FORMER #BB Blackberry Founders solving digital crime 🚀🚀🚀 INTRODUCTION
Magnet Forensics develops data analytics and AI software that aids in legal cases by acquiring, analyzing, and managing digital evidence. Their services
help save time and improve accuracy for investigators by providing a digital platform that can quickly identify and highlight important data and evidence. Magnet Forensics (MAGT-TSX) has created a diversified revenue base with an international presence alongside a split of public and private sector customers in multiple industries.
Headquartered in Waterloo, Canada, Magnet Forensics is headed by previous Research in Motion founders (Blackberry creators) and a former police officer focused on cyber-enabled crimes. All of the management team and directors have skin in the game, holding a total of ~77% of outstanding shares and are committed to reinvesting into the growth of the company. The author believes that $MAGT is positioned for strong future growth due to a competitive moat encompassing high switching costs and a first-mover advantage that will increase returns to shareholders for years to come.
Lucrative growth story in the underappreciated criticality of the MAGT’s services in a rapidly growing industry
Magnet Forensics operates in an industry with incredible tailwinds that they are well positioned to capitalize on.
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Increasing frequency, sophistication, and economic impact of cybercrimes as global damages are 3.3x 2015 levels, and 7.2x 2011 levels; this furthers a need for cybersecurity, digital forensics to identify attackers, and to estimate impact.
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Global digital investigations and intelligence market is projected to reach a total market size of approximately US$10.2 billion in revenue by the end of 2026, growing at a CAGR of over 10.1% between 2021 and 2026; MAGT will capture a large portion of the growth of digital forensics.
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A shortage of digital forensics professionals and lack of manpower in public agencies (32 agencies had evidence backlogs of 12k devices); thus increasing the need for agencies to save time but remain accurate.
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Electronic evidence is needed in 85% of criminal investigations and is growing at 26% CAGR per year; thus, with the rise in volume and complexity, agencies will struggle with the analyzing digital evidence, providing an opportunity for solutions like MAGT
Ultimately, the shortage of manpower, increasing difficulty of digital investigations, and the growing TAM point to explosive growth for Magnet Forensics in the next 5 - 10 years and indicates a critical need for their services.
Management has a successful track record of growing companies and is highly aligned with shareholders
Magnet Forensics was founded in 2010 by CTO Jad Saliba, a former digital forensics investigator who left policing to develop software solutions that would improve the process of recovering and analyzing internet evidence, which investigations lacked severely at the time.
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Current CEO Mr. Belsher has sales and marketing experience at a growth technology company and was previously the VP of the Verizon Business Unit at RIM/BlackBerry, where he was responsible for growing revenue from $400MM to over $2B in 4 years.
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Additionally, Jim Balsillie, the director and chair of the board was a Chairman of RIM/BlackBerry from 1992 to 2007 and Co-CEO from 1992 to 2011.
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Lastly, CFO and COO Angelo Loberto have a number of senior executive positions in finance and operations at RIM/BlackBerry.
Management is highly experienced and has a successful track record of growing technology companies.
Further, management is highly aligned with stakeholders, owning 77.1% of outstanding shares. Specifically the CTO owns 31.5% of shares outstanding, the CEO owns 30.2%, and the Chair of the BoD owns 15.4% shares outstanding. High management share ownership ensures that the company pursues appropriate strategies that maximize the outcome for shareholders on a risk-adjusted basis, adding a vote of confidence to MAGT’s future success.
Ultimately, key policing and business experience from management, their successful track records, and the high % of insider ownership provide confidence in the execution of MAGT’s growth strategy and operations execution.
Proven growth strategy to become the next-generation digital forensics software provider
On April 28th, 2021, $MAGT recently completed a $100mm capital raise that strengthened the company's cash position to accelerate its growth. Using its proven growth strategy, MAGT genmerates incredibly sticky customers that provide a strong source of recurring revenue.
Growth Strategy:
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Land New Logos: growth in private markets (65% of current customers) and penetrate public markets (35%)
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Expand: upselling (higher tiers of the service) and cross-selling products to existing customers
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Product Innovation: increase offerings for current customers through R&D
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Opportunistic Acquisitions: grow capabilities and expand into adjacent markets (ex. e-discovery)
The company generated $51MM revenue last year, with 70% recurring revenue, >120% net revenue retention (i.e. 20% increase in revenue per avg. customer), and has >4,000 customers (86% ARRPA growth over the last two years). MAGT also has attractive unit economics, achieving a 21% net income margin, 30% EBITDA margin, all of which have potential to grow as the company continues to scale and move away from perpetual licenses (one-time fees). Further, Magnet’s customers include national-level government agencies such as the FBI, RCMP, and the U.S. Department of Homeland Security, which validates the capabilities and criticality of its software. Low churn rates reflect the mission-critical nature of MAGT’s solutions and the competitive advantage they’ve created. It is likely we’ll see double digit growth for years to come due to structural tailwinds and MAGT’s attractive business model.
Ultimately, MAGT is a highly successful software story and is well positioned to continue to capture sticky customers across private and public markets due to industry trends and their position as a market leader.
CATALYSTS
Substantial usage in a publicized case: successful and publicized use cases like the Boston Marathon case
High-profile investors and increased liquidity: a reputable investment firm investing in MAGT or increased liquidity due from institutions
Sustained revenue growth: MAGT shows more certainty to maintain a high % revenue growth through new and higher seat counts, and cross-selling
RISKS
Potentially small SAM: uncertainty around future growth and the potential serviceable market size for digital forensics
Execution risk: aggressive expansion into private markets may prove to be more difficult than expected with increased competition
Technological changes: currently MAGT is able to unlock Apple phones and decrypt files easily, if Apple or enhanced encryption makes this difficult, MAGT may lose its value proposition if it cannot find another solution
Conclusion/TLDR
Magnet Forensics (TSX: MAGT) is a comprehensive digital forensics solution that aids in all steps of the case, from forensics, to intelligence and analytics, and discovery. It is a next-generation software provider with high revenue growth rates, net dollar retention, and a diversified base of customers. On top of this, structural industry tailwinds will enhance MAGT’s future growth prospects. With a clear value proposition shown through MAGT’s high-profile government clients and an incredibly aligned and successful management team, shareholders can expect explosive returns in the next 5 years.