Increased recurring revenue with gross margins of 92% year to date provides strong and scalable growth model.
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Ottawa, Ontario (November 20, 2019) – Martello Technologies Group Inc., (“Martello” or the “Company”) (TSXV:MTLO), a leading provider of technology solutions that deliver clarity and control of complex IT environments deployed in thousands of locations around the world, today released financial results for the three and six months ended September 30, 2019. Martello’s fiscal year end is March 31.
Q2 FY2020 Highlights
- Revenue in the second quarter of FY2020 was $3.1 million, an increase of 59% over the same period in FY2019. Organic revenue from sales of unified communications (UC) performance analytics software to the Mitel channel grew 34% this quarter, compared to Q2 FY2019.
- The Monthly Recurring Revenue (“MRR”) was approximately $957,000 in Q2 FY2020, an increase of 79% compared to the same quarter in the prior year, and an increase of 4% over Q1 FY2020. MRR is a measure which offers insight into the predictability of Martello’s monthly recurring revenue stream, which creates a strong and stable foundation for future growth.
- Recurring revenue was 92% of total revenue in the second quarter of FY2020, compared to 82% in Q2 FY2019, as recurring revenue from UC Performance Analytics and IT operations analytics (ITOA) software was strong at 98% and 95%, respectively.
- Gross margin demonstrated continued strength at 91.5% for the second quarter of FY2020, compared to 93.6% in Q2 FY2019. The slight decline is due to an increase in web hosting costs for UC Performance Analytics software and sales commissions for ITOA software.
- The loss from operations was $1,449,530 compared to a loss of $857,783 in the same period of FY2019. This includes non-cash amortization of $267,253 mainly from the recent acquisitions of Elfiq and Savision.
- Adjusted EBITDA, a non-IFRS financial measure which assesses operating performance before the impact of one-time costs associated with acquisition activity and non-cash costs, was a loss of $985,457, compared to a loss of $343,298 in the same period of FY2019.
- The increased loss from operations and Adjusted EBITDA loss was due to accelerated investments in sales, sales operations, marketing and support services and new systems to create a strong platform for future revenue growth. Going forward, these investments are nearing completion and, notwithstanding future acquisitions, expenses should stabilize in the foreseeable future.
- Having developed a high-quality revenue model that features strong recurring revenue, exceptional gross margins and predictable, stable growth, the Company has established a solid platform to accelerate future growth. The Company will focus on activities that further increase recurring revenue, including channel development, strategic partnerships, integrated product development and acquisitions that are accretive to this objective.
“Martello is helping businesses to control the performance of their most critical cloud-hosted services, including Office 365 and unified communications”, said John Proctor, President and CEO of Martello. “By building a unique technology stack through acquisitions and product development, Martello has achieved solid monthly recurring revenue growth in Q2 FY2020 with exceptionally high gross margins. As we continue to invest in the development of integrated service optimization solutions to grow our monthly recurring revenue, we expect we will begin to see the results of this effort early in FY2021. We appreciate the vision and patience of our investors, who understand Martello’s market opportunity”.
Martello helps businesses control the performance of their most critical cloud-hosted services – from Office 365 to other unified communications services, in today’s complex network environments.
The Company has taken a systematic approach to growing its high-quality recurring revenue stream. Having grown its core business in the Mitel channel, Martello now has millions of telephony users under management by its software, and large amounts of data about how real-time services perform on networks. The Company has acquired businesses whose technology is strategic to Martello’s mission to control the performance of services in complex network environments.
Martello is integrating these technologies to capture a significant emerging market opportunity: the optimization of business critical services on cloud networks. For example, Office 365 now has 200 million monthly active users, growing the service at a pace of 3 million users per month1. Gartner has reported that 42% of problems with Office 365 (as reported by users) can be attributed to network performance2. Martello is confident that executing on this service optimization opportunity will grow the Company’s high-quality, recurring revenue stream.
In pursuing the market opportunity for service optimization solutions to drive recurring revenue growth, Martello is leveraging its SD-WAN and link balancing technology. As this progresses, there has been a decline in one-time SD-WAN and link balancing sales revenue. Martello is actively engaged with a small number of customers who have validated the value proposition for the service optimization solutions currently in development, and expects to have trials underway by the end of fiscal 2020.
The Company will focus on the activation and acceleration of strategic partnerships, which can become channels for Martello’s acquired product lines and integrated service optimization solutions. These partnerships include Mitel, a channel in which Martello already has thousands of customers, Paessler and Microsoft. In November 2019, Martello joined Microsoft’s Co-Sell program, which offers access to Microsoft’s global ecosystem of sellers and more than 75 million buyers, to sell Martello’s software which provides service assurance analytics for Office 365 and Azure.
Channel development is a key area of focus for the Company as part of its systematic approach to recurring revenue growth, and will help accelerate the cross-sell of acquired technologies. The Company will increase channel enablement activity to expand its network of resellers, MSPs and distributors, and address key global regions. The Company believes that it can drive more high-quality, recurring revenue through these channels, including from selling SD-WAN service optimization solutions in the future.
The Company’s cash position grew to $9M as at September 30th, as a result of the net proceeds of a successful $4.1 million overnight marketed public offering in September. The cash position enhances Martello’s capacity to accelerate revenue growth by targeting and acquiring strategic assets, and investing in operations including sales and marketing, and research and development.
Conference Call Details
Martello will host a conference call and audio webcast with John Proctor, President & CEO and Erin Crowe, CFO at 8:00 AM Eastern Time on November 20, 2019.
Canada/USA Toll Free: 1-800-319-4610
International Toll: +1-604-638-5340
Callers should dial in 5 – 10 min prior to the scheduled start time and simply ask to join the Martello call.
An audio recording of the call will be available on November 20, 2019 at https://martellotech.investorroom.com/quarterly-results.
Martello will host an Investor Day in Toronto, Canada on Wednesday, December 4th. The event will be hosted by Martello Co-Chairman Bruce Linton. Interested investors and analysts can register to attend on Martello’s website.
During the second quarter of fiscal 2020 Martello achieved the following milestones:
- In September 2019, the Company issued 15,333,332 shares at $0.30, for gross proceeds of $4,600,000 through an overnight marketed public offering with a syndicate of underwriters led by Canaccord Genuity Corp, and including CIBC World Markets Inc. and PI Financial Corp.
- In September 2019, Martello announced that its unified communications performance analytics software is now monitoring more than one million users in Mitel’s network operations center (NOC) as part of a managed service offering.
- In July 2019, Martello announced that it has teamed with Paessler AG to offer a service assurance solution to large enterprises and managed service providers (MSPs).
Subsequent to September 30, 2019, Martello achieved the following milestones:
- In November 2019, Martello announced a strategic partnership with WatchGuard® Technologies, Inc., a global leader in advanced network security solutions, to team Martello’s SD-WAN solution with WatchGuard’s security products in a bundled offering delivering a secure, high-performance network infrastructure that is unobtrusive and cost-effective to deploy.
- In November 2019, Martello joined the Microsoft Co-sell program, which provides opportunities to sell Martello’s iQ product together with Microsoft, by working to develop the market and enable sales.
- In October 2019, Martello announced that Australian cyber security solutions and network performance reseller SecureServ had joined its Partner Alliance.
Revenue grew 13% between Q2 FY2020 and Q2 FY2019, excluding Savision. This includes organic growth of 34% from the Mitel channel. Strong recurring revenue growth from this channel was driven by an increase in royalties from Mitel resulting from the amendment to the Company’s agreement with Mitel in Q4 FY2019, and an uptick in the number of users subscribed to Mitel’s premium software assurance program.
Sales and Gross Margin
* To facilitate comparison with the three months ended September 30, 2018, the Remaining balance represents the results of the Company’s operations in Q2 FY20 without contributions from Savision (acquired in November 2018). The analysis compares the Remaining balance to the comparable period in FY19.
* To facilitate comparison with the six months ended September 30, 2018, the Remaining balance represents the results of the Company’s operations in YTD FY20 without contributions from Savision (acquired in November 2018). The analysis compares the Remaining balance to the comparable period in FY19.
SD-WAN and link balancing sales declined 32% in the three months ended September 30, 2019, and 21% in the six months ended September 30, 2019. The decrease is mainly due to lower one-time hardware and licensing revenue, which was partially offset by an increase in recurring maintenance and support revenue quarter-over-quarter. This reflects Martello’s current focus on generating recurring revenue through the development of service optimization solutions. We expect that these solutions will address the mid-tier market’s demand for stellar performance of cloud-deployed UC and real-time enterprise systems like Office 365.
MRR grew 79% to $957,110 in Q2 FY2020 compared to $535,209 for the same period in FY2019. The growth in MRR is due to the ITOA software MRR of $282,724 for Q2 FY2020 (nil in Q2 FY2019 due to the timing of the Savision acquisition) and an increase in UC Performance Analytics MRR of $143,325.
Customer and Partner Growth
Martello generates revenue from both new business and the renewal of existing software and maintenance subscriptions. In the second quarter of FY2020, the Company continued to focus on generating recurring, subscription-based deals and renewals through both direct sales and channels. In the ITOA line of business, the majority of the new business in the quarter was subscription-based and recurring, with contracts between one and three years.
Martello earned business this quarter from customers including University of Newcastle, City of Ottawa, Heidelberg Cement and University of Massachusetts Boston. Longtime partner and early adopter of Martello’s UC analytics software 4Sight Communications said in September that it had improved its remote fix rate to 98% after standardizing on Mitel Performance Analytics (MPA), the software developed by Martello.
Martello continued to see global sales growth in the second quarter of FY2020, with 56% of revenues derived outside of Canada. In Q2 FY2020, the Company signed new resellers in Indonesia, Australia, Egypt, Kingdom of Saudi Arabia and France.
Martello’s global growth is also driven by strategic partnerships. In September 2019, the Company announced that it has teamed with Paessler AG to offer a service assurance solution to large enterprises and managed service providers (MSPs). Paessler is the German headquartered network monitoring specialist with more than 200,000 customers worldwide. During Q2 FY2020, Martello’s UC Analytics software reached a milestone of 1 million users under monitoring at Mitel’s network operations center (NOC) , demonstrating its value as a service assurance solution for managed service providers.
* To facilitate comparison with fiscal year 2019, the Remaining Balance represents the results of the Company’s operations for Q2 and YTD FY2020 without contributions from Savision (acquired in November 2018) operations. The analysis compares the Remaining balance to the comparable period in FY2019.
For the three months ended September 30, 2019, operating expenses increased by $1,603,558 compared to the same period in FY2019. Excluding Savision, the increase was $430,178. For the six months ended September 30, 2019, operating expenses increased by $3,080,857 compared to the same period in FY2019. Excluding Savision, the increase was $695,128.
For more details on Q2 FY2020 and YTD FY2020 expenses, please see Management’s Discussion and Analysis (MD&A).
EBITDA and Adjusted EBITDA Summary (Non-IFRS financial measures)
Note: Please see Management’s Discussion and Analysis (MD&A) for the three and six month periods ending September 30, 2019 and 2018 for a complete explanation of “EBITDA” and “Adjusted EBITDA”.
Adjusted EBITDA in the three and six months ended September 30, 2019 was a loss of $985,457 and $1,483,871, compared to a loss of $343,298 and $592,329 in the same period ended September 30, 2018.
Cashflow and Capital Resources Summary
The Company’s objectives in managing its liquidity and capital structure are to generate sufficient cash to fund the Company’s operating objectives, including organic growth and growth through acquisitions.
For the foreseeable future, the Company expects to continue financing its operations through raising equity capital and long-term debt to strengthen its financial position and to provide sufficient cash reserves for growth and development of the business. In addition, the Company is focused on further development of its recurring revenue stream, which will generate cashflow from operations, while maintaining strong investments in research and development to support the development of new service optimization solutions.
Cash and cash equivalents, including restricted cash, totaled $9,007,386 at September 30, 2019 compared to $6,649,302 at March 31, 2019. The following table sets out the working capital position of the Company as at September 30, 2019 and March 31, 2019.
The increase in working capital in the first six months of FY2020 was mainly due to cash from the overnight marketed public offering in September 2019, partially offset by the inclusion of the current portion of the lease obligation due to IFRS 16, an increase in the current portion of long-term debt, as well as losses from operations and repayment of the RBC term loan.
Balance Sheet – Highlights
The financial statements, notes and Management Discussion and Analysis (“MD&A”) are available under the Company’s profile on SEDAR at www.sedar.com, and on Martello’s website at www.martellotech.com. The financial statements include the wholly-owned subsidiaries of Martello. All amounts are reported in Canadian dollars.
One institutional investment firm has initiated research coverage of Martello. The Company does not endorse the research of third party institutions.
- Microsoft Q1 FY2020 Financial Results (23 October 2019)
- Gartner: Network Design Best Practices for Office 365 (22 March 2018)
About Martello Technologies Group
Martello Technologies Group Inc. (TSXV: MTLO) is a technology company that provides clarity and control of complex IT infrastructures. The company develops products and solutions that monitor, manage and optimize the performance of real-time applications on networks, while giving IT teams and service providers control and visibility of their entire IT infrastructure. Martello’s products include SD-WAN technology, network performance management software, and IT analytics software. Martello Technologies Group is a public company headquartered in Ottawa, Canada with offices in Montreal, Amsterdam, Paris, Dallas and New York. Learn more at http://www.martellotech.com
This press release does not constitute an offer of the securities of the Company for sale in the United States. The securities of the Company have not been registered under the United States Securities Act of 1933, (the “1933 Act”) as amended, and may not be offered or sold within the United States absent registration or an exemption from registration under the 1933 Act.
This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful.
Neither the TSXV nor its Regulation Services Provider (as that term is defined in the policies of the TSXV) accepts responsibility for the adequacy or accuracy of this news release.
Cautionary Note Regarding Forward-Looking Statements
The forward-looking statements contained in this news release are made as of the date of this news release. Except as required by law, the Company disclaims any intention and assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law. Additionally, the Company undertakes no obligation to comment on the expectations of, or statements made, by third parties in respect of the matters discussed above.
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