Magnet Forensics Inc.

Q1 2021 Earnings Conference Call

5/13/2021

spk03: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Magnet Forensics 2021 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided for you at that time for questions. If anyone has any difficulty hearing the conference, You may press star zero for operator assistance at any time. Listeners are reminded the portions of today's discussion contains forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as plans, targets, expects, estimates, forecasts, strategy, intents, beliefs, or variation of such words and phrases. In addition, any statements that refer to expectations, intentions, projections, or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts, but instead represent management's current expectations. estimates and projections regarding future investment events or circumstances. Any such statements are subject to risk and uncertainties that could cause actual results to differ materially from those projected in the forward-looking information. For more information on the company's risk and uncertainties related to the forward-looking information, Please refer to the factors described in the Summary of Factors Affecting Our Performance section of the company's MD&A for the three months ended March 31, 2021 and in the Risk Factors section of the company's Supplemented Prep Prospectors dated April 28, 2021 posted on the CDAR. Although the company has attempted to identify important risk factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other risk factors not presently known to the company or that the company presently believes are not material that could also cause actual results or future events to differ materially from those expressed in such forward-looking information. No forward-looking statement is a guarantee of future results. Accordingly, you should not place undue reliance on forward-looking information, which speaks only as of the date made. The forward-looking information referenced in today's discussion represents the company's expectations as of the date hereof, and is subject to change after such date without obligation to update any forward-looking information. except as required under applicable securities laws. This morning's call is being recorded on Thursday, May 13th, 2021 at 8 o'clock a.m. Eastern Time. I would now like to turn the call over to Mr. Adam Belcher, Chief Executive Officer of Magnet Forensics. Please go ahead, sir.
spk01: Good morning, and thank you for joining us today on our inaugural earnings call as a public company. This morning, we released our 2021 first quarter results, which you can find on our website at magnetforensics.com. Based on the quick turnaround from the IPO Roadshow and the disclosure we provided at that time, these results should be familiar. In terms of the highlights, revenue was up 25% to $14.7 million. We ended Q1 with $44 million in ARR, which is a strong leading indicator of how the company is performing. Adjusted EBITDA was up 194% to $4.8 million, representing a margin of 33%. We delivered a number of new customer wins and expansions with existing customers that I will highlight in a moment. But to start this morning, given it's our first earnings call, I'll provide a high-level overview of our business. We are a market leader in the development of digital investigation software. Digital forensics is the science of acquiring, analyzing, and reporting on evidence from digital devices. We at Magnet Forensics are known for bringing together critical evidence across multiple device types, including computers, mobile phones, cloud services, and IoT devices, as well as hundreds of applications. These include chat messages, social media activity, pictures, and web browser histories. As you can imagine, the volume and complexity of data is growing exponentially, and criminals are using technology to invent new types of crime and creating new methods for committing traditional crimes. We provide public sector and private sector organizations with innovative tools to combat the crimes of today. In the public sector, our clients include all levels of law enforcement, defense and intelligence agencies, and other organizations that focus on regulatory and compliance enforcement. There is an urgent need for these agencies to leverage technology to take control of the data tsunami, get to the truth and the data in a timely and defendable fashion, and ensure justice can be achieved. In the private sector, our customers include global 1,000 companies and forensic service providers. Cyber attacks are happening more frequently with criminals looking to profit from access to confidential information. It's not a matter of if, but when an organization will be breached. In this market, our digital investigation solutions are used to investigate both internal and external threats quickly. and ultimately improve our customer security posture for the future. The market for digital investigation and intelligence solutions is large and growing and is estimated to reach $10 billion by 2026. The market is expected to continue to grow as we all become more digitally connected. Here at Magnet Forensics, we are in the early stages of this large opportunity. We've been growing at three to four times the market. driven by rapid product innovation, displacing legacy players, and creating new product categories. To this point, we have funded growth without outside capital. Going public provided us capital to support our growth, given the magnitude of the opportunity in front of us and the innovation we brought to market with our current offerings. We have built a business with attractive fundamentals, a unique product portfolio that is winning in the market, A market that is growing and evolving that requires consistent and continuous software upgrades to stay relevant as technology's role in commerce and all facets of life continues to increase. This creates an extremely sticky revenue model for us, which Angela will describe in a moment. But in short, our recurring revenue has grown to approximately 70% of total revenue. We grow primarily through the typical land and expand strategy of a software growth company. During Q1, we won new logos in both the public and private sector. In the public sector, we saw a new logo growth across the Americas, EMEA, and Asia Pacific regions. In the Americas, these wins included a U.S. state police agency, a U.S. municipal transport authority, U.S. city sheriff department, and a U.S. state fish and wildlife agency. In EMEA, one of the key new customers was a European border agency. And in Asia Pacific, the wins included a South Korean IP protection agency, a law enforcement crime lab in India, and an Australian corruption commission. On the private sector side, we saw new local growth across all regions. A few examples from the regions include In EMEA, we won a large German brand named Sportswear Manufacturer, a UK cybersecurity services company, and a Middle Eastern bank. In Asia Pacific, we added a large retail group, a large Japanese conglomerate, and an Indonesian digital payments technology company. In the Americas, we added a number of new customers from diverse industries, including a US pharmaceutical company, an electronics component distribution company, an oil field services company, a large outdoor recreation retailer, a transportation and logistics company, and a cybersecurity services company. These logo wins in the quarter are typical of our new deal velocity, strong, steady, and robust with a balance between the public and private sector markets. At the same time, We have cross-sell and up-sell opportunities that we consistently execute on with our existing customers. As customers are exposed to the benefits of our technology, the cadence of updates, and the new features we launch, they often add additional licenses, new modules, and adjacent products to their suite. These additions drive higher ARR for us. Let me give you a few examples of expansion in the quarter. On the public sector side, we had a Canadian federal government agency that adopted our automation orchestration product. We saw a large U.S. state police agency add more Axiom with cloud licenses, a European national police agency moved to a term-based site license, and a Japanese law enforcement agency increased their number of Axiom licenses. On the private sector front, a Canadian cybersecurity consulting company standardized on Axiom Cyber as their primary tool, a global oil and gas company converted their deployment from Axiom to Axiom Cyber, and a global consulting company doubled their Axiom Cyber term licenses and then added cloud modules onto their existing Axiom licenses. I'll stop there, and I promise that we won't list our wins on every quarterly call going forward. but doing so on this first call highlights the frequency and breadth across our markets and regions that we are growing in. It's both broad and deep. One of the primary reasons we're winning and expanding is our focus on innovation. Axiom Cyber is a great example. We launched it at the start of 2020. It was specifically designed for private sector cybersecurity teams. and purpose build for organizations that need to perform remote investigations. The examples I just referenced demonstrate the traction it's getting in the market as enterprise customers transition to it from our other offerings. These customers are able to extend their investigation capabilities beyond their corporate network and deal with the heightened security risks that accompany remote work and insecure home Wi-Fi networks. In the public sector, we are seeing continued success and growth in the pipeline across agencies of all sizes for our magnet digital investigation suite, which includes our case management, automation and orchestration, and web-based evidence review products. These solutions address the case intelligence and analytics market. Our anchor deal for this product with a globally recognized UK police agency is having a positive effect with other public safety agencies. We are seeing the sales pipeline building in countries like the US, UK, Sweden, Denmark, and Germany. We landed our first Magnet Digital Investigation Suite customers in both Canada and Asia during the quarter. And our momentum in the UK continues for this product with a win from one of the five largest UK law enforcement agencies. We bring a compelling value proposition to a large and growing market. It's resonating. We continue to attract new customers, expand with existing customers, and introduce new innovations into the market. Now, I'll turn it over to Angelo to describe the impact that is having on our business.
spk02: Thank you, Adam, and good morning, everyone. We earn revenue through the sale of digital investigation software products and services, which are comprised of software licenses, software maintenance and support, and professional and training services. Approximately 90% of our revenue comes from the sale of software licenses and support. And in the prior year, approximately 70% of our total revenue was recurring in nature. You will hear us talk about two forms of software licenses, perpetual and termed. We offer both types of licenses to our customers to ensure we are meeting the unique requirements for both our public and private sector accounts. Perpetual sales contain both a one-time license component and a recurring software maintenance and support component, which our customers are required to renew in order to receive the latest software and digital artifact updates. Term licenses allow customers to use our software for a defined term and also receive updates and support. Term licenses are similar to a conventional software subscription model and are recurring in nature. We have been actively selling term licenses to new and existing customers, and all our new products are generally available as term subscriptions only. This has allowed us to continue growing our recurring revenue base. Moving on to our financial results for the three months ended March 31st, 2021. Total revenue was $14.7 million, an increase of $2.9 million, or 25%, from the prior year's quarter. This total was comprised of software license revenue of $4.3 million, software maintenance and support revenue of $8.8 million, and professional services revenue of $1.6 million. Our performance this quarter aligns to what we would have expected in the first quarter of a fiscal year. Historically, we tend to see the second half of the fiscal year account for a larger proportion of annual revenue than the first half. As Adam mentioned, our efforts to grow our install base through cross and upsell is a strength of the business, which is demonstrated by the strong growth in software maintenance and support revenue. Now looking to our key metrics. Annual recurring revenue, or ARR, was $44.2 million, an increase of $14 million, or 46%, in the same period last year. This is an important measure as it provides insight into our ability to generate predictable earnings for future periods. Total recurring revenue was $11.8 million in the quarter, representing 81% of total revenue. This is an increase from 62% in the same quarter last year. The growth in recurring revenue is in line with our expectations as we see more customers adopt term licenses of our products. On a quarterly basis, this metric fluctuates depending on mix of term versus perpetual licenses. To provide context on how we are trending on a trailing 12-month basis, total recurring revenue represented 74% of total revenue for the 12-month ad in March 31st, as compared to 64% on the trailing 12-month basis at that same point last year. Gross margins for the quarter were 95%, a slight increase from 94% in the same period last year. Our gross margins have historically been at this level, reflecting consistency and efficiency in costs to deliver our current products and services. Adjusted EBITDA was $4.8 million, which represents a margin of 33%, an increase from 14% in the same period last year. This margin level not only is a result of higher Q1 revenues, it also reflects the pandemic environment that we are currently in, where spending related to travel, marketing events, and other employee-based expenses are lower due to global restrictions. In addition, we had some one-time costs related to the IPO that have been reflected in the calculations. Moving on to cash flow, historically we have demonstrated a track record of positive annual cash flows from operations, which has been a key factor in our growth. Cash flow varies quarter to quarter based on timing of payments, receipt of counts, receivable, etc. Looking at Q1, cash outflows from operations during the period was $4 million, compared to cash inflows of $1.1 million from the same period last year. Use of cash this quarter was primarily as a result of the payment of our fiscal 2020 tax liability in February, as well as certain expenses related to the IPO. We finished the quarter with $16.6 million in cash compared to $21.2 million in cash at the end of fiscal 2020. On an annual basis, we do expect to continue to generate positive cash flows from operations. Subsequent to March 31, 2021, we closed on our IPO, and net proceeds from the offering were $87.6 million, or $107.8 million in Canadian dollars. Finally, I'll close on guidance for the year. We expect revenue for fiscal 2021 in the range of $64.5 to $66.5 million, which represents an annual growth rate of approximately 26% to 30%. We expect adjusted EBITDA for fiscal 2021 in the range of 9.7 to 11.2 million, which represents between 15 to 17% adjusted margins on an annual basis. We feel this margin profile represents an appropriate balance between revenue growth and future investment in the business, together with continued focus on unit economics to ensure we're growing profitably. Thank you again. to everyone for participating in today's call. And with that, I'll pass it back to Adam.
spk01: Thanks, Angelo. We have an exciting opportunity in front of us. We have attracted high-quality customers that recognize the value of our products and their importance in bringing criminals to justice and protecting the innocent. Our recent IPO was simply another step in our journey to delivering on that mission in a large market, but more importantly, in a meaningful way. Our founder and CTO, Jad, the broader team and I are all very humbled by the response we've received to date in the market. We see tremendous amount of momentum and opportunity ahead of us. Our pipeline is growing very nicely across all regions as customers explore new ways to modernize their digital investigations and keep up with the tsunami of data they need to process and analyze. We are introducing new approaches and new ways to leverage technology that are unique in the market. Our customers recognize us as thought leaders as they look to transform how they are doing business. We recently released Magnet Review version 3.0 in March, and we are seeing great customer interest and have several pilots underway. Our training and certification program continues to grow. March was our best month ever. for our training all-access pass. We appreciate the trust that shareholders have shown in us, and I look forward to updating you further on our progress during our call in August. With that, I'll turn it back to the operator to open up the call for questions. Thank you.
spk03: Thank you. For a question and answer, if you would like to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, press star one to ask a question. Please stand by while we compile the Q&A roster. For our first question, it's from Doug Taylor with Canaccord Genuity. Your line is open.
spk00: Yeah, thank you. Good morning and congratulations on your first quarter as a public company. I'll start off by asking, you know, about... some things I observed during the user conference that's been happening over the last couple of weeks. You know, considerable attention being drawn to some of the new functionality on your Axiom 5.0 platform, specifically around the ability to look at Linux devices. Can you talk about how, you know, that capability or some of the other new features you've added, you know, is expected to manifest in terms of your growth? I mean, do you see this as displacing
spk01: other tools that your users might be using for that function to help you get wallet share or is it that it increases you know the addressable market or or expands the addressable market in some way yeah no thanks doug yeah i mean we we launched axiom 50 which was a you know it's our flagship product a major release of the year um we added a couple to your point a couple of capabilities one was around the ability to support uh linux digital artifacts. And that becomes especially important in incident response. You know, we're seeing in the market things like ransomware and malware. You know, there's Colonial Pipeline is a recent example in the news where they got hit with ransomware. So, you know, these these cyber attacks are happening all over the place. And certainly they impact customers that have Windows and Mac, but they also impact customers that are running Linux on their servers, whether it's databases, et cetera. So a lot of the kind of key assets of a company are sitting on Linux-based servers. So that capability in Axiom really helps basically extend the capability, but allows us to serve new use cases and ultimately new users within those enterprises that we don't have today. The other kind of big piece in the 5.0 release, the Axiom 5.0 release, was what we call Media Explorer. And that's exciting because that's an area that is part of a typical customer's workflow, dealing with pictures and videos and analyzing those and categorize them, etc., And there's been various point solutions that do that in the market today. So we've decided to add those capabilities as part of our core product to really capture some of those new users that are focused on specifically video and picture review and really streamline their workflow. So it really strengthens our platform. It gets us into new users that we wouldn't have today. And ultimately, you know, it just makes Axiom a lot more sticky with our law enforcement customers.
spk00: You touched on, you know, cyber attacks and the pipeline attack was obviously a recent eye-opening example. You know, Magnet, to my knowledge, is more often used as an investigation tool after the fact rather than proactive monitoring. But maybe you can talk about how when these types of events occur, how that impacts your conversations with your customers or your sales cycles or the conversations you're having with prospective customers. That would be helpful.
spk01: Yeah, sure. To your point, I think traditional forensics has been post-incident. So there is an attack or there is some kind of data breach. And with those breaches, one of the key things is how fast can you respond? What's the response time to some kind of incident? Because the reality is as good as any cybersecurity product is or a company's kind of security posture, we see every day, every week, that companies get breached regardless of how much they're spending. So these companies need the investigative capabilities when there is a data breach, and they need to be able to get to that incident quickly. So yes, forensics is a lot around the post-incident, but what we are also seeing is companies are getting more proactive. They're using something called, they're focused on things like threat hunting, so which is proactively looking for threats on their network, whether that's malware or other kind of malicious activity. So they're taking a proactive stance in a lot of cases and scanning computers to look for those specific pieces of malware. So, yeah, it's been interesting. We see a lot of use of our product on the post-incident, but we're seeing more progressive use agencies and enterprises, frankly, saying we also can use digital forensics in a proactive way, you know, just to really increase their security posture.
spk00: Okay, perhaps one last question for me. What would you say to investors that look at the 33% EBITDA margin you posted in Q1 and then the 15% to 17% guidance for the year? I mean, I think we understand that, you T&E for COVID. I mean, what are your assumptions around how and when that ramps up in the coming quarters? I'm sure we'd all love to know when restrictions are going to be lifted. And perhaps you can talk, can you talk about, you know, your experience in hiring right now in these markets to invest in your growth? I'll pass the line. Thank you.
spk01: Okay. Thanks, Doug. Yeah. I mean, maybe I'll start and then let Angelo jump in on the EBITDA stuff. Yeah. I mean, I think You know, a lot of the world is still under restrictions because of the pandemic. Our largest market, which is the U.S., you know, it's really nice to start seeing things loosen up there. And, you know, our teams are traveling and visiting customers, which, you know, becomes more important, especially as you're selling, you know, bigger, more complex solutions, higher value. So we're starting to see some of that. But the majority of the company is, you know, we're not doing events. We're not traveling. You know, we're not on planes, et cetera. There's no, you know, hotel expense, et cetera. So I suspect as the year rolls on, you know, we certainly won't be, you know, posting, I don't think, the EBITDA margins that we have in Q1. And, you know, I think we feel pretty good about, you know, the guidance that we've given, to your point, Doug, 15% to 17% on EBITDA margin for the year.
spk02: Yeah. Yeah. And just to jump on that. Yeah, certainly. Look, you know, we got a better result than we thought, quite frankly, in Q1. As Adam mentioned, marketing programs, travel entertainment are still very low. But a couple of things. Number one, we are starting to ramp. You know, we've hired about 30 employees in Q1 and our plans are north of 60 or 70 for the year. Second, you know, that Canadian dollar is going against us. And at this level, we're looking at probably one and a half million or so of extra expense that we're going to see coming through in terms of labor. As you know, Canadian dollars are certainly the bulk of what we pay our employees. And so, you know, you take some of those expenses offset by the savings and looking at a ramp, certainly in the second half of the year, as we continue to put more money in sales and marketing. R&D and use those proceeds of the IPO. We do expect our margins to lower in the second half.
spk01: Maybe just to tell on to what Angela said on the hiring. Yeah, I mean, you know, we're, you know, we have a lot of our staff here in Waterloo and Ottawa, and we're actually, excuse me, starting to hire in a couple of other sites in Canada, really to make sure that we can get the talent in to to scale the business. So we're very proactive on making sure that we can get the folks in to deliver on the product roadmap and ultimately grow the business. Thank you.
spk03: Again, if you would like to ask a question, press star one on your telephone. Mr. Belcher, those are all the questions we have this morning. Thank you for joining us today. The call is now completed. You may disconnect your lines.
Disclaimer

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