Thank you for standing by. This is the conference operator. Welcome to the Martello Technologies Group first quarter fiscal 2023 investor conference call. Today's call will provide information and commentary on financial results for the three months ended June 30, 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 investor@martellotech.com. First, here are a couple of housekeeping notices. All participants are in listen-only mode for the duration of the call. After the presentation, there'll be an opportunity for analysts to ask questions. To join the question queue, you may press Star then One on your telephone keypad.
Should you need assistance during the conference call, you may signal an operator by pressing Star and Zero. 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 CEO, John Proctor.
Good morning, everyone, and thank you for joining us. I hope you and your families are all keeping well, and I'm joined this morning by Jim Clark, Martello's CFO. Before turning to my recap of the quarter, I wanted to briefly reiterate core components of our growth strategy, discuss our tightened focus and cost optimization plan, and the insider-led debt financing we announced last evening in our Q1 Financial 2023 results press release. We are pleased so far with the uptake on our flagship Vantage DX Modern Workplace optimization software. Microsoft's Modern Workplace solutions are focused on driving a seamless communications and collaboration experience for employees, whether they are at home or the office. Vantage DX has been developed to address this ecosystem, which includes the 270 million users of Microsoft Teams. It's a broader subset of.
It's a subset of the broader digital experience monitoring market that allows us to specialize deeply. Vantage DX is the Microsoft-recommended optimization solution for monitoring the Microsoft Teams user experience, and we see a very strong opportunity for Martello in this specific segment of the market. Members of our board are just as excited about the potential, so much so that our Co-Chairman, Terry Matthews, has provided new debt financing totaling $1.5 million aligned with the terms of the current debt, but subordinate to it. This gives us an excellent runway to grow our Vantage DX business to provide positive cash flow without diluting our shareholder base. We are concentrating much of our resources on building our Vantage DX pipeline and accelerating our sales cycles from lead to bookings to revenue through strategic sales motions in direct and indirect channels.
When the quarter concluded, we had 352,000 users on Vantage DX, which is a 60% increase over last quarter and close to 1 million users under trial. With the help of Jim, we have begun to optimize our operational KPIs to focus our entire operation on filling our pipe and shortening our trial periods, which are longer than we want them to be. This tightened focus has also allowed us to examine our overall business and optimize our cost structure. As a result, we have been able to reduce our overall expenses by about 20%, which will really begin to show up in the third quarter of fiscal 2023. We expect that the operational focus we are developing will get us to profitability faster.
The competitive differentiator we have created in monitoring Microsoft Teams voice performance has allowed us to develop new sales channels for Vantage DX through partnerships. Last quarter, we announced Orange Business Services, a large global systems integrator, and Microsoft Operator Connect partner with significant operations in Europe. This quarter, we announced Datacom, a Microsoft partner focused on Asia Pacific, with a deal already closed. The pipeline continues to expand with both of these partners. Our Microsoft partnership continues to be a valuable pillar in our Vantage DX growth strategy. We have a significant pipeline of Microsoft co-sell deals, which allows us to leverage Microsoft resources on these accounts to get to the right people faster than we otherwise could. Finally, I want to highlight the three-year renewal we signed with Mitel in Q1 for MPA.
MPA is important for Mitel solutions, and it forms a solid CAD 8 million annual recurring revenue base from which we can expand. We are focused on driving more adoption of MPA through Mitel's communication and collaboration solutions, developing support for additional Mitel platforms, and seeking additional opportunities with Vantage DX cross-selling within the Mitel relationship. I'll speak more about our focus and outlook shortly after Jim provides a more detailed review of our financial performance in the first quarter. Over to you, Jim.
Thanks, John. I will review the Q1 fiscal 2023 financials in some depth in a few moments. I wanna highlight for our investors the tightened focus we have adopted subsequent to quarter end in order to drive customer and shareholder value. John and I will speak about this in more detail in today's call. Onto the financials for quarter one. As always, we have posted our financial results and the press release to SEDAR, where you can review our financials in more detail if you wish.
Revenues were CAD 4.2 million, representing a 5% decrease compared to CAD 4.4 million in Q1 of fiscal 2022. The decrease is primarily related to unfavorable currency conversion and a slight decline in legacy maintenance and one-time Mitel product revenue, partially offset by an increase in our software subscriptions. On a constant currency basis, revenue decreased by 2% year-over-year. The recent dynamics in global currencies, coupled with Martello's shifting revenue mix to the modern workplace optimization, highlights the importance of continual assessment of options to mitigate. Gross margin was 89% in Q1 of fiscal 2023, compared to 90% in the same period of fiscal 2022. The slight decrease is attributable to higher hosting costs associated with the cloud migration of the product suite.
The recurring portion of total revenue was 99%, compared to 97% in the same period of fiscal 2022. The increase was attributable to the growing mix of software license subscriptions with lower sales of hardware associated with the Mitel business line in the prior year. As Martello's CFO, a few of my key focus areas are financial and business controls, driving value to the front of the business, and simplicity. Let me share an example of simplicity. Based on input from external and internal stakeholders and the market-aligned evolution of Martello's products and services, Martello is now reporting under two lines of business. First line of business is modern workplace optimization. This is Martello's dominant business line, representing 58% of total revenues in Q1 of fiscal 2023. This includes revenue from our flagship product, Vantage DX, and associated software focused on Microsoft.
The second line of business is Mitel Performance Analytics, which represented 42% of revenues. In Q1 of fiscal 2023, monthly recurring revenue was CAD 1.38 million compared to CAD 1.43 million, representing a 4% decrease. This is primarily attributable to unfavorable currency conversion, coupled with marginal declines in Mitel Performance Analytics and support and maintenance on legacy products. On a constant currency basis, monthly recurring revenue was relatively flat year-over-year. As a reminder, monthly recurring revenue is a non-IFRS measure representing average monthly recurring revenues earned in a fiscal quarter. There were 252,000 Microsoft users on the Vantage DX platform as of June 30, 2022. That's a sequential 60% increase compared to Q4 of fiscal 2022.
The total number of Microsoft users on all Martello products totaled 2.66 million, compared to 2.76 million in Q1 of fiscal 2022. The company is focused on driving Microsoft user growth through sales of Vantage DX through direct sales activities and channels such as Microsoft and Operator Connect partners. This includes upgrading legacy monitoring customers and converting trials to paid subscriptions. Operating expenses decreased 12% year-over-year to CAD 5 million in Q1 of fiscal 2023, versus CAD 5.7 million in Q1 of fiscal 2022. The decrease is primarily attributable to lower headcounts and vendor-related costs and other cost optimization actions. As we announced recently, the cost optimization measures will fully impact operating expenses in Q3 of this year, resulting in a 20% reduction.
The net loss of CAD 1.2 million represents a 47% improvement compared to the net loss of CAD 2.2 million in Q1 of fiscal 2022. The improvement is attributable to the items explained above, plus lower income taxes. Adjusted EBITDA loss, which is a non-IFRS measure, improved by 32% to CAD 0.7 million in Q1 fiscal 2023, compared to a loss of CAD 1 million in the prior year. The improvement in adjusted EBITDA performance was related to lower operating expenses, as discussed above. The company's cash and short-term investments balance was CAD 5.7 million at June 30, 2022, compared to CAD 4.9 million at March 31, 2022. Subsequent to quarter end and announced last evening, the company closed an additional CAD 2 million funding via an insider-led subordinated loan.
Net working capital was a negative balance of CAD 7.2 million at June thirtieth, 2022, compared to CAD 2.3 million at March thirty-first, 2022. This decrease in working capital is attributed to the CAD 10.2 million Vistara loan being reclassed as current liability based on IFRS. The loan matures in May 2023. As part of management's tightened focus on related cost optimization measures, we are enhancing the business management constructs, metrics, and discipline that will support our accelerated path to positive cash flow and profitability. I'll now hand it back to John to close with his perspective on Martello's focus and outlook. John.
Thanks, Jim. As I mentioned earlier, we continue to be focused squarely on the opportunity to optimize Microsoft Teams and Microsoft 365 user experience, working closely with Microsoft and key partners like Orange and Datacom. We'll create efficiencies with more disciplined management of the core KPIs that measure time to revenue with the goal of accelerating this cycle. The board and management team are excited about the demand for Vantage DX coming from our Microsoft relationship. We are working with Microsoft on co-selling activity every day now, and our pipeline is growing from this activity, as well as the sales motions of Orange and Datacom. Working with Jim and the rest of the organization, this emerging demand has allowed us to focus operationally on the key drivers to success, mainly filling the pipeline and accelerating our time to revenue cycles.
By doing this, we've been able to redeploy resources and optimize our cost to execute. This was positioned as well to generate sustained cash flow quickly as we gain sales momentum through our partners Vantage DX. The Mitel MPA solution remains a solid long-term recurring revenue base from which we can build sustained growth in our Vantage DX solution. Our deepening partnership with Microsoft is an important differentiator and asset from Martello, and one we will continue to nurture and develop. Jim and I are now here to answer your questions, and operator, if you'd please facilitate the Q&A part of this call.
Thank you. We will now begin the question and answer session. Investors and analysts who wish to join the question queue may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question from the queue, please press star then two. Once again, anyone on the conference call who wishes to ask a question may press star then one at this time. Our first question comes from Christian Sgro of Eight Capital. Please go ahead.
Hi, good morning, and thanks for taking my questions. First, I wanted to ask on the churn in the legacy product segments. Could you talk about the percent of revenue that's related to legacy products at this point in time? If you expect, you know, that to churn, and maybe at what pace through the next couple of quarters?
Sure, Christian, it's Jim here. There's a couple elements to this, but to start with, our legacy products make up around 11% of our current revenue. The churn that we speak about, I would look at it in two buckets. One is the legacy products themselves, and one is with one of our clients, SoftwareOne, the business itself is fading out, that was a decision that they made in terms of how they thought our product fit with their portfolio. I think there's two components to that, but I hope that answers your question.
It does. That's helpful color. I'll move on to the partner channel. It sounds like you're seeing some early success from some of the newer partners that you've onboarded. Just your comments on the go-to-market with these partners and any early contributions in the quarter that we can look out for.
Well, I'll take, and obviously the most important partner for us is Microsoft. What is nice in the last, I'd say just six weeks, we've seen Microsoft bringing opportunities to us. Why that's important is prior to that, we've got Microsoft co-sell opportunities, but these are opportunities we have found, and then brought Microsoft into the conversation to help us push it along. What we're now seeing with Microsoft is they're bringing opportunities to us, and we're tracking those specifically because as those grow, that could become quite dominant. This is also part of us navigating the giant Microsoft ecosystem. It's taken time, you know, months for us to get there. Once you get that going, you know, once you get the Microsoft machine churning, it's going.
Orange, same sort of thing, huge machine. You know, we've got through that. You know, we've got some large deals with those guys in the pipe, working through. They bid us on a couple of large opportunities, which is great. Again, it's really sort of, you know, moving those pieces along on the big machine. Datacom are particularly interesting as well, mainly because their position, they are the largest homegrown IT company in Australasia, over $1 billion in revenue. What they wanna do is also wrap not only services around it, but their ability to install. So they take quite a lot of load off us. If I look at sort of Microsoft, that's very much a sell through.
There's expectations that we'll support all the way through the deal and we'll help do the install. Datacom wanna take all that on and wrap basically as a value add to their, what their services are offering. That one particularly, and as I said, we've already closed our first deal with Datacom. I think that one will be, you know, a great one to watch. For me, the giant partner for us is Microsoft, and we're just starting to see that pick up and, you know, just alone in the last six weeks.
That's all helpful. I'll ask one more question before passing the line. Just on the commentary around accelerating the sales cycles, I was wondering what strategies you might have there to accelerate, maybe the time to value or customer signing, and then is a big part of that converting your trial users to paid customers? How do those conversations go and how do you work through those relationships?
Yeah. I mean, the bottom line is the product went GA in December, so we've learned an awful lot. I think, you know, we said before on these calls, you know, the first couple of installs were sort of January, February, you know, had the usual sort of expected challenges, and it was, you know, everyone from, you know, myself, everyone to, you know, down to R&D, you know, solving problems with a client as quickly as we could. You know, if it meant working overnight, we did that and got it solved because we learned things. Having learned those lessons, it means we've got a better handle on how install works, et cetera, et cetera, things to do and our ability to scale as well as we took on some of these bigger clients.
Added on top of that now is, you know, what we're also seeing is, you know, what clients are starting to really expect out of the box. You know, we've got some, you know, new pieces coming. For example, at the moment, once we install the product, we then go back to the client, we help them set up some of the dashboards they need. In September, that will come out of the box. That again goes to your point about, you know, time to value.
That means as soon as we install the product, in other words, install the product, get some credentials in it, they will have dashboards straightaway, as opposed to now, you know, at the moment it takes us, you know, a few days to get those dashboards spun up based on what we need to know within the client's environment. Again, that time to value will accelerate. There's a focus like that, and then there's more automation as we go through in that respect. The other nice thing is being integrated with Microsoft, getting sort of Microsoft's input on where they see the product should go. One of those key things is, and we talked about Operator Connect.
I don't know if you saw the Microsoft release that came out, I think it was about three weeks ago, four weeks ago, that talked about where Teams is. One thing they mentioned on there is they've got 12 million users now who are connecting Teams to the PSTN network. That's and I think I've mentioned this to you specifically and I think as well to Daniel, you know, this is why we did the session border controller route, and we've made our connections there. Microsoft want to dominate that space, and I think this is where, you know, we have our unique differentiator because we alone of all of the people in this space can see both the internet, the network, and the phone side.
As Microsoft tries to, you know, continue to move and dominate even with this 12 million Teams users, that number's gonna grow, we become more and more important to that side. If you look at the Operator Connect part, I think this is, you know, as they've signed more and more companies, you know, Orange is already a Operator Connect partner. As they sign more, I think, you know, a quarter ago it was 24, now it's already 36 Operator Connect partners, those guys are gonna want us to help troubleshoot that environment. Again, just to reinforce, you know, we don't optimize Office 365, we optimize the environment Office 365 runs in including Teams. As you make that environment more complex, the more you need our product to help you troubleshoot.
That's all for now, John. Thanks for taking my questions.
Once again, if you have a question, please press star then one. Our next question comes from Daniel Rosenberg of Paradigm Capital. Please go ahead.
Hi, good morning, John and Jim. My first question was just around the dialogue you're having with potential customers. I was wondering if there's any shift in conversation. We've seen some companies do hiring freezes and concerns around recessionary spending. Has there been any change in what you're seeing on the front line?
Yeah. I think the easiest way to say is, you know, they've got people coming, you know, they're all looking at this modern workplace, what does it mean? People going back to the office, people going at home. I think, I mean, we've seen Apple's announcement and, you know, all those people saying, "We want people back in the office 2-3 days a week." Generally that's, you have that aspect and particularly sort of, you know, with Microsoft, you know, they've got, you know, what does that mean in that space for us? It means, you know, with that hybrid work environment, you've gotta understand, you know, give the same level of quality of service, whether the person is at home or in the office. That's where we fit.
On the other side of that which is, you know, we watch the economy like everybody else does. We're watching, you know, potential recession, you know. I think I've said this before, right? We have to do defensive and offensive measures. The defensive was cost cutting, right? It's making sure we accelerate our time to cash flow positive, right? That's important and getting to, you know, stepping through EBITDA positive on the way there. We're accelerating that. But the offensive is, you know, doubling down in the Office 365 space, right? Being more effective and more focused there. You know, making you know, we get the legacy churn, right? But that's not where the growth is gonna come, right? You know, we can't fix legacy churn. Those products are aged. They're used in the environment.
It also comes into, you know, budget challenges, right? When we hit sort of the procurement conversation, procurement goes, "Oh, well, you know, we're gonna have to..." There is a bit of a slowdown on procurement, which we're watching closely. Again, that's why we've done the defensive measures, right? To make sure that we are resilient to any slowdown in the pipeline because much as we can accelerate, right, the time to value, if procurement then goes, "Yeah, well, we're gonna have to slow this down to the next, you know, next financial quarter, or we want to buy this next financial year," you know, we have a hard time working with that. We can go in and sort of offer, you know, potentially offer discounts, but only where they make business sense overall to us.
Okay, thanks for that. On the user front, is there anything one-time occurring that happened in the quarter or kind of, you know, previously you guys looked at CAD 3.5 million as a target. Is that still on the table, or do you think it might be taking a longer time to achieve those targets?
Well, the one time change, Daniel, that I touched on was with SoftwareOne. With SoftwareOne phasing out, you know, we're gonna experience about a 400,000 user decline on that piece. Of course, we're scaling Vantage and we're offsetting a good chunk of that. We obviously, as we scale the business, given where we are with our life cycle with Vantage, I'm sure everyone can appreciate it's early days and we're getting phenomenal traction out there. But in terms of the one time, I would mention the SoftwareOne piece.
Yeah. Daniel, to that, you know, SoftwareOne were a client or partner that came with the GSX acquisition. You know, they're on the legacy product. By nature it's they wanna move to Vantage, but they can't. Again, I think it goes back to your previous question. We'd love them to move faster to Vantage. They're interested. You know, they're looking at the demonstrations. They're trying to see where it fits. That will not sort of overlap with the AVEVA off board of the legacy product. That's kind of the challenge for us. You know, again, it's for me, the 60% growth in Vantage is key, right? We see the uptake on Vantage. We are focusing our resources there.
I'm not focusing on the legacy product that SoftwareOne is churning out, because the revenue growth and the overall growth of Martello is tied to Vantage.
On the cost side of the equation, just as you approach Q3, should we expect the cost reductions to be kind of linear as you hunt towards CAD 2 million annualized?
The cost reductions, it's a great question on linear. The goal, as John touched on it, is the cost reductions are a one-time action that was taken to get us a little more right aligned with performing financially at a level that's expected. The truth is, we have plans where the growth is gonna have us grow our cost base, you know, probably in a linear fashion.
The scalability of the business, if you think about the software industry, I would expect the costs in certain areas to actually go down as a percentage of revenue dollars, over time, because we're still in that very early stage of standing up the software and making significant investments and making sure that it's understood, it's marketed well, and that we've got a great, a great process for trials and delivery. I would say that we're gonna improve that over time with the volume of users and customers coming on board.
In terms of the Q2 versus Q3, when you expect to have the full impact seen, is that kind of a linear function or it's just mostly gonna come in Q3 or how should we expect to see that?
I'm sorry. I'll tell you. In terms of the Q2 versus Q3, I would say there's gonna be a bigger impact in Q3 simply because the cost that we are reducing will be phasing out. They're not falling off in a kind of a step fashion. They're gonna be phased out naturally. Q3 will have a much bigger impact than Q2.
Lastly, just on the, you know, the overall strategy here, you're trying to accelerate growth, control costs, with the goal of profitability. Is there a target or timeline or aspiration that you're shooting for, when we could expect to be a bit positive or cash flow positive?
Yeah, you know, for all the right reasons, we avoid forward guidance. I would say what we're doing right now is, you know, there's a philosophy here of continuous improvement. I think that's an important foundational tent peg for us to consider. This is about continuous improvement. The tent pegs are in place in many areas. As we scale the business, we're looking at it from a continuous improvement lens. Therefore, we're able to project out into the future, what we're gonna be able to achieve both with our customers and financials and operational with our product. At this time, I'm gonna avoid giving any forward guidance on that. Rest assured we have a plan to achieve that.
Maybe I'll sneak just one more in here. With the revenue trajectory as it is, you know, when do you think the growth business will overshadow, you know, some of the legacy declines we're seeing? I understand that you guys are facing some effects here, but setting that aside, you know, when should we see growth overshadow the legacy lines?
If I look at growth from a percentage perspective, I think the growth is outstripping on a percentage basis already in the legacy business. I think it's the scaling of the growth so that the volumes are at a level where they can offset in its entirety the volume declines. Again, I think at this time, I'm probably gonna defer from answering that question. What I'll say is, we have a plan and we're very confident that we're gonna be in a position of net growth, you know, in the coming quarters.
All right. Thanks for taking my questions.
Thanks, Daniel.
This concludes the question and answer session. I would like to turn the conference back over to John Proctor for any closing remarks.
Thank you. On behalf of all of us, thank you for your continued interest in Martello. As mentioned earlier, you can register to receive our upcoming newsletter in the investor section of our website. The recording of today's call is available on our website later today. Also, if you have any questions on today's call, you can reach out to investor relations anytime by emailing investor@martellotech.com. Thank you to all and speak to you all soon. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.