Magnet Forensics Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Magnet Forensics 2022 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 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 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 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 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 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 or factors affecting our fulfillment section of the company's MD&A for three months ended June 30, 2022. and in the risk factor 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 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 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 Wednesday, August 10, 2022, at 8 a.m. Eastern Time. I would like to turn the call over to Mr. Adam Belsher, Chief Executive Officer of Magnet Forensics. Please go ahead, sir.

Good morning, and thank you for joining us today. This morning, we released our 2022 second quarter results. which you can find on our website at magnetforensics.com. It was a strong Q2. Revenue was up 41% to $23.1 million compared to the same period last year. ARR was up 49% to $73.7 million at the end of Q2 compared to the same point last year. ARR is an important metric that we monitor to assess how the company is performing. With this morning's results, we are raising our revenue guidance for the full year to reflect the performance year-to-date and the high conviction we have in our abilities to deliver on the opportunities in front of us. This conviction is a result of a few factors. The digital investigation markets we address are growing. Multiple tailwinds in the public sector and private enterprise markets support continued investment in digital investigation technologies. The digitization of society means digital evidence is everywhere. It's growing exponentially. The case backlogs with police agencies globally are growing as more cases involving digital evidence require investigation and review. Beyond crimes with digital evidence, pure cybercrimes continue to grow in volume. Ransomware, business email compromise, and criminal use of cryptocurrency incidents are increasing. The cost to a corporation of dealing with a data breach or a ransomware attack is becoming more and more expensive. Attracting the specialized personnel that conduct digital investigations is challenging. Regulations to comply with standard cybersecurity preventative practices and disclosure after breaches occur are increasing for both public and private organizations. The risk to private enterprises is front of mind at the executive and board levels. These problems are persisting and getting harder to deal with for organizations. We believe there is going to be strong demand for digital forensics and incident response technologies. The macro outlook across all sectors of the economy is uncertain. This creates challenges for executives in determining capital allocation and expenditure priorities. We believe the digital investigation markets we address are more resilient to recessionary pressures than other sectors. Private enterprises recognize the threat of cybercrime and the business-critical nature of cybersecurity investments and incident response. The public sector, which represents approximately 65% of our ARR, is dedicating more resources to confront cybercrime and crimes associated with digital evidence, both within society and within their own organization. Our technologies address the scarcity of specialized personnel by leveraging workflow automation, analytics, and distributing the workload to non-technical personnel in a secure and simplified manner. Our solutions improve efficiency, gets to the key evidence quickly to solve the crime or understand what happened and how to remediate it. Should we be facing a prolonged recession, it would have broad-reaching impact that is undeniable. but we believe the strength of Magnet Solutions, our team, and prudent approach of managing the business coupled with the tailwinds underpinning our markets puts us in a strong position for continued sustainable growth. We have a proven track record of managing for the top-line growth and delivering bottom-line performance from bootstrapping our business all the way through to the public listing. We intend to continue to invest in the business to capture market share, grow our wallet share among our customers, and penetrate new markets. We do so while being cognizant of the macro environment and the headwinds in the economy. We are prioritizing investments to ensure that we deliver against our plan. We are mindful of increasing costs, specifically wage inflation pressures, which are a significant factor in today's market in the ability to attract talent. We filled a number of key openings in Q1 and a few more in Q2. As we look out to the second half of the year, we intend to deliver progressively improved adjusted EBITDA and bottom line performance as demonstrated by our guidance. We'll continue to hire, but we are being disciplined with our planning and execution to ensure that the new positions we fill are fundamentally required and not just a function of the budget planning process that we established in Q4 of last year when the market conditions were quite different. We believe there is an opportunity to attract top talent and retain them in the current environment. which is quite different than the higher freeze-reduce strategy that a number of other tech companies have dealt with recently. We are doing this with a clear focus on our ability to continue to deliver positive and growing adjusted EBITDA through the back half of 2022 and into 2023. We believe significant operating leverage exists in our business to improve margins and continue to grow the top line on 2023. The unit economics of our platform make possible In fact, warrant continued investment in the team because we know that the incremental value of a new account today combined with our proven ability to expand with that account over their lifetime is a healthy multiple of the dollar invested to acquire that new account. The salespeople that we brought on in the back end of last year are now nearing the stage where they are making a meaningful contribution to our growth. And we believe that is a repeatable process with new hires today making significant positive contributions in the back half of 2023. We are seeing a marked change in our pipeline. Our new opportunities today are stronger than they have ever been. We are seeing opportunities across both the public sector and especially the private enterprise. On the public front, those opportunities consist of expansion within existing accounts and outright new wins. And on the private enterprise side, we are seeing growing momentum in new customers. This progress is primarily driven due to a few factors. The investments we've made in R&D and product development with the launch of new products like MDIS, that's the Magnet Digital Investigation Suite, Magnet Automate Enterprise, and Magnet Ignite. The investments we've made in our sales and marketing team, who can now get back in front of customers in person for these solution sales, which is paying off for us. Plus, we are holding in-person workshops again. with customers speaking to prospects and other accounts about their success with these solutions, which is creating additional momentum. In terms of customer wins, we won new public sector accounts at federal cybersecurity agencies in North America, Europe, and Asia, defense departments in North America and Europe, and a national intelligence agency in Europe. With new law enforcement accounts, including a major state-level corrections department, new police and county sheriffs in North America, federal as well as state-level police agencies in Europe, and forensic science labs in multiple Asia-Pacific organizations. On the private enterprise side, we won accounts across a number of financial service organizations, including multiple banks in North America, tech companies, including a brand name electric vehicle manufacturer and retailer in North America, and a number of service providers in both Asia and Europe. In addition to forensic service providers and consulting companies, in North America, Asia, and Europe. This is just a select sample of the success we're having on the new customer front. We are often asked how our solutions address the private enterprise vertical, how we fit into the market relative to the recognized endpoint detection and response, EDR, providers such as CrowdStrike and Sentinel-1, and our ability to grow in the private enterprise market, how large a vector it could become. This morning, we wanted to provide an illustrative use case There are a number of players involved in cybersecurity on the detection end of the spectrum, including EDR, XER, and MDR providers. During a cyber intrusion, detection is step one. We do not compete head-to-head with those providers at that part of the workflow. Where we enter is at the post-detection investigation stage, which requires deep analysis. A detection concludes an intrusion has happened, but it doesn't identify the scope of the intrusion, and that is an important stage that needs to proceed very quickly. At this stage of the investigation, the organization is trying to narrow down that intrusion to a range of devices. Depending on the intrusion, it could number in the tens, hundreds, or even thousands of devices and millions of data points that could potentially be infected. You want to do this as quickly as possible to quarantine the infected devices. We think We think of this as the triage stage, narrowing down to the exact number of endpoints impacted, be they computers or even servers. This is the purpose of our new Magnet Ignite offering. It's a cloud-based triage solution enabling business to perform rapid, remote scans of targeted endpoints for malicious and insider activity. This triage approach to the market is a greenfield opportunity that expands our addressable market. The conventional approach is a full digital forensic analysis after an incident has happened. The issue with that standard approach is it can take hundreds of hours to complete on multiple endpoints. Security teams cannot afford to waste time and resources on multiple endpoints that haven't been impacted by an attack and pose little to no threat. Magnet Ignite offers internal incident response teams and external service providers an early case assessment that will guide the next steps of their investigations. By quickly gathering intelligence and assessing a potential ransomware attack, for example, Magnet Ignite helps enterprises understand where and when they need to deploy a deep dive forensic analysis. Once you have triaged the network for those devices impacted, the next stage along the workflow of an intrusion is a deep dive forensic analysis to understand what malware is involved and what vectors really happen. This is our traditional strength of offering like Axiom Cyber and our new solution, Automate Enterprises. which delivers significant value to the private enterprise and forensic service providers, we are recognized as leaders in this market. With the broad range and the depth of our artifact support, we enable deep dive investigations of those endpoints. Through our investments in product development, we have enhanced our offering over the years, specifically for the private enterprise. As an example, Axiom Cyber has been tailored to support investigations by enabling collections of both targeted portions or full images of those impacted endpoints. In this sense, think of the process as a funnel. Thousands of endpoints at the detection stage, thousands or hundreds at the triage stage, and tens or singles at the deep dive stage. This not only reduces risk for enterprise customers, it also does so in a fiscally responsible manner. We're expanding upon the workflow from the comprehensive deep dive analysis to the triage stage, while at the same time facilitating the workflow within the corporation's digital forensic lab or at the forensic service provider, just like where we have been successful in law enforcement. The forensic experts at the private enterprise have the playbook of what to do. We are the platform that integrates the different applications into a single pane of glass to look through. EDRs are good at the front end as they cover millions of endpoints, which is a significant challenge. However, It is at a very narrow depth in terms of coverage. When you cross over the threshold into that targeted deep dive, that is where we are strong. We are now adding more expertise at the triage area and getting better results faster. One of the ways we deliver these results is through improved automation. Our new Magnet Automate Enterprise addresses incident response workflows. It's designed to work with Axiom Cyber to collect and process more evidence in a methodical approach which can be done for ad hoc collections, queued up collections, or multiple collections in parallel to increase the scale of the investigation and move faster. These processes can continue 24-7 by 365 without human intervention, maximizing the efficiency of incident responders. The forensic service providers and in-house digital forensic experts and incident responders use our deep dive analysis to know what to look for on the devices what devices to quarantine, the steps required to remediate it, and just as important, to understand what has happened so they're able to harden their cybersecurity against future attacks. We address a market that is rapidly evolving with increased threat levels and higher scrutiny from boards, executives, and security managers in the private enterprise. We believe there's tremendous opportunity to grow within the space from our core strength at the deep dive forensic investigation up the workflow into the tree updates to move quickly and get to the key information faster. Our ability to grow our wallet share within the private enterprise is significant. The revenue multiple of a corporate user is up to four and a half times higher than a conventional forensic user. A forensic lab leveraging our automation orchestration platform is up to an additional 12 times increase in revenue. You can see why we believe the private enterprise is an attractive opportunity. We are seeing early success in generating higher ARR within the account base. During Q2, we delivered increased ARR of 750% at a European inter-institutional service provider, 400% at a technology and service provider, and 300% at a European bank. 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. Total revenue was $23.1 million in Q2, an increase of $6.7 million, or 41%, compared to the same period in 2021. Our continued strong performance was a result of our new customer acquisitions and our land and expand strategy, where we continue to win new accounts and expand within our customer base. We delivered strong growth across all of our major revenue streams. Software license revenue was $7.3 million, an increase of $2.4 million, or 48%. Software maintenance and support revenue was $13.6 million, an increase of $4 million, or 42%. And professional services revenue was $2.2 million, an increase of $300,000, or 14%, each compared to the same period in 2021. Total recurring revenue was $20 million in the quarter, representing 86% 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 product. On a quarterly basis, the percentage of recurring revenue can fluctuate depending on the mix of term versus perpetual licensing that is sold. Adjusted EBITDA was $3.5 million in Q2, a decrease of $1 million compared to the same period in 2021. The 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 2022. Our adjusted EBITDA margin profile was 15% in Q2 compared to 27% in the same period in 2021. The 2021 margin was bolstered by reduced expenses due to limited travel and marketing programs, as a result of COVID-19 restrictions, which have now generally lifted, and we're seeing our teams back out in the market again. 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 does vary quarter to quarter based on timing of payments, receipt of accounts receivable, as well as the impact of certain large transactions. For Q2, we had cash flows used in operations of $200,000, compared to cash provided by operations to $63 million in the same period in 2021, primarily driven by lower net income, as well as timing of payments and receipt of cash. Year-to-date, we have generated $1.3 million in cash flow from operations, compared to $2.3 million in the same period last year. 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 June 30, 2022, cash and cash equivalents stood at $116 million compared to $118.1 million at the end of fiscal 2021. We are closely monitoring the macroeconomic environment with rising interest rates and inflationary pressures, and as Adam mentioned, are prioritizing our investments to ensure that we can deliver against our plan. With that in mind, we are updating our outlook for fiscal 2022 with this morning's announcements. We have increased our expected revenue outlook for fiscal 2022 to a range of 92.5 to 94.5 million, moving the range up a million dollars at both the top and the bottom end, which represents growth of approximately 32% to 34% in fiscal 2022 compared to fiscal 2021. We have also increased our margin guidance for fiscal 2022 and expect adjusted EBITDA to be in the range of $13.75, $15.75 million, which represents a margin of 15% to 17% for the year. As Adam mentioned earlier, we believe we can continue to deliver top-line growth and at the same time generate scale within the business to deliver improved EBITDA margin performance in 2023 and beyond. In the current macroeconomic environment, we intend to be disciplined, striking an appropriate balance between revenue growth and further investment in the business with a continued focus on unit economics to ensure we are growing in a sustainable fashion. Thank you again, Fred, for participating in today's call. And with that, I'll pass it back to Adam.