Magnet Forensics Inc.

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.

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.

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.