Magnet Forensics Inc. MAGTF

RBC

[retiredcf]

Magnet Forensics (TSX: MAGT)

Outperform, C$48.00 price target

We expect Magnet to report solid Q4 results, driven by a strong demand environment. Our forecasts call for revenue growth of 26% Y/Y, slightly above consensus. Additionally, we expect the company to introduce healthy FY22 guidance for +30% Y/Y revenue growth. As a public company, Magnet has exceeded consensus expectations and raised annual guidance twice. Maintain Outperform, C$48.00 price target.

Magnet is expected to report Q4/FY21 on March 1. Magnet has not yet confirmed the date when it will report Q4/FY21 results. We expect Magnet to report Q4/FY21 on March 1, before market open.

RBC forecasts Q4 revenue slightly above consensus. We forecast Q4 revenue to increase 26% Y/Y to $19.6MM (+10% Q/Q), slightly ahead of consensus for $19.1MM. Our forecast reflects term license revenue rising 18% Q/Q to $4.6MM (+40% Y/Y), driven by strong uptake of new cloud-based software, along with steady growth in maintenance (+38% Y/Y, +8% Q/Q). On higher sales & marketing spending, we estimate adj. EBITDA to fall to $2.5MM (-53% Y/Y), slightly above consensus at $2.2MM. Our $0.04 adj. EPS forecast is in line with consensus.

Expect Magnet to provide solid FY22 guidance. Similar to FY21, we believe Magnet will provide annual guidance. Our model calls for FY22e revenue to rise 30% to $89.1MM, slightly above consensus at $88.1MM. We expect momentum from Magnet’s push into the private  sector to help sustain revenue growth. As a result, we anticipate Magnet’s mix of term license revenue to rise to 25% FY22e from 22% FY21e. Following new investments, we anticipate adj. EBITDA margins to decline to 17% in FY22, from 24% in FY21. As a result, we forecast $15.1MM FY22 adj. EBITDA, slightly above consensus at $14.2MM.

Magnet’s U.S. Federal awards up 21% Y/Y. Based on data from U.S. Federal government procurement databases, Magnet’s U.S. Federal awards rose 21% Y/Y to $83k Q4. Calendar Q4 is typically Magnet’s smallest quarter for U.S. Federal awards, given seasonality. Agencies that purchased Magnet’s software Q4 include the Department of Justice, Homeland Security, and Agency for International Development.

Cellebrite reported Q3 ahead of consensus. On November 10, Israel-based digital intelligence company Cellebrite (NASDAQ: CLBT) reported Q3/FY21 (Sept-qtr) revenue rose 24% Y/Y to $66MM, above consensus at $59MM. The company raised FY21 revenue guidance to $241.5- 243.5MM from $236.0MM, above consensus at $234.4MM. However, Cellebrite lowered FY21 ARR guidance to ~34% Y/Y growth from 44% previously as some public sector customers still prefer to purchase perpetual licenses instead of SaaS.

Maintain Outperform. We believe that Magnet’s stock is positioned to outperform over the long-term on realization of 30%+ compounded revenue growth. With the increasing strategic importance of digital forensics, Magnet has an opportunity to leverage its position as the digital dashboard for investigations to expand into additional tools and adjacencies (e.g. e- discovery) through acquisitions or product development. Our C$48.00 price target equates to 12x CY23e EV/S, slightly above cybersecurity peers at 10x given the company’s higher growth.