January 27, 2020

Bruce Linton Speculates Martello Technologies (CVE:MTLO) Poised to Grow at a Steady 15-30% Per Year

Midas Letter
Midas Letter
Bruce Linton Speculates Martello Technologies (CVE:MTLO) Poised to Grow at a Steady 15-30% Per Year

Bruce Linton, Chairman and Erin Crowe, CFO of Martello Technologies Group Inc (CVE:MTLO) join Midas Letter to explain the business of Martello, their recent news and what’s going to drive the business into 2020 and beyond. Bruce Linton describes his long pedigree in the technology space prior to his involvement in growing the largest cannabis corporation: Canopy Growth Corp (NYSE:CGC) (TSE:WEED) (FRA:11L1). Erin Crowe outlines the technology company’s road to profitability and their focus on bringing its EBITDA into the positive. The pair outline the company’s competitive advantage as well as current and future partnerships.

Midas Letter
Midas Letter
Bruce Linton Speculates Martello Technologies (CVE:MTLO) Poised to Grow at a Steady 15-30% Per Year

[stock_chart symbol=MTLO]


James West: I’m joined now by Erin Crowe, CFO, and Bruce Linton, Chairman, of Martello Technologies. Welcome. 

Bruce Linton: Good to be in Toronto, James.

James West: You bet. Bruce, we’re going to start with you. You’re the Chairman of Martello Technologies, yet your famous sort of reputation derives from cannabis as far as the world knows. But you’ve had a long pedigree in the technology space prior to your involvement in cannabis; tell us about that, please.

Bruce Linton: Well, you know, I was, in fact, CEO of Martello for the first four and a half, five years of Canopy, as well. And the reason I was is, I had this idea that if I had multiple things going at once, maybe one would work. It turned out both these worked. In four or five years, two full-time jobs as CEO was enough, and so we recruited in a gentleman, John Proctor, to become CEO. Erin is CFO, and I became Co-Chairman with the fellow that was my very first boss and mentor, a guy named Sir Terence Matthews. 

And so I’d say part of the reason Canopy worked pretty well was that we tried to think about scalability. And scalability in any business has to be, how do I make everything virtual, digital, you know? We had rules. You can’t buy a server. You can’t buy a PBX.

James West: So what is the business of Martello, exactly?

Bruce Linton: So, think of voice as an application. Voice used to be a phone; you’d pick it up and it has a little string attached, and that was kind of nice. But now what happens is, we’re using our PCs and we’re integrating everything, meaning, you’re doing Skype for Business or Zoom calls, you’ve got, you know, virtual phones. You’re trying to run everything over a network.

James West: Uploading video in real time to multiple…

Bruce Linton: Right. And when you’re on a phone call, or you’re having a collaboration across a whole bunch of jurisdictions, it starts being a bit choppy a lot of the times, a bit difficult. And the CIO has no clue what went wrong; you know that it’s not working. And so what Martello does is, we have about a million end points. So, think of it as devices, and about 5,000 customers around the globe, who all pay us about $0.20 per end point – maybe a bit more, depending on what we get – to monitor what’s going on, analyze what the problems are.

And increasingly, we’re buying companies that give us solutions to fix those problems. And so the effect is that all these applications of which voice is a very sensitive one, work way better, especially if you’re, say, United Nations, or Volkswagen, or a hotel chain.

James West: Okay…

Bruce Linton: The Sheraton in Toronto, there’s three of us traveling to go around and explain Martello, and we all stayed at the beautiful Sheraton City Centre; I think it shows that we’re not wasting shareholder money. And at about 7:45 this morning, their network failed if you happened to be trying to do a Zoom call. You got blown up. 

Do you care, when you stay at a hotel now for business, if they have nice fluffy pillows or you get a free coffee, or if their platform called the web works? Like, I can’t stay someplace that doesn’t actually have a highly functional, very reliable, great bandwidth platform.

James West: Okay, so you’ve got clients around the world. Is the company profitable at this point?

Erin Crowe: We are getting very close to profitability, very focused on bringing our EBITDA to positive at this point. Not quite there yet, but certainly a focus for the company as we move forward.

We’ve spent a lot of time over the last year growing our platform for scalability, and that’s really what our key – 

James West: Sure. And is the competitive landscape in this space very rich, deep?

Bruce Linton: Well, you know, so part of the way we started, this is a company that, you know, it’s becoming a success after focus for almost ten years. And what it started off was a science project that said, if Mitel is going to see people move from business phones that are physical and a PBX to virtual ones, what’s that mean?

And the science turned into a product, the product turned into a company, and now the company has this base. And we’ve done three acquisitions, and the reason we’re walking around explaining what we’re up to is, we think we can do more, that we can buy things at a couple times top line, and we trade at four or five, and that we’re really good, now, at taking things and making them software as a service. So that, call it $12 million sort of trailing revenue, a majority of that is 90-plus percent margin, and it’s on a recurring basis. So, by waking up on the first of January this year, we have $11.5 million or $12 million of revenue coming in.

And so what is interesting is, I think this one, the goal I have to stay as co-chairman is, when it gets to $100 million recurring revenue on an annualized basis, I will think that I’ve done all I can do to help make it go, and so now the push is to get there.

James West: Right. Okay, and so then, the importance of partnerships in this IT environment, in this world, is obviously significant. You’re a Microsoft co sell program partner. What other partnerships do you have out there that’s going to drive the business into 2020 and beyond?

Bruce Linton: And Erin will speak to it a bit as I rap, but you think of, you know, a lot of people aren’t aware that Microsoft is not dead, so it’s good that you brought that up, in that everything that’s Microsoft now is Office 365. You no longer need Larry the IT guy, you actually are logging in, getting access, and there’s no physical disk you’re loading; it’s a very different world, and that means the network has to work.

So we’re building up that. In the case of Mitel, when we started, they’re about attaching to their systems about half our revenue, a little bit more. But it’s not from Mitel, it’s from Mitel clients.

James West: Sure.

Bruce Linton: And, over time, we start competing with players that are in what they call this software-defined network. Just think of it as really smart virtual boxes that actually say, oh, voice traffic is a bit more intelligent and needed better bandwidth than, say, watching YouTube. And so you start to manage and measure and route based on what’s the purpose of the actual packet.

And so I think, you know, our auditors and things, we have sort of as a Tier One company, right? Who are our auditors?

Erin Crowe: Yep. Deloitte.

James West: Deloitte.

Bruce Linton: Who’s our debt with?

Erin Crowe: RBC.

Bruce Linton: Right. So this is a company that it’s designed to be a good, big company.

James West: Right. Okay, so the gross margins: 91.5 percent, that’s almost enough to make me fall out of my chair backwards, which would be unprofessional. [laughter] But, so how do you achieve such high margins and yet have to look yet to the future for profitability?

Erin Crowe: Well, I think the key on the high margins is really around the type of product we have, right? It’s a very – it’s software. Our hardware piece is a small part of the business, the cost is minimal. We’re looking at virtualizing that and moving towards that, so, low cost there as well. So when we look at that subscription software business, those actual costs of sales is not large, right? You look at a, you’ve got a reseller channel strategy which reduces your costs as well.

So I think some of these key pieces drive that high margin, and that really is, really again drives this, as Bruce talked about earlier, the scalability of the business, right? With those high margins, the dollars you add on are just dropping to the bottom line.

James West: Wow, that’s fantastic.

Bruce Linton: Yeah, and we built a company with an infrastructure that, having done three acquisitions, I thought we’d get on a pace of doing them a little quicker than we are. And so we probably have some capacity there that, with the next acquisition, it will load on the balance to make it so that that infrastructure actually then can be cash flow neutral or positive.

And would I have liked another acquisition done three or four months ago? Yeah, but sometimes they just take a little longer.

James West: So you use, strategically, do you hope to use the company’s equity for acquisition, or cash, a combination of both?

Bruce Linton: Yeah. You know, right now it trades on the TSX-V; it trades with pretty good volumes. So we’ll use some equity, but a lot of these private companies in Europe want some cash and some equity. I think after we get the next one or two done, then it’s going to be that our currency is more valuable. Maybe we can move up to the actual TSX.

James West: Yes.

Bruce Linton: And maybe we start to see some institutions buying in. Then, I could see it becoming an all-equity type of transaction, but I don’t want to do it at current prices. When it’s north of $1.00 you start seeing, or $2.00, that’s more equity, less cash.

James West: Right. So then, who else do you have to compete with? Like, what are the big players in the space?

Bruce Linton: So remember, our business is, first we monitor what’s going wrong. Then we analyze it and say why did it happen, and then we seek to optimize it with certain pieces of software and/or equipment that fix the problem. So in those three spaces, you have sort of three different competitors, and at the last one, you get paid a lot more, so you start dealing with competing with what’s their name – F5?

Erin Crowe: F5, yeah.

Bruce Linton: F5 is sort of a branded company that we just beat for a piece of business in Colombia. So in that space. In the first two spaces, you know, you might bump into the guys that just bought the shop down the road a couple of years ago…forgetting their name.

Erin Crowe: Solis?

Bruce Linton: Solis. They basically start looking, at a high level, what’s going on, but they don’t necessarily get embedded in the network the same way as we do. Because we’re already inside with Mitel, we see everything that’s happening in the network.

James West: I see. So it sounds like this is very specialized, and there’s no big household names that you have to compete with.

Bruce Linton: Solar Winds.

Erin Crowe: Oh, Solar Winds, yeah.

Bruce Linton: That’s more of the – so, you know, there are some players. But, you know, this is intended to be a very boring, very don’t go to cocktail parties and tell people about this; this is not as exciting as talking about pot. But when you got 5,000 clients, you’ve got a million end points, and what you’re doing is, you’re just adding more value to each of those clients while you add more clients, that’s a very steady business. It’s not designed to be, oh my God, it went 10 times bigger this year, or it goes to zero; no, no, no. This is supposed to grow sort of at 15 to 30 percent a year, and it’s supposed to keep growing and be steady, and that’s the kind of business we’re building.

James West: It sounds fascinating. Is there a risk that, or is there a hope that, a big behemoth like Microsoft or one of its subsidiaries, or a likewise major company comes in and buys you, or is there a risk that they just elbow you aside and say hey, they’ve built a great business; now we know how to do it, we’ll just compete with them, because we have deeper pockets?

Bruce Linton: Yeah, I think if I was running a PE firm, right, so Mitel got bought by a PE firm. I’d buy us, right? Why wouldn’t you? Ultimately, we’re a component of a solution that the direction everything is going to is more utilization of voice as an application across the internet than it is buying a phone with a string. And so I think that that could occur; it’s only a risk if what we don’t do is keep strength, and strength is cash flow positive. Strength is a business that shows earnings per share, and that’s where this thing needs to land as we go through this year.

James West: Okay. What are the big milestones you hope to hit in 2020 that are going to excite investors?

Erin Crowe: Yeah, so I think a couple of key milestones that we’re really targeting in the year, we’ve been very clear about acquisitions. I think completing an acquisition this year will be a big milestone for us. I think, as Bruce talked about, right, cash flow and EBITDA-positive is something we’re very focused on achieving. Not going to give a time frame at this point, but certainly near future.

Bruce Linton: Yeah. For me, I think when you list a company through a shell, you need to make sure that they know how to file their quarters, that they can do it in a timely fashion, because if you move to a bigger exchange, you have to take away days. And so I think this is a company that should do what we’re going to do, and then it should look at uplisting so it can actually be attractive, or a potential investment, for some of the institutional groups. They’re not going to buy a whole lot of it, but they can all buy a little bit, because now you’re on a real exchange at the higher level. You’re a steady business, you’re a Canadian business that’s international, so you’ve diversified geographies; and you know, do you make money with hotels? Yep. Do you make money with governments? Yep. Banks? Yep. And so this is, I could see if we finish the year well, it starts to have a component of institutional holdings. And so that – 

James West: Sure. What percentage is owned by insiders?

Bruce Linton: About 24 or 25 percent?

Erin Crowe: 24, yeah.

James West: Okay, and who’s the biggest shareholder?

Bruce Linton: Sir Terence Matthews.

James West: A well-respected Canadian industrialist, to say the least.

Bruce Linton: And he tends to be a person who owns a lot of stock and doesn’t sell much.

James West: Right. Long term investor. Perfect! All right, well, that’s a great update. We’re going to leave it there for now. Thank you both for joining me today.

Bruce Linton: Thank you, James.

Erin Crowe: Thank you.

Related Articles


Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.