Magnet Forensics Inc. T.MAGT

RBC

[retiredcf]

Their upside scenario target is $50.00. GLTA

March 10, 2022

Outperform

TSX: MAGT; CAD 28.20

Price Target CAD 42.00 ↓ 48.00

Magnet Forensics Inc Cyber demand fuels growth

Our view: Magnet reported Q4 above expectations, with revenue up 37% Y/Y, ARR increasing 48% Y/Y and backlog growing 55% Y/Y. FY22 revenue guidance for 30-33% Y/Y growth was slightly above expectations, with ARR expected to increase at a faster pace. Magnet is benefitting as public and private sector organizations deploy digital forensics software for investigations and to improve cybersecurity. Maintain Outperform, adjusting target to C$42.00.

Key points:

• Q4 ahead of expectations. Q4 revenue increased 37% Y/Y to $21.4MM, above RBC at $19.6MM and consensus for $19.0MM. Upside stems primarily from term license ($5.9MM vs. RBC at $4.6MM) though all segments were better than our forecasts. On higher revenue, adj. EBITDA of $4.7MM was above RBC/consensus at $2.5MM. Adj. EPS of $0.06 was ahead of our forecast for $0.04 though below consensus at $0.08.

• Guidance shows >30% growth to continue. Our Outperform thesis is based on Magnet sustaining 30% revenue growth over our forecast period. FY22 revenue guidance for $91.5-93.5MM revenue was ahead of our estimate for $89MM (consensus at $88MM) and implies 30-33% growth. Management anticipates ARR to grow even faster than total revenue, given the mix shift from perpetual to term license. Magnet is making investments to scale; as a result, the company guided to $13-15MM adj. EBITDA, in line with consensus at $14MM (RBC at $15MM). Our FY22 estimates move to $92.5MM revenue and $14.0MM adj. EBITDA, compared to $89.1MM and $15.1MM previously.

• Cyber and digital investigations demand drives 48% Y/Y ARR growth. ARR increased 48% Y/Y to $61MM, up from $54MM Q3 and with grow accelerating from 47% YTD. Backlog increased 55% Y/Y to $53MM, up from $44MM Q3. ARR growth faster than revenue growth reflects Magnet’s mix shift from perpetual to term license, continued strong public sector demand, and expansion into the private sector (now 33% of ARR, up from 25% in FY19). Magnet is increasing its footprint per customer, with ARR per account up 44% Y/Y in FY21, accelerating from 40% Y/Y in FY20, and continued >120% net revenue retention.

• A rollercoaster of a ride, but thesis remains compelling. While Magnet’s shares, along with high-growth software peers, have been volatile of late, the company’s momentum has exceeded expectations. Looking forward, we see continued >30% growth, due to the high priority being placed on digital investigations in the public sector and rising adoption within private enterprises. Magnet is currently trading at 8x FTM EV/S, below cybersecurity peers at 11x, despite higher estimated FTM revenue growth (32% vs. 23%).

• Adjusting target from C$48.00 to C$42.00. We are updating our price target to reflect the material contraction in peers’ valuation multiples. Our revised C$42.00 price target equates to 10x CY23e EV/S, down from 12x EV/S previously. Our target multiple is justified slightly below cybersecurity peers, given Magnet’s smaller TAM