Magnet Forensics Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Magnet Forensics 2022 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct 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 PAR 0 for operator assistance at any time. Listeners are reminded that portion 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, intent, belief, 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 contained forward-looking information. Statements containing forward-looking information are not a source of facts, but instead represents management current expectations, 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's 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 ended March 31, 2022. and 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, the remains to the other risk factors are not presently known to the company or that the company presently believes are not material but could cause also 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 under reliance or 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 of the date hereof and are subject to change after such date without obligation to update any forward-looking information, except as required under applicable securities law. 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, May 5, 2022, at 8 a.m. Eastern Time. I would now like to turn the call over to Adam Belcher, Chief Executive Officer of Magnet Forensics. Please go ahead, sir.

Good morning, and thank you for joining us today. With me today is Peter Vrieswyk, our CFO. This morning we released our 2022 first quarter results, which you can find on our website at magnetforensics.com. We had a great start to 2022. Q1 revenue was $19.8 million. up 35% from the same period last year. ARR was up 49% to $66 million at the end of Q1 compared to the same point last year. ARR is an important metric that we monitor to evaluate how the company is performing. Customers that use our technology like it. Our net revenue retention was 136% in 2021. This demonstrates our ability to expand and grow with a customer once we land them. This level of retention underpins the consistency and predictability of our recurring revenue-based business model, and we continue to enhance our capabilities and solutions. This morning, we announced the acquisition of strategic IP assets from Kome Technologies, a cybersecurity firm headquartered in the UAE that specializes in incident response and memory analysis. This tuck-in acquisition will accelerate the development of our memory analysis capabilities. Kome's IP and team provides us with the capabilities to recover strategic evidence to understand what happened on a device before the incident occurred. This acquisition will have value for both our public and private sector customers. We will look to accelerate the development and commercialization of COME's platform and integrate the capabilities into our other solutions. The markets we address are growing with multiple significant tailwinds supporting continued investment in digital investigation technologies like ours. Digital evidence is everywhere and it's growing exponentially. More than 90% of criminal cases involve digital evidence. We each, on average, create 1.7 megabytes of data per second, and it's growing. In 2021, there were approximately 850,000 complaints from the public, with estimated losses of more than 6.9 billion, according to the Internet Crime Report published by the FBI. Ransomware, business email compromise, and the criminal use of cryptocurrency are among the top incidences reported. As the level of awareness for cybercrime increases, the funding environment for law enforcement agencies is improving. In the U.S., for instance, the 2023 budget committed $30 billion in mandatory resources to support law enforcement, crime prevention, and community violence intervention. It also committed an additional $3.2 billion to state and local government to hire more police officers. This funding is in addition to the $350 billion allocated to state and local governments as part of the 2021 American Rescue Plan that can be used to support new public safety approaches over a three-year period. So there's more funding flowing into public safety organizations with a focus on cybercrime. That's a great start. But one of the biggest challenges facing agencies is talent retention and recruitment. Law enforcement agencies reported an 18% increase in resignations and a 45% increase in retirements compared to the previous year, according to the 2021 survey by the Police Executive Research Forum. The public sector is faced with investigating more frequent incidents of cybercrime with more funding, but less people to do the actual investigative work. A backlog of casework is building. A Freedom of Information request in the UK found that more than 21,000 Digital devices were waiting for examination across 45 police forces. These devices include mobile phones, tablets, and computers. Each could be an integral to an investigation and the pursuit of justice. We've designed and expanded our Magnet Digital Investigation Suite, or MDIS, offering to address this growing global challenge. Magnet Automate uses automation to keep the processing of digital evidence running 24 by 7 by 365 without human intervention. The sheer volume of data and evidence continues to be a primary driver for our Automate product, specifically when it comes to investigations with large volumes of digital evidence such as child exploitation cases. Magnet's sales team is seeing increased interest in Automate within our existing Axiom account base as a natural extension that can drive efficiencies and improve outcomes. Strong interest is coming out of Europe, including Germany and a new account win in northern England at a police service in a major urban centre. These opportunities are coming to life because of the growing need to reduce the backlog of cases and improve case closure rates. In another instance, a national agency in Europe is looking to enhance police capabilities and deliver innovation to address the increasing volume of digital evidence. Their focus is on the end-to-end workflows, victims, and stronger collaboration between the digital forensics lab and the investigating officers right through to the prosecution service. This is exactly what Axiom, and to a greater extent, Magnet Review, solve for. We have designed our platform to be the hub for the digital investigation It is part of the digital evidence solution along every step of the case. Our platform has the sophistication and power required by the highest caliber technical user. It's also purpose-built to be intuitive so technical users like case officers, investigators, and prosecutors can collaborate, review digital evidence, and advance casework efficiently, securely, and in a manner that preserves the chain of evidence. Last month, we were recognized by IDC Marketscape and named as a leader for worldwide digital forensics in public safety. And our platform is winning over customers. We want a new North American federal-level agency that specializes in training. Our core Axiom offering will be used as a centerpiece of their digital forensics curriculum to support education across multiple federal agencies. In Asia Pacific, two national law enforcement agencies acquired Axiom Cyber to improve their capabilities to conduct remote and mobile investigations. In another instance, we expanded our offering with an existing public sector account in Asia Pacific that added more licenses of DVR Examiner to expand their investigative capabilities for video. In the enterprise market, the rise of cybercrime and insider threats continues, and the importance of safeguarding corporate assets and managing risk is an organizational priority. It is estimated that an organization suffered a ransomware attack every 11 seconds in 2021, according to Cybersecurity Ventures. By 2031, they expect a new attack every two seconds. The average cost of a data breach is now estimated at $4.2 million, according to IBM and the Ponemon Institute. The average cost of a ransomware attack is even higher than a data breach reaching $4.6 million per incident. Enterprises are also faced with a growing risk level within their organizations from malicious insiders. 57% of respondents surveyed by cybersecurity insiders say that insider attacks became more frequent in 2021. What's worse, 63% of organizations surveyed said they couldn't effectively monitor, detect, and respond to insider threats. The organizations with the largest cybersecurity budgets still get hacked. There is no such thing as 100% breach prevention. The market leader in endpoint detection and prevention has only achieved an 85% prevention rate on external attacks, and they do not address insider threats. In the face of these challenges, enterprises are increasingly taking an assume you have been breached posture. This has led more and more enterprises to focus on cyber resilience and building out their digital forensics and incident response capabilities. This plays directly into our product offerings. Our technology helps analysts understand what happened, how it happened, and how to get better. We recently launched Magnet Ignite, a cloud-based triage solution that enables businesses to perform rapid, remote scans of target computers to uncover uncover potential malicious activity. This triage approach to the market is a greenfield opportunity that expands our addressable market. Magnet Ignite offers internal incident response teams and external service providers an initial compromise assessment that will guide the next steps of their investigation. The conventional approach is a full digital forensic analysis after an incident has occurred. That standard approach can take dozens or even hundreds of hours to complete on multiple endpoints. Security teams can't afford to waste time and resources on multiple endpoints that haven't been impacted by an attack. By quickly gathering intelligence and assessing a potential compromise or an insider's exfiltration of intellectual property, Magnet Ignite helps enterprises understand where and when they need to deploy full forensic analysis rather than attempting a broad application across thousands of endpoints that pose little to no threat. Earlier this quarter, 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 analysts to simultaneously recover and process evidence from multiple endpoints, and perform targeted collections. It's an approach that reduces the time enterprises need to respond and recover from cybersecurity incidents. Private enterprises are not only under increased threat of cyber attacks and data breaches, but policymakers are calling for increased accountability and transparency. To strengthen the financial market's resilience to online attacks, the SEC is considering mandating that public companies disclose data breaches within four days of an incident. The U.S. Cybersecurity and Infrastructure Agency requires notice of a data breach within 72 hours for companies operating critical infrastructure, such as power plants, water systems, pipelines, financial services, healthcare facilities, and emergency services. In the event it's a ransomware attack, the notice must be given within 24 hours. In India, the response time is even shorter. The India Computer Emergency Response Team just announced it requires notifications within six hours of an incident. They're implementing that deadline within the next 60 days. As you can see, we address a market that is rapidly evolving with increased threat levels and higher scrutiny on boards, executives, and security managers in the enterprise. We believe there's a tremendous opportunity to grow within both the public and private sector. We have a strong pipeline of potential customers and existing customers that we're engaged with on new modules or licenses. We won several new Fortune 500 companies during the quarter. These wins include a global pharmaceutical company based in Europe. They're using Axiom Cyber to confront cyber attacks across one of their major divisions. A recognized global hardware technology player out of the U.S. that acquired Axiom Cyber. They're a global organization with approximately 40,000 employees. They're using Axiom Cyber to support a new arm of the business. Axiom Cyber assists with a new forward way of thinking to execute ad hoc remote collections. Axiom Cyber is used throughout the SOC and the incident response teams. A strength in both the public and private sector addressable markets was illuminated last month when we held our annual customer summit. This is a seminal event for us every year. We split the event into two parts. We returned to an in-person stage in Nashville, Tennessee, early in April, and then held a series of virtual sessions through the back half of the month. We were very pleased with the engagement and had over 4,000 attendees across the in-person and virtual sessions. It's an opportunity for existing customers and strategic prospects to come together and share their experiences and learn about the exciting new innovations we're bringing to market. At the summit, we launched major new versions of Axiom and Axiom Cyber. We highlighted our innovations across the Magnet Digital Investigation Suite, including upgrades of Magnet Automate and Magnet Atlas, and a major new upcoming release of Magnet Review. The upgrades to Axiom Cyber are driving conversions from Axiom. The new Axiom Cyber upgrades allow investigators to target multiple endpoints for analysis and consolidate the evidence into one case file, as well as detect and classify malware through rules-based matching. The investigators benefit from the improved functionality and greater efficiency in the face of increasing complex threat landscape. 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 it's having on our business.

Thank you, Adam, and good morning, everyone. Total revenue was $19.8 million in Q1, an increase of $5.1 million, or 35%, compared to the same period in 2021. Our continued strong performance was a result of our land and expand strategy, where we acquire new accounts and expand within our customer base. Revenue for the period was comprised of the following. Software license revenue of $5.1 million, an increase of $800,000 or 19%. Software maintenance and support revenue of $12.6 million, an increase of $3.8 million or 44%. And professional services revenue of $2.1 million, an increase of $500,000 or 30%, each compared to the same period in 2021. Total recurring revenue was $17.3 million in the quarter, representing 87% of total revenue. This is an increase from 81% in the same quarter in 2021. 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, the percentage of recurring revenue can fluctuate depending on the mix of term versus perpetual licensing that is sold in the period. Adjusted EBITDA was 2.4 million in Q1, a decrease of 2.4 million compared to the same period in 2021. This change is primarily due to increased investments that we made in sales and marketing and research and development in the back half of last year and in Q1 of this year. Our adjusted EBITDA margin profile was 12% in Q1 compared to 33% in the same period in 2021. The 2021 margin was bolstered by reduced expenses due to limitations on travel and in-person marketing programs as a result of COVID-19 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 transactions. Cash flows from operations were $1.6 million in Q1, an improvement of $5.6 million compared to cash used in operations of $4 million in the same period in 2021. The change was primarily due to income tax payments of $5.1 million in the prior period relating to fiscal 2020. On an annual basis, we expect to continue to generate positive cash flows from operations. This demonstrates our ability to both invest ahead for future growth and still demonstrate meaningful profitability. As of March 31st, 2022, cash and cash equivalents stood at $117.1 million compared to $118.1 million at the end of fiscal 2021. We are reiterating our outlook for fiscal 2022 with this morning's announcement. We expect revenue for fiscal 2022 to be in a range of 91.5 million to 93.5 million, which represents growth 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 many private enterprises, and Q3, in large part due to it being the fiscal calendar in many North American public sector organizations. 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. This is a more normalized range for the business based on our expectation that some of the cost savings experienced during the pandemic will no longer persist in 2022. Based on our ability to continue to fuel top-line growth, we believe a mid-team's EBITDA profile represents an appropriate balance between revenue growth and further investment in the business, together with a 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.