Martello acquires European firm, prepares to divest money-losing business line

John Proctor
John Proctor is the CEO of Martello Technologies. File photo

In what CEO John Proctor calls a “mixture of offence and defence,” Kanata software firm Martello Technologies is making a major acquisition while at the same time divesting itself of a money-losing portion of its business.

Martello (TSX-V:MTLO), which makes products that help customers detect and troubleshoot problems in their high-speed communications networks, said this week it’s agreed to acquire Geneva-based GSX Participations in a cash-and-share deal worth $18.7 million. The transaction, which will see Martello pay $13.86 million in cash and hand over 22 million shares to GSX shareholders, is expected to close at the end of next month.

Martello has seen significant growth in monthly recurring revenues over the past several years from its subscription-based software that helps Mitel customers manage their communications networks. GSX provides similar services to users of Microsoft’s 365 suite of products such as Outlook, SharePoint and Microsoft Teams and currently has more than 400 customers around the world.

“That is such a huge market for us to go at,” says Proctor, adding networking monitoring software might be more valuable than ever during the current COVID-19 lockdown.

“Given our restrictions, it’s actually more valid, because as everyone moves to the cloud and Office 365, is the person in Westboro having the same Office 365 experience as the person in Orléans or the person in Stittsville? If the answer is no, then why?” 

The deal is expected to give a healthy boost to Martello’s top line. GSX generated revenues of 4.4 million euros ($6.6 million Cdn) in 2019, about 90 per cent of it from recurring monthly software subscriptions that now bring in about 300,000 euros ($450,000) a month. The company grew its Microsoft 365 sales channel by 34 per cent over the course of last year.

Martello, meanwhile, doubled its revenues in fiscal 2019 to more than $10 million and continues to grow at a healthy clip. The firm said in February its monthly recurring revenues had reached the $1-million mark by the end of the last calendar year.

Most of GSX’s 36-person team will eventually be integrated into Martello’s home base in Kanata. The Swiss entity’s R&D operations, which are based in France, will also be managed from Ottawa.

But while the network management side of Martello’s business has continued to thrive during the coronavirus pandemic, the resulting widespread economic downturn has dealt a blow to the company’s Elfiq network technology division that focuses on troubleshooting and fixing issues in cloud-based systems.

Created after Martello acquired Montreal’s Elfiq Networks in 2018, the network technology division suffered when many of its customers ​– particularly those in the hospitality industry ​– saw their revenues evaporate practically overnight in the wake of COVID-19. 

Following a strategic review, Martello has opted to divest itself of the Elfiq division’s IP and assets. Proctor says the company is already in talks with a potential buyer, adding the decision is part of a plan to make Martello “more focused on the areas where we see revenue coming.”

About 70 per cent of the division’s workforce has been temporarily laid off, but Proctor would not say how many of Martello’s roughly 100 overall employees would be affected by the decision to exit the troubleshooting side of its operations. 

“It wasn’t a profitable part of our business,” says Proctor. “We’re not going to keep burning cash there. Companies that will generally come out of COVID well are the ones who do a mixture of offence and defence.”

While the COVID-19 crisis has hit many tech enterprises hard as it wreaks havoc with the global economy, Proctor says his company’s solutions remain in high demand at a time when more employees than ever are working remotely.

“If you look at a CIO, one thing they’re struggling with is how do I understand my IT environment now when everybody is working from home?” he says. “Well, we have a solution for that. I don’t necessarily see too much of a slowdown.”

Martello shares had jumped more than 40 per cent to 30 cents in late-afternoon trading on the TSX Venture Exchange.