Magnet Forensics Inc.

we will conduct a question and answer session. Instructions will be provided for you at the time for any questions. If anyone has any difficulty hearing the conference, you may press star zero for operator assistance anytime. Listeners are reminded the 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 plan, target, expect, estimate, forecast, strategy, intend, 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 represents management's current expectations, estimates, and instructions regarding future events or consensus. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially than those projected in the forward-looking information. For more information on the company's risks 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 MDMA for the year ended December 31, 2021, and in the Risk Factors section of the company's Annual Information Form dated March 9, 2022, posted on 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 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 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. 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. 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 Thursday, March 10, 2022, at 8 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.

Thank you. Good morning, and thank you for joining us today. With me today are Angelo Liberto, our COO, and Peter Vrieswyk, our newly appointed CFO. It's great to have Peter on this call. He's worked with Angelo and I for coming up on nine years, and based on that experience, we know he's the ideal fit for his new role. Peter and I will be handling the formal remarks, and Angela will be available for the Q&A portion of the call. This morning, we released our 2021 fourth quarter and year end results, which you can find on our website at magnetforensics.com. We finished the year strong. Q4 was a record quarter with $21.4 million in revenue, up 37% from the same period last year. ARR was up 48% to $61.3 million at the end of Q4 compared to the same point last year. ARR is an important metric that we monitor to evaluate how the company is performing. Adjusted EBITDA was ahead of our expectations at $4.7 million in the period. As part of our year-end reporting, we are also providing updates on certain key performance indicators that we shared at the time of the IPO. and committed to provide on an annual basis. Our net dollar retention remains well in excess of 120%. This speaks to the consistency and predictability of our business model that has built on recurring revenue. Our average recurring revenue per account, or ARPA, grew to 13,500, an increase of 44% compared to the end of 2020. The strength shown across each of these metrics demonstrates the performance of the business. I'm pleased to say it was a phenomenal year. Our comprehensive digital investigations product suite offers forensic specialists, investigators, and other stakeholders with innovative technologies to investigate cybercrime and incidents involving digital evidence. Our solutions enable them to quickly identify critical data in their investigation. It is powered by the largest library of evidence types in the market. Our built-in AI and analytics helps investigators get to that critical evidence in a timely fashion. We address a large growing market comprised of public and private sector organizations. There are significant market drivers across each of these two major segments for us. Estimates from law enforcement suggest 85 to 90% of crimes today involve digital evidence, and the amount of data and its complexity in these investigations continues to rise. The ability of police agencies to uncover the truth from digital evidence is one of their greatest organizational challenges. Their leadership, policymakers, and the general public are increasingly becoming aware of the magnitude of the challenge and its impact on the pursuit of justice. They want to see innovative and economically sustainable solutions to addressing this challenge. Our technology solutions offer the public sector an efficient method to process, analyze, and share digital casework and identify critical and report on it in a forensically sound manner that is both easy to understand but can withstand technical scrutiny in the justice system. In the private sector, the frequency and scale of cybercrime, like ransomware attacks on enterprises, are gaining more and more prominence. It's no longer a question of if, but when, and how sophisticated the intrusion is. How we all work is also increasing the risk. As employees continue to work remotely, they are off the corporate network. That could be in a work from home setting or from another type of Wi-Fi network. The potential threat vectors are also growing from a device perspective as more organizations have bring your own device policies or employees connect to critical systems on the same Wi-Fi as their personal devices. The complexity of the network and the challenge of monitoring their cybersecurity and protecting a private enterprise's assets is becoming increasingly difficult. Our cloud-based technology empowers our private enterprise customers to conduct investigations beyond their corporate networks from anywhere in the world. It helps them manage the heightened security risks of working off the corporate network. We believe there is tremendous opportunity to grow both in the public and private sector. We have a differentiated approach to the market. We have designed our platform to be the hub for the digital investigation. Our platform for digital evidence is part of the solution along every step of the case. It accepts data and evidence from many types of evidence sources. No one in the market has a larger digital evidence library than we do. We understand and design the platform for the sophistication and power required by the technical forensic expert user But we also understand the need for intuitive workflows that enable collaboration among the non-technical users like case officers and investigators in the public sector market and HR and legal within the private sector. We are building a new category, a digital investigation platform for a larger audience. The ability to serve a broad range of users with the widest range of data sources that delivers for the highest caliber specialist is a winning strategy. And our growth backs that up. Our continued growth is driven by a highly successful land and expand strategy. We grow through a few highly focused methods across both the public and private sectors, winning new accounts, adding new licenses at accounts we already serve today, expanding the services and products used by our existing accounts. And within our existing private sector, upgrading them to Axiom Cyber, which is specifically designed for those private sector organizations from our flagship product Axiom, which was the first to market and intended for public sector use cases. The team is effectively executing on all these strategies in both segments across all our core regions consisting of the Americas, EMEA and Asia-Pacific. We're delivering new customer wins and generating higher value with accounts as evidenced by our growth in ARR and ARPA. We are often asked, where do you see the most growth? We have a high level of penetration in the public sector marketing, including many of the most recognized global public safety agencies. The reality is digital evidence is relevant in almost every investigation type, whether it's terrorism, human trafficking, guns and gangs, and so on. We still see a great opportunity to grow in that market with more users, more modules, and new accounts as agencies work on modernizing their operations. On an absolute basis today, more of our growth is derived from the public sector market. That said, private sector is growing faster today on a percentage basis off a smaller base. The overall prospect pool is larger and the ability to bear price is higher. We believe over a period of time, private sector will be at a similar scale to our public sector business. As an example, at the end of 2019, Approximately three quarters of our ARR came from the public sector and one quarter from the private sector. Two years later, at the end of 21, that mix had shifted to two-thirds public sector, one-third private sector. We expect the two markets to move into balance over the next five years or so as we continue to generate growth in both markets. We have a strong pipeline of both new potential customers and existing customers. that we are engaged with with our new products or licenses. Our MDIS offering, the Magnet Digital Investigation Suite, is gaining momentum in less than a year since its launch. The team is closing new business and building a funnel of actively engaged prospects across the different offerings of workflow automation, case management, and evidence review. While it's still early days, we are pleased with the progress made on the magnet digital investigation suite, and the increased level of interest from prospects as they look to modernize how they conduct digital investigations. We are also seeing good progress on the conversion of accounts to a term license from our legacy perpetual license model. We are ahead of where we expected to be at this stage as more public sector organizations are increasingly open to this style of contract, specifically in the more mature markets or developed nations. The sales team has done a good job in helping to convert their accounts. We intend to continue to offer perpetual licenses for public sector accounts, but we lead with the term license model and we're having success. In terms of scaling the team, we added more than 127 new team members in 2021, which was just short of the goal we set at the beginning of the year of 140. And we accomplished that in what was a very competitive recruiting environment. Our two key areas of investment were sales and marketing and R&D, which accounted for approximately 81% of the new team members, followed by G&A, which accounted for 19%. Our ability to attract talent in this market is more than just competitive compensation. It is underpinned by the sense of purpose for what we do and the value team members, new and old, place on it. In 2022, we are targeting approximately 140 new hires as we continue to invest for growth we see in front of us. We continue to expand our offerings and invest in the product roadmap. A few weeks ago, we announced the launch of Magnet Automate Enterprise. Designed for the private sector, this offering synchronizes detection and incident response solutions to immediately trigger investigations, automates basic and repetitive tasks, and enables forensic analysts to simultaneously recover and process evidence from multiple endpoints. It is an approach that reduces the time enterprises need to respond to and recover from cybersecurity incidents. We also continue to expand our commercial relationships in the market. In January, we announced a partnership with NICE, a recognized brand in the market, to digitally transform police case building and investigations to accelerate the pursuit of justice. The integration of NICE Investigate and Magnet Review will enable police agencies to automatically merge digital forensic evidence for Magnet Review with other digital evidence sources in NICE Investigate to streamline case building and investigations. We think it is a great combination of two complementary solutions that can appeal to a broader audience together. 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. With that, I'll turn it over to Peter to outline the financial impact that it's having on our business.

Thank you, Adam, and good morning, everyone. As Adam mentioned, we finished our fiscal year strong with Q4 revenue growing to $21.4 million. an increase of 5.8 million, or 37%, compared to the same period in 2020. The great performance in the quarter was a result of our land and expand strategy, where we expanded our portfolio of products within our customer base, as well as won new accounts. From a composition perspective, revenue for the quarter was made up of the following. Software license revenue of 7.3 million, an increase of 1.7 million, or 30%, Software maintenance and support revenue of $11.8 million, an increase of $3.5 million, or 42%, and professional services revenue of $2.3 million, an increase of $0.6 million, or 38%, each compared to the same period last year. Historically, about 90% of our revenue consists of software licenses and support, with the remaining coming from professional services and training, where the value is typically dependent on the activity during the period. For fiscal 2021, total revenue was 70.3 million, an increase of 19.1 million or 37% from fiscal 2020. Moving on to recurring revenue, total recurring revenue was 17.6 million in the quarter, representing 82% of total revenue. This is an increase from 74% in the same quarter in 2020. The growth in recurring revenue is in line with our expectations as we see more customers adopt term licenses of our product as Adam mentioned previously. On a quarterly basis, this percentage of revenue that is recurring can fluctuate depending on the mix of term versus perpetual licensing that are sold in a given period. And looking back at our performance in 2021, we can see it was relatively consistent throughout the year. Adjusted EBITDA was 4.7 million in Q4, a decrease of 19% or 1.1 million compared to the same period in 2020. The change was primarily due to increased investments that we made in research and development and sales and marketing in the back half of the year, as well as ensuring that we have the appropriate infrastructure in place to support the company's continued growth. For fiscal 2021, adjusted EBITDA was $18.6 million, up 21% or $3.2 million from the 2020 period. Our adjusted EBITDA margin profile was 22% and 27% in Q4 and fiscal 2021, respectively, compared to 37% and 30% in the corresponding periods in 2020. Again, these 2020 comparative figures were bolstered by an overall reduction of expenses due to limited travel and marketing programs as a result of COVID-19 restrictions, as well as the impact of the pandemic assistance from certain government programs. 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 to our growth over the last several years. Cash flow varies quarter to quarter based on timing of payments, receipt of accounts receivable, as well as the impact of certain large transactions, like for example, the DME transaction that we closed in Q3. Cash flows from operations were $17.7 million in fiscal 2021 compared to $23 million in the corresponding period in 2020. The change was a result of increased investment in the business as we continue to scale for future growth. On an annual basis, we expect to continue to generate positive cash flow from operations. This demonstrates our ability to both invest ahead for future growth and still demonstrate meaningful profitability. As of December 31st, 2021, cash and cash equivalents stood at $118.1 million compared to $21.2 million at the end of fiscal 2020. The change is primarily a result of the net proceeds from the IPO of $86.5 million, as well as cash provided by operating activities during the year. In addition to our quarterly and annual results that we released this morning, we also announced our outlook for fiscal 2022. We expect revenue for fiscal 2022 to be in a range of 91.5 to 93.5 million, which represents growth of approximately 30 to 33%. We expect our seasonality for 2022 to be generally similar to what we saw in 2021. Namely, our strong quarters are Q3 and Q4. Q4, as it's the year end for public agencies in Europe, as well as the year end for a large number of private enterprises. And Q3, in large part due to it being the fiscal calendar in many North American public sector organizations. Historically, the lowest contributing quarter to growth is Q1, and we expect that to be the same in 2022. We expect adjusted EBITDA for fiscal 2022 to be in a range of $13 to $15 million. which represents a margin of 14 to 16% for the year, which is a more normalized range for the business based on our expectation that some of the cost savings we experienced during the pandemic will no longer persist in 2022. Namely, we expect that we will be returning to a more typical in-person sales and marketing process and return to a more regular travel routine than what we experienced in 2020 and 2021. Based on our ability to continue to fuel top-line growth, We believe a mid-teens EBITDA margin profile represents an appropriate balance between revenue growth and further investments in the business, together with a continued focus on unit economics to ensure we're growing in a sustainable and profitable fashion. Thank you again to everyone for participating in today's call. And with that, I'll pass it back to Adam.