a short week, I've got 2 calls this week with potential partners. I had 4 last week. So very pleased with how this is starting to pick up. On the Microsoft piece, yes, this is a large, meaningful partnership with significant benefits to Martello. It's complicated. Discussions are ongoing. But we are very, very optimistic on a positive outcome for that one.

[Operator]

[Operator Instructions] The next question comes from Christian Sgro with Eight Capital.

[Christian Sgro, Research Analyst]

The first question I'll ask, you just touched on -- more on the cost, gross margin side. GSX gross margin landed right around 80%, below the recent quarters. You've mentioned there were some hosting costs, licensing fees in there. Would you say there was anything anomalous in the Q4 quarter there, that 80% suggests a run rate for the next couple of quarters? It sounds like there's the scale benefits that will come over time, but wondering if there's anything to pull out in the March quarter.

[Erin Crowe, Chief Financial Officer]

No. I would say there's nothing sort of out of the ordinary in the March quarter. I think in the short term, we would expect the margins to be in that range or slightly above that. And then as we talked about, obviously, over time, we'll see some scale there and improvements on the cost side. But I would say that's -- we've -- with one of our partners, there are more hosting costs, and we've seen as they've increased their usage, we've seen those hosting costs go up. So I think that's really what we're seeing, is the impact of that adoption on the partner side, on that one partner in particular. The other impact is just the recording of the commissions on the GSX side and how. Those are the 2 big pieces that really make up the cost of sales. And I think those are -- we see those being fairly stable for the -- at least a couple of quarters, I would say.

[Christian Sgro, Research Analyst]

That's helpful to understand sort of the quant behind the estimation behind the 80%. So full effects pick up over time. Switch over and talk to the partner channel. It sounds like some good progress with LDI already. And then the outlook there was the target of signing 30 new partners in fiscal '22. That's a lot, that's a good target. And it sounds like we're in discussions with these partners now. As we think of the ramp with each of these partners such as LDI, one month in, some quotes out, is that a good -- is that sort of how the sales cycle and customer uptick would come in, a month, a couple of months out? Do you see these 30 adds, let's say, benefiting fiscal '22? Or is this all sort of paving the way for, let's say, the end of '22 and beyond?

[John Proctor, President, CEO & Director]

I think we'll see more towards the end of '22 and beyond, right? I mean I would like to be surprised otherwise. But we're all struggling with sort of pandemic, return to home, et cetera -- sorry, return to work, et cetera. So I'm not going to overstate that. LDI, we've been in discussions quite a while because they helped us sort of work the moving pieces, they allowed us to test certain aspects as well. So clearly, they lent forward. So I think they were clearly an accelerator. The ones I think we will see potentially have that level of acceleration are the Mitel partners because they already know us. We already have relationships, right? We already know how they function. So I think those could go quickly. I think some of the bigger ones we're talking to of the sort of telco size, those take time, right? You can't sort of turn those on a dime. They've got a lot of sort of moving pieces inside. So those ones will be a bit of a lag. So I think we'll see some of the smaller ones and some of the Mitel partners go faster and some of the bigger ones, the bigger ones will take a little bit of time, but those are the ones that also that will make a significant difference to us over time.

[Christian Sgro, Research Analyst]

Okay. Great. The Mitel partners that kind of exist, there's easy -- it's easier to sort of update them and then terms to get going with them quickly. That makes sense. I'll ask one more question. When I think of the user growth due to -- 3.5 million to the end of F '22. I think when we think of user growth quarter-to-quarter, the benefit, let's say, financially would land in the following quarter. So it's sort of like the delayed benefit into the financial model. Do you see that as the case? Like, for example, the 2.7 million end of March, that will start to benefit -- that will have benefited this June quarter. Whatever June comes in, we'll see that sequentially benefit the F Q2 quarter? Or are there like -- or would the financial benefit get pushed out as pricing comes into play? Like is it linear? Should we think of the lift in GSX as linear? Or are there other dynamics on the pricing side?

[Erin Crowe, Chief Financial Officer]

Yes. So I mean, I think the simple equation is that you should see it in the following quarter. There are certainly some additional factors when you dig into the numbers because, obviously -- so some of the user counts are coming from a monthly royalty with one of our monthly fee with one of our partners. So that's sort of already baking in. We also have, obviously, on the GSX side, you've got the legacy declines offsetting some of the growth on the user counts. So there's a bunch of different factors. But I would say, generally speaking, over time, it should be -- the user counts and the revenue should track reasonably closely. It may not be like one quarter to the next quarter perfectly, but if you looked at it on a trajectory over time, it should look like that.

[Christian Sgro, Research Analyst]

A good positive correlation for sure.

[Erin Crowe, Chief Financial Officer]

Yes.

[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. And I'm just going to -- I'm going to -- people are about to look at me for something, so I'll script slightly. I want to reinforce something of what the team has done this year. And I think it's really important. So during a pandemic when people are working from home, some of our senior leadership were schooling their kids. We acquired a company based in Switzerland. We divested ourselves of Elfiq and the associated MedTech. We focused the company on DEM, all this working from home. And we integrated GSX during a pandemic with no travel whatsoever. There's people -- I'll give you an example. In our R&D team in Nice, we've never met them. So our CTO, who's a very smart man called Doug Bellinger, has never met what is a fairly significant part of his team, and they still managed to do these pieces, get into multi-tenancy and improve our product. We've created new departments, and we've also done 2 capital raises. So -- and again, I want to reinforce that. We've done all of that during a pandemic, and we've managed a 15% pay cut across the company and returned people back to full salary with minimal churn across the company. And I would put it to you that if you can find another company our size that have done that as well, I would invest in them as well as Martello. So just putting that out there, is if you want to look at the team and what they've achieved, it is considerable, from April 2020 to March '21 has been a considerable achievement. So on that note, I will wrap this up. On behalf of -- oh, sorry. And I want to just finish up and say, again, $16.8 million revenues, 97% of those recurring, the gross margins of 93%. So again, we've maintained that during what has been a really, really challenging year. So on behalf of all of us here, thank you for your interest in Martello. And as we mentioned earlier, you can register to receive our upcoming newsletter 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 our Investor Relations any time by e-mailing [e-mail]. Thank you, 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.