Magnet Forensics Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Magnet Forensics 2021 Third 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 difficulties hearing the conference, you may press star zero for prior assistance at any time. Listeners are reminded that portions of today's discussions contain forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as plan, target, expect, estimate, forecast, strategy, intend, believe, or variation of such words and phrases. In addition, any statements that refer to expectations, inventions, projections, or other characterizations of future events or consensus content forward-looking information. Statements content forward-looking information are not a source of facts, but instead represents management, current expectation, estimates, and instructions regarding future 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 MDNA for the three months ended September 30, 2021 and in the Risk Factors section of the company's short-form-based shelf prospectus dated October 21 posted on CDER. 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 presently known to the company or that the company presently believes are not material but could also cause actual results of future events differ materially from those expressed in such forward-looking information. No forward-looking statements in guarantee of future results. Accordingly, you should not place undue 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 expectation as the date of EREV and are subject to change after such date obligation to update any forward-looking information, except as required under applicable security laws. The company reports its financial results under IFRS, and all values are U.S. dollars unless stated otherwise. This morning's call is being recorded on Tuesday, November 9, 2021, at 8 o'clock a.m. ET. I would now like to turn the call over to Adam Belcher, Chief Executive Officer of Magnet Forensic. Please go ahead, sir.

Thank you. Good morning, and thank you for joining us today. This morning, we released our 2021 third quarter results, which you can find on our website at magnetforensics.com. Q3 was another record quarter with $17.8 million in revenue, up 44% from the same period last year. 82% of the revenue in the quarter was recurring in nature, which speaks to the consistency and predictability of our business model. ARR was up 48% to $54 million at the end of Q3 compared to the same period last year. ARR is an important metric that we monitor to evaluate how the company is performing. Adjusted EBITDA was well ahead of our expectation at $4.6 million, up 33% from the same period last year. During the quarter, we also made our first acquisition since the IPO, acquiring DME Forensics, which I'll address in a moment. With this level of performance and based on where we stand today, we are raising our guidance for both revenue and adjusted EBITDA for the remainder of 2021, which Angelo will outline in a moment. Where I'd like to start this morning is what's driving our growth and what we are doing to sustain this momentum. We go to market with a comprehensive digital investigation product suite that offers forensic specialists, investigators, incident responders, and other stakeholders innovative technology to investigate cyber attacks and digital crimes. Our solution enables them to quickly identify critical data and evidence related to their investigation. It is powered by the largest library of evidence types in the market and our built-in artificial intelligence and analytics helps investigators get to that critical evidence in a timely fashion. We address a large growing market comprised of public safety and private sector organizations. Our flagship products are designed specifically for the needs of public sector organizations which adopt Axiom, and private organizations which are deploying Axiom Cyber. Complementing those offerings, we go to market with our MDIS offering, which stands for the Magnet Digital Investigation Suite. We have designed our platform to be the hub for the digital investigation. It is a platform where sophisticated users like forensic experts and non-technical users like officers or investigators both drive value. This approach helps to ensure our platform is part of the solution across the entire investigative workflow, which is a major differentiator in the market for us. Our approach, balancing the power acquired for technical users and intuitive workflows to enable collaboration with non-technical stakeholders, is proving to be a winning strategy. Non-technical users represent a significant number of stakeholders who need to review these cases. The alternatives in the market are complicated and not intuitive. By serving a broader pool of stakeholders in our customer base while still retaining the functionality required by the forensic specialists, we believe our offering represents a category-defining solution. We are winning new customers, growing our wallet share with existing customers through new licenses and new modules, and expanding our reach within organizations with our recently launched MDIS offering. Overall, The growth we are seeing in revenue and ARR today is primarily generated from Axiom and Axiom Cyber, but with slightly different approaches. Our growth in the public sector with Axiom is primarily coming from new licenses to existing customers and new logo wins from public safety agencies. We offer these new public sector customers both perpetual and term licenses through a subscription. Historically, Public sector organizations required perpetual license for budgetary reasons, but we are encouraged to see more openness to subscription models among these customers. Public safety organizations are experiencing a transformation in how criminals are using technology to invent new types of crime and are creating new methods for committing traditional crimes. A high percent of crimes today involve digital evidence. A European Commission report suggested 85% of criminal investigations include digital evidence, and the amount of data in these investigations continues to rise. The ability of police agencies to investigate and solve these crimes with finite resources in a timely manner is an incredible challenge. Recruiting and retaining skilled personnel only adds to the challenge. Our technology offers the public sector a more efficient method to collect, process, analyze, and report on digital evidence in a forensically sound manner that is both easy to understand but can withstand technical scrutiny in the justice system. Meeting and overcoming these challenges were one of the key reasons behind the London Metropolitan Police choosing to deploy our magnet review offering, which we discussed on our Q2 calls. In the private sector, our growth is primarily driven in three ways. Existing customers upgrading to our more recently launched Axiom Cyber, which we designed specifically for private enterprises from our original Axiom product. Number two, logo wins from new customers. And third, new licenses which expand our share of wallet at existing customers. The private sector is more accustomed to term license contracts and we lead with subscription-based offerings with these customers and all new products. As the frequency and scale of cybercrime like 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 in-house digital forensic solutions is a tailwind for us. Our 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 risk related to remote work, bring your own device, and insecure Wi-Fi networks, which are expected to persist long after the pandemic ends. We believe there is a tremendous opportunity to grow within both public sector and with private enterprise. On an absolute basis, public sector growth is still the larger of the two markets for us, but our customer mix is evolving. At the end of calendar 2019, our ARR split was approximately 75% public sector and 25% private sector. Today, that split is closer to two-thirds in the public sector and one-third in the private sector which speaks to the momentum we are seeing with private enterprises as well as the higher price point of Axiom Cyber relative to Axiom. We expect the ARR mix to balance out over time, but we do not expect it to shift dramatically. We are continuously looking to position the business for sustainable growth. I mentioned earlier that public sector organizations are becoming more open to term licenses and private enterprises are choosing to upgrade to Axiom Cyber. which is a term license model. We are making great progress in helping to transition customers to the term contract model, and we are ahead of our expectations. In September, we announced the acquisition of DME Forensics, a video and multimedia evidence solution company. Their technology further strengthens our ability to consolidate evidence on our platform as the hub for digital investigations. Video evidence is increasingly available and used in the investigative process. DME's video forensic capabilities provide us with an immediate and cost-effective method to broaden our product suite much faster than if we had chosen to develop it ourselves. Beyond the growth we are seeing from our flagship products, we are also seeing strong momentum with our MDIS offering, upgrading existing accounts and winning new customers with larger deployments. MDIS is a comprehensive agency-wide digital investigation solution offering which includes case management, workflow automation, and evidence review and collaboration. It is still early days for the MDIS suite, but we're seeing early success and accelerating momentum. During the third quarter, we won multiple new customers in each of North America, Europe, and Asia. The team has built a strong sales pipeline and we are closing out 2021 and entering 2022 with confidence in our market position and the opportunity in front of us. Deploying Magnet Automate or Magnet Review provides significant ARR growth as it consists of a broader enterprise deployment with expanded seats and a larger organizational utility. We bring a compelling value proposition to a large and growing market. We continue to attract new customers, expand with existing customers, and introduce new innovations into the market. Our value proposition and commitment to innovation is being recognized by our industry. In Q3, Magnet won a number of Forensic Forecast Awards, which are our industry's highest honors. This includes awards for Digital Forensics and Incident Response Team of the Year and Commercial Tool of the Year. Our founder and CTO, Chad Saliba, was also inducted into the Digital Forensics and Incident Response Hall of Fame. With that, I'll turn it over to Angelo to outline our financial performance.

Thank you, Adam, and good morning, everyone. Total revenue was $17.8 million, an increase of $5.4 million, or 44% compared to the same period last year. Revenue was comprised of the following. Software license revenue of $4.7 million, an increase of $1.3 million, or 39%. Software maintenance and support revenue of $10.6 million, an increase of $3.2 million, or 43%. And professional services revenue of $2.4 million, an increase of close to $1 million, or 59%, each compared to the same period last year. Our efforts to grow our install base through upselling and cross-selling is the strength of the business. which is demonstrated by the growth in total revenue. Historically, 90% of our revenue consists of software licenses and support. The mix of professional services and training revenue is typically dependent on the activity during the period. Annual recurring revenue, or ARR, was $54 million in Q3, an increase of $17.6 million, or 48% from the same period last year. ARR is an important financial measure of the strength of the business as it provides insight into our ability to generate predictable earnings for future years. Total recurring revenue is $14.5 million in the quarter, representing 82% of total revenue. This is an increase from 70% 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 will fluctuate depending on mix of term versus perpetual licensing. On a trailing 12-month basis, total recurring revenue was 79%, and we would expect that to continue to increase as a percentage moving forward as we sell more term-based products to our customers. It is also noteworthy that we had a $6.5 million increase in deferred revenue from Q2 to $44.4 million which also reflects the higher adoption of term versus perpetual licenses being offered to our customers. Gross margins for the quarter were 93% compared to 95% in the same period last year. Our gross margins have historically been at this level, reflecting the consistency and efficiency and cost to deliver our current products and services. Adjusted EBITDA was $4.6 million in Q3, an increase of 31% or $1.1 million compared to the same period last year. Our adjusted EBITDA margin profile was 26%, which is in line with the 28% from the same period last year. Our margin level continues to reflect the environment that we were in as a result of persistent COVID-19 health restrictions impacting spending relating to travel, marketing events, and other employee-based expenses. We are starting to see this change as we are beginning to attend more in-person events and customer activities, which will help build our funnel for 2022 and beyond. Including the acquisition of DME, we have added almost 100 employees to the company thus far in 2021, which reflects continued investment in all functional areas of the company as we scale the business. 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 payment, receipt of accounts receivable, as well as the impact of certain large transactions, such as the DME acquisition announced during the quarter. Cash flow from operations in Q3 were $9 million, compared to $10.6 million for the same period last year. On an annual basis, we expect to continue to generate positive cash flows from operations. As of September 30th, cash and cash equivalents stood at $110.1 million compared to $21.2 million at the end of fiscal 2020. This change is primarily a result of the net proceeds from the IPO of $86.5 million or $106.5 million in Canadian dollars. We have revised our outlook based on the performance of the business through the first nine months of 2021. We expect revenue for the full year 2021 in a range of 66.5 to 68.5 million, which now represents growth of approximately 30 to 34%. We expect adjusted EBITDA for fiscal 2021 in a range of 14.5 to 16.5 million, which represents a margin of 22 to 24% for the year, which is higher than expectations to the continued impacts of pandemic-related savings during the first nine months of the year on certain expenses that I've mentioned earlier. Based on our ability to continue to fuel top-line growth, we believe a normalized EBITDA margin represents an appropriate balance between revenue growth and further investment in the business, together with continued focus on unit economics to ensure we're growing in a sustainable fashion. Thank you again to everyone for participating in today's call. And with that, I'll pass it back to Adam.