Magnet Forensics Announces 2022 Fourth Quarter and Year End Results

Magnet Forensics Inc. (“Magnet Forensics” or the “Company”) (TSX: MAGT), a developer of digital investigation solutions for more than 4,000 enterprises and public safety organizations, today announced its financial and operational results for the three months (“Q4 2022”) and twelve months (“FY 2022”) ended December 31, 2022. Financial references are in U.S. dollars unless otherwise indicated.

Q4 and FY 2022 Financial Highlights
(Comparison periods in each case are the three and twelve months ended December 31, 2021, unless otherwise stated)

• Revenue of $31.0 million in Q4 2022, an increase of 45%; and $98.9 million in FY 2022, an increase of 41%
• Gross profit margin1 of 94% in Q4 2022, up from 93%; and 93% in FY 2022, unchanged
• Net income of $4.2 million in Q4 2022, up from $0.8 million; and $3.7 million in FY 2022, down from $7.3 million
• Adjusted EBITDA2 of $9.5 million in Q4 2022, up from $4.7 million; and $21.3 million in FY 2022, up from $18.6 million
• Annual Recurring Revenue3 (“ARR”) of $92.0 million as of December 31, 2022, an increase of 50% from the prior year

“We finished the year strong with topline growth of 41% and ARR growth of 50% as a result of the strategic investments we’ve made in R&D and sales and marketing while maintaining focus on our mission to help our customers seek justice in a digitally connected world,” said Adam Belsher, CEO of Magnet Forensics. “The volume and variety of cybercrimes and crimes with digital evidence, coupled with the scarcity of skilled personnel to investigate them, is driving the adoption of Magnet’s solutions. Our public sector and private enterprise customers are increasing their productivity by leveraging automation, analytics, the cloud, and intuitive workflows delivered by our platforms that enable more people within the agency to contribute to digital investigations.”

Q4 2022 Highlights
(Comparison periods in each case are the three months ended December 31, 2021, unless otherwise stated)

• Revenue of $31.0 million, an increase of 45% compared to $21.4 million, primarily due to a $6.0 million increase in Software Maintenance and Support revenue (as defined herein) and a $3.9 million increase in License – term revenue, each of which are a result of growth within the Company’s customer base. The transition to a greater proportion of term license revenue compared to perpetual license revenue is part of the Company’s strategy to increase Term License Contracts (as defined herein). This transition to term-based products has increased the proportion of term license support revenue as a percentage of total Software Maintenance and Support revenue to 69% as of December 31, 2022, compared to 45% at the same point in 2021. Total Recurring Revenue1 was $27.6 million, representing 89% of total revenue.
• The Company delivered the final milestone on its development contract with London’s Metropolitan Police Service (the “MET Police”) totalling $2.2 million of revenue for the three months ended December 31, 2022, reflecting $1.4 million for License – term revenue, and $0.8 million for Software Maintenance and Support – term revenue, which is primarily related to revenue holdbacks from previous deliverables. Total revenue from the MET Police for the fiscal year ended December 31, 2022 was $5.1 million.
• ARR2 grew to $92.0 million as of December 31, 2022, an increase of 50% compared to $61.3 million as of December 31, 2021. The growth in ARR was primarily due to higher License - term revenue due to an overall increase in licenses sold, higher Software Maintenance and Support revenue from growth in the user base and an increase in new revenue form our expanded suite of products being sold and deployed into the customer base.
• Gross profit margin3 was 94%, up from 93% in Q4 2021.
• Net Income was $4.2 million, an increase of $3.4 million compared to $0.8 million in Q4 2021. The change is primarily due to an increase in Revenue, partially offset by increased investments in Sales & Marketing and Research & Development, including additional resources required to support our expanding customer base and suite of products.
• Adjusted EBITDA1 was $9.5 million, an increase of 102% or $4.8 million from the prior period, primarily due to operating leverage in the business from the strong revenue growth due to the investments made in Research & Development and Sales & Marketing during the past 12 months.
• Cash was $146.8 million at December 31, 2022, compared to $118.1 million at December 31, 2021, an increase of $28.7 million.
• The Company won new customers across each of its public safety and private enterprise markets, including Europe, Asia, and North America.
• The Company’s approach of consistent and rapid innovation supported multiple software updates across its product portfolio, which included Magnet AXIOM 6.9 and Magnet AXIOM Cyber 6.9 from its core products and product updates for the MDIS with new upgrades and innovations of Magnet AUTOMATE, Magnet AUTOMATE Enterprise and Magnet REVIEW.

Proposed Transaction to Be Acquired by Thoma Bravo

On January 20, 2023, Magnet announced that it had entered into a definitive arrangement agreement with Morpheus Purchaser Inc. (the “Purchaser”), a newly created corporation controlled by Thoma Bravo, a leading software investment firm, whereby the Purchaser will acquire the Company, subject to obtaining shareholder and other customary approvals (the “Transaction”). The Transaction is to be considered by shareholders at a special meeting of shareholders to be held on March 23, 2023. The management information circular dated February 16, 2023 with respect to the matters to be considered at that meeting has been prepared and filed by Magnet on SEDAR at www.sedar.com, and has been mailed to shareholders.

The Company is suspending its practice of providing its outlook for Revenue and Adjusted EBITDA for the fiscal year at this time as a result of the proposed Transaction. The management information circular of Magnet includes the Formal Valuation and Fairness Opinion dated January 20, 2023 of CIBC World Markets Inc., the independent valuator to the Special Committee of the Board of Directors of Magnet in Appendix “F”, which sets forth the Company’s 2023 forecast for Revenue and Adjusted EBITDA.

Given that the Transaction is pending, the disclosure contained in Magnet’s management information circular and its audited consolidated financial statements for the year ended December 31, 2022 and related management’s discussion and analysis (“MD&A"), and that Magnet is limited in the comments that it may make in respect of the Transaction and its financial results other than that publicly disclosed and filed on SEDAR, it will not be holding a conference call in respect of its year end results with investors.

About Magnet Forensics

Founded in 2010, the Company is a developer of digital investigation software that acquires, analyzes, reports on, and manages evidence from digital sources, including computers, mobile devices, IoT devices and cloud services. The Company’s software is used by more than 4,000 public and private sector customers in over 100 countries and helps investigators fight crime, protect assets and guard national security. For further information, please visit the Company’s website at www.magnetforensics.com.

Non-IFRS Financial Measures

This press release contains certain non IFRS financial measures, specifically Adjusted EBITDA and Total Recurring Revenue. These measures are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under IFRS. These non-IFRS measures are used to provide investors with supplemental measures of the Company’s operating performance and liquidity and thus highlight trends in its business that may not otherwise be apparent when relying solely on IFRS measures. The Company also believes that securities analysts, investors, and other interested parties frequently use non-IFRS measures in the evaluation of issuers. The Company’s management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management and executive compensation.

“Adjusted EBITDA” represents net income and net income as a percentage of total revenue, respectively, adjusted to exclude depreciation and amortization, income tax expense, share-based compensation expense, foreign exchange loss (gain), interest expense (income), certain financing-related expenses that are non-recurring in nature, and certain acquisition-related expenses that are non-recurring in nature and not indicative of continuing operations. The Company uses Adjusted EBITDA as a supplemental measure to review and assess operating performance, assess its ability to generate cash-based earnings, as well as provide a more complete understanding of factors and trends affecting the Company’s business that may not otherwise be apparent when relying solely on IFRS measures.

The following table reconciles net income to Adjusted EBITDA for the three months and twelve months ended December 31, 2022 and December 31, 2021 (expressed in thousands of US dollars):

“Total Recurring Revenue” represents the total revenue recognized during the period from contract elements that are recurring in nature and includes revenues recognized as “License – term” and “Software Maintenance and Support” under term license contracts (“Term License Contracts”) and revenue recognized as “Software Maintenance and Support” from term subscriptions for software maintenance and support (“Software Maintenance and Support”) purchased by customers under perpetual licenses. The Company believes that Total Recurring Revenue is an indicator of business expansion and provides management with visibility into its ability to generate predictable cash flows.

Term License Contracts and subscriptions for Software Maintenance and Support must be renewed upon expiry, permit customers to terminate their contracts for convenience and do not contain penalty provisions in the event of early termination, though customers that terminate early are not entitled to refund of amounts paid under the contract. The Company facilitates customer renewals generally through automatic delivery of renewal notifications sent in advance of the renewal dates, followed by a personal contact from a member of the Company’s sales team. Based on the Company’s experience, early terminations by customers have not been material and a significant majority of customers renew their contracts upon expiry.

The following table reconciles Revenue and Total Recurring Revenue to total revenue for the three and twelve months ended December 31, 2022 and December 31, 2021 (expressed in thousands of US dollars):

Key Performance Indicators

The Company monitors a number of performance indicators to help it evaluate its business, measure its performance, identify trends affecting its business and formulate strategic plans. Each of these key performance indicators utilizes revenue from contract elements that are recurring in nature, which include Term License Contracts and subscriptions for Software Maintenance and Support and excludes non-recurring Perpetual License fees and training and implementation fees. Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies and may be adjusted in certain cases related to acquired businesses.

“Annual Recurring Revenue” is defined as the annualized value of contracted recurring revenue from all customers that have contracts for the Company’s products and services as at the date being measured. The Company calculates Annual Recurring Revenue by dividing the contracted recurring revenue of each customer contract in effect as at the measurement date by the term of the contract, expressed in years. The Company’s calculation of Annual Recurring Revenue assumes that active customers will renew their contracts with it at the time of renewal. Based on the Company’s experience, a significant majority of customers renew their contracts upon expiry. In addition, while subscription agreements may be subject to price increases on renewal, the Company does not assume price increases on subscription agreements when calculating Annual Recurring Revenue. In the event of an acquisition, management includes the annualized value of recurring revenue from contracts with a commencement date subsequent to the acquisition date. The Company believes that Annual Recurring Revenue is an indicator of business expansion and provides visibility into its ability to generate predictable future cash flows.

Forward-Looking Information

This press release contains “forward-looking information” and “forward-looking statements” (collectively, “forward-looking information”) within the meaning of applicable securities laws. Forward-looking information includes or may relate to anticipated events or results and may include information regarding the Company’s financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, taxes, dividend policy, plans and objectives. This forward looking information includes, but is not limited to, information regarding the Company’s expectations of future results, performance, achievements, prospects or opportunities or the markets in which it operates; expectations regarding the growth of cybercrime and crimes with digital evidence; expectations regarding the Company’s public and private enterprise customers and the usefulness of the Company’s key performance and non-IFRS measures and the frequency of use of non-IFRS measures by third parties.

In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects", "is expected", "an opportunity exists", "budget", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates", "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or, "will", "occur" or "be achieved", and similar words or the negative of these terms and similar terminology. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management's current expectations, estimates and projections regarding future events or circumstances.

Forward-looking information is necessarily based on a number of opinions, estimates and assumptions that the Company considered appropriate and reasonable as of the date such statements are made, and is subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in the "Summary of Factors Affecting our Performance" section of the Company’s MD&A for the three months and fiscal year ended December 31, 2022, and in the "Risk Factors" section of our Annual Information Form dated March 8, 2023, both of which are available under the Company’s profile on SEDAR at www.sedar.com. Certain assumptions in respect of, among other things, the Company’s ability to build its market share; retain existing customers and attract new customers, and increase revenue associated with those customers; the Company’s ability to retain key personnel; the Company’s ability to maintain and expand geographic scope; the Company’s ability to execute on its growth strategies; the Company’s ability to maintain and protect its intellectual property rights and proprietary information; the Company’s ability to prevent unauthorized access to or disclosure, loss, destruction or modification of data, through cybersecurity breaches or computer viruses disrupting the functionality of the Company’s products; the Company’s ability to obtain additional financing and maintain existing financing on acceptable terms; currency exchange and interest rates; the impact of competition; changes and trends in the Company’s industry and the global economy, including changes in laws, rules, regulations, and global standards are material factors made in preparing forward-looking information and management's expectations.

If any of these risks or uncertainties materialize, or if the opinions, estimates or assumptions underlying the forward-looking information prove incorrect, actual results or future events might vary materially from those anticipated in the forward-looking information. The opinions, estimates or assumptions referred to above are described in greater detail in "Summary of Factors Affecting our Performance" section of the Company’s MD&A for the three months and fiscal year ended December 31, 2022 and should be considered carefully by prospective investors.

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 may be other risk factors not presently known to the Company or that the Company presently believe are not material that could also cause actual results or future events to differ materially from those expressed in such forward-looking information. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such 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 made. The forward-looking information contained in this press release represents the Company’s expectations as of the date of hereof (or as of the date they are otherwise stated to be made) and is subject to change after such date. However, the Company disclaims any intention or obligation or undertaking to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws.

All of the forward-looking information contained in this press release is expressly qualified by the foregoing cautionary statements.

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