Magnet Forensics Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Magnet Forensics 2021 Second 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 the 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 that portions of today's discussion contain forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology, such as planned, target, expect, estimate, forecast, strategy, intent, believe, or variations of such words and phrases. In addition, any statement that refers to expectation, inventions, projections or other characterizations of future events or consensus contain forward-looking information. Statements containing forward-looking information are not a source of facts, but instead represent management's current expectations, estimates, and instructions regarding future investments, events, or consensus. Any such statements are subject to risk and uncertainties that could cause actual results to differ materially than those projected in the forward-looking information. For more information on the company risk and uncertainties related to the forward-looking information, please refer to the factors described in the summary of factors affecting our fulfillment section of the company's MD&A for the three months and the June 30, 2021, and in the risk factors section of the company supplemental debt prospectus dated April 28, 2021 posted on CDOR. 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 remain the other risk factors not technically known to the company or that the company presently believes are not material, but 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 and do reliance on forward-looking information which speaks only as of the date we met. The forward-looking information referenced in today's discussion represents the company's expectations as of the date hereof and are subject to change after such date without obligations to update any forward-looking information, except as required under applicable securities laws. The company reports its financial results under IFRS and all values are US dollars unless stated otherwise. This morning's call is being recorded on Tuesday August 10, 2021, at 8 o'clock a.m. Eastern Time. I would like to turn the call over to Mr. Adam Belcher, Chief Executive Officer of Magnet Forensics. Please go ahead, sir.

Thank you. Good morning, and thank you for joining us today. This morning, we released our 2021 second quarter results, which you can find on our website at magnetforensics.com. Q2 was a record quarter. with $16.5 million in revenue, up 42% from the same period last year. 81% of the revenue in the quarter was recurring in nature, which speaks to the consistency and predictability of our business model. We ended Q2 with ARR up 48% to $49.6 million, compared to the same period last year. ARR is one of the most important metrics that we monitor to evaluate how the company is performing. Adjusted EBITDA was $4.4 million, which is in line with the same period last year. However, as noted in past filings, last year's figure included $1.5 million of government support due to the pandemic. This momentum is being driven by our innovative digital investigation product suite, our effective go-to-market strategy, and a large and growing market. Public safety organizations... All right. experiencing a transformation in how criminals are using technology to invent new types of crime and are creating new methods for committing traditional crimes. Police, defense and intelligence agencies, private companies and forensic service providers are left to manage the challenges of digital crimes and cyber attacks, which continue to increase in frequency and scope. Here at Magnet Forensics, we've reimagined digital investigations and provide a unique and differentiated solution in the marketplace. We bring a complete, unified digital investigation platform to our customers and prospects. Our platform enables them to quickly identify critical evidence to their investigation. It's powered by the largest digital artifact library in the market and our built-in AI and analytics, which helps investigators uncover more evidence. Our product portfolio supports technically sophisticated forensic experts in their work. but we've also designed our offering to support non-technical investigators and stakeholders, agency-wide, to ensure our platform is part of the solution along every step of the case. A great example is our MDIS offering, or the Magnet Digital Investigation Suite, which includes our case management, workflow automation and orchestration, and web-based evidence review products. These solutions address the case intelligence and analytics space and represent a differentiator in the market for us. We continue to innovate in our approach to digital investigations. During the first half of the year, we released 27 software updates across our product portfolio. We launched our major spring releases of Axiom, our flagship product that is designed for the public sector, and Axiom Cyber, which is purpose-built for the private sector. Our Axiom 5.0 release featured improvements related to getting to the evidence more quickly and enhancements to the digital media review, which continues to be an important element in investigations, in addition to supporting new evidence sources. Our Axiom cyber offering continues to gain traction in the market. As the frequency and scale of ransomware attacks gain greater awareness, the private sector is becoming increasingly engaged in search of solutions that better prepare and protect them. The importance of digital forensic solutions is a tailwind for us. Our cloud-based technology empowers our customers to conduct global investigations from anywhere in the world. Axiom Cyber extends their investigation capabilities beyond their corporate networks and helps manage the heightened security risks related to remote work and insecure Wi-Fi networks and applications, which are expected to persist long after the pandemic ends. As part of our Magnet Digital Investigation Suite, or MDIS, we introduced new capabilities in mobile workflow automation for our Magnet Automate offering and added a new deployment option for Magnet Review to complement our existing support of the leading cloud providers. Earlier this year, we introduced Magnet Ignite, a cloud-based solution to quickly review computers to understand if they could have been compromised and require deeper forensic analysis. We understand from our service provider customers that such an incident response triage tool would be especially helpful in the investigation of potential ransomware and other cyber crimes. In May, we hosted our second annual Magnet Virtual Summit. The event attracted more than 5,000 registrants. We held 130 lectures and 21 hands-on labs led by 51 industry guests and 26 Magnet forensic speakers. This event has typically been a catalyst for our sales momentum in the second half of the year. It attracted a balanced mix of existing customers and new prospects from both the public and private sector. These new prospects are now tiered across various stages of our sales funnel. Yesterday, we introduced our collaboration with the London Metropolitan Police and Microsoft to transform how police agencies investigate crimes with digital evidence from smartphones and computers with magnet review. The project with the Met Police, which is a long-term customer of ours, will leverage analytic tools to identify and report on critical evidence in a timely manner. Developed in concert with the Met Police, Magnet Review helps bring together technical and non-technical investigators to collaborate while maintaining the forensic integrity of the evidence. Its aim is to ensure digital evidence is reviewed in a simple, timely, effective, and secure manner to ensure justice is achieved. Our consistent and rapid ability to innovate supports our land and expand strategy. We again won new Axiom customers in the public sector in each of our core regions, including the Americas and MIA and Asia Pacific. The momentum for Axiom cyber product continues to build with new wins in the private sector. While Axiom remains our workhorse, the size of the private sector opportunity is growing as well. As an example, in the second quarter, we won almost as many customers with Axiom Cyber as we did with Axiom, which we believe is a great indicator of the opportunity in the private sector and the traction Axiom Cyber is gaining. We have a robust pipeline of opportunities across both our core markets as we enter the second half of the year. The strength of our pipeline underpins our financial outlook for the back half of the year, which Angela will address in a moment. As noted, we are seeing particular strength in our Axiom Cyber and MDIS offerings. With the launch of MDIS, we have also received increased interest in our Atlas offering as a standalone product that addresses specific case management needs or as part of a broader agency offering. Our Automate solution that supports workflow automation orchestration is also drawing increased interest with the public sector. A key driver of ARR is our ability to expand within existing customers with new licenses, additional products, as well as innovations that drive value. We increased our ARR with effective upsell and cross-sell strategies across both our private and public sector customers in each of our major geographies in the second quarter, which supports future revenue growth. 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. With that, I'll turn it over to Angelo to describe the impact that it's having on our business.

Thank you, Adam, and good morning, everyone. Before I address our financial results, I will provide a quick review of our business model for anyone that is new to Magnet Forensic. We earn revenue from 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'll hear us talk about two forms of software licenses, perpetual and term. 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 license 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 products are generally available as term subscriptions only. This has allowed us to continue growing our recurring revenue base in the first half of the year. Now I'll turn to the financial results for the second quarter. Total revenue is $16.5 million. an increase of $4.9 million or 42% compared to the same period last year. Revenue was comprised of the following, each compared to the same period last year. Software license revenue of $4.9 million, an increase of $1.7 million or 54%. Software maintenance and support revenue of $9.5 million, an increase of $2.7 million or 38%. And professional services revenue of $2 million, an increase of $500,000 or 36%. As Adam mentioned, our efforts to grow our install base through upsell and cross-sell is the core strength of the business, which is demonstrated by the growth in software maintenance and support revenue. Annual recurring revenue, or ARR, was $49.6 million in Q2, an increase of $16.1 million, or 48% from the same period last year. As Adam noted, ARR is an important measure as it provides insight into our ability to generate predictable earnings for future years. Total recurring revenue is $13.3 million in the quarter, representing 81% of total revenue. This is an increase from 72% 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 product. On a quarterly basis, this metric will fluctuate depending on mix of term versus perpetual licensing. On a trailing 12-month basis, total recurring revenue was 77%, and we would expect it to continue to increase as a percentage moving forward as we sell more term-based products to our customers. Gross margins for the quarter were 94% compared to 95% 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 $4.4 million in Q2, which represents a margin profile of 27%. The adjusted EBITDA is unchanged for the same period last year. However, as Adam mentioned, in Q2 2020, we received $1.5 million in government support related to the COVID-19 pandemic. Additionally, EBITDA includes $1.1 million of transaction-related expenses specific to the IPO and preparation for a public filing that were expensed in the period. Our margin levels still reflect the environment that we are in as a result of COVID-19, where spending related to travel, marketing events, and other employee-based expenses are generally lower than expected due to continued regional restrictions. Moving on to cash flow, we have demonstrated a track record of positive cash flows on an annual basis, which has been a key factor in our growth. Cash flow varies quarter to quarter based on timing of payments, receipt of accounts receivable, as well as the impact of certain large projects. Cash flow from operations in Q2 was $6.3 million, compared to $5.3 million for the same period last year. On an annual basis, we expect to continue to generate positive cash flows from operations. As of June 30, 2021, cash and cash equivalents stood at $108.9 million, compared to $21.2 million at the end of fiscal 2020. The change is primarily as a result of the net proceeds from the IPO of $86.5 million, which represents $106.5 million in Canadian dollars. Finally, I'll close on guidance for the year. We have revised our outlook based on the performance of the business for the first half of 2021. We expect revenue for the full year 2021 in a range of 65.5 to 67.5 million, which represents a growth of approximately 28 to 32% over prior year. We expect adjusted EBITDA for fiscal 2021 in a range of 11.7 to 13.7 million, which represents an adjusted margin between 18 to 20% on an annual basis. We feel this margin profile represents an appropriate balance between revenue growth and further investment in the business, together with continued focus in unit and economics to ensure we are growing prudently. Thank you again to everyone for participating in today's call. And with that, I'll pass it back to Adam.