Analysis of MSAB, 2017

MSAB is a Swedish software company, developing mobile forensic solutions for federal police internationally. It operates in a market with strong growth, driven by digitalization. The market is also competitive though, with almost no moats to keep other players away, and MSAB has become quite expensive during the last few years.

Products

MSAB has 5 different solutions:

Platforms: Includes solutions to present data. The main product here is MSAB Office, an all-in-one forensic system for mobiles, designed for labs. All the solutions are created for Windows.

XRY: Extracting data from operating systems, device memory, connected clouds and from pictures. Wide range of devices – smartphones, tablets and satellite navigation units.

XAMN: Products used to identify valuable information from the extracted data by the XRY-solutions.

XEC: Allows for exporting and management of data.

iVE: Vehicle forensics solution. Partnered up with Berla, a global leader in vehicle forensics, in 2016.

A small part of its revenue also comes from training customers in the systems the company provides.

MSAB adopts to the fast-moving market by being fast too. One example is when Apple released iPhone 6 and the operative system iOS8. MSAB released forensic solutions for both during that same quarter.

Geographies

MSAB has offices all over the world. An issue here is that the company can’t really decide where these offices are situated. In one source (all sources from the same period) regional offices in Brazil and Russia are included as well. Another one states that there’s and office in Hong Kong. In yet another one, Australia is left out. This confuses me and is somewhat adding to the negative side in the analysis. Clear communication is a must.

Business model

MSAB sells licenses and hardware for its services, with the initial payment making up about 50% of the company’s revenue. The other 50% is reoccurring cash flows, generated by allowing customers to subscribe for software updates and services.

The business model seems to be fairly scalable, the profit margin has been increasing as the revenue has done so. It makes sense since it’s products, once developed, can be sold numerous times without affecting the variable cost too much. Expenses for marketing and service should be the only margin costs.

The profit margin is strong. It takes a lot of problems before this company bites the dust.

The business model should be able to produce cash flows for many years to come. As people spend more and more time using their phones, MSAB’s products becomes more and more valuable to society. This trend shouldn’t stop in the upcoming years.

Customers

The customer of MSAB is law enforcement agencies all over the world. By nature, these are public owned. One strong buying criteria for MSAB’s products is therefore the price. Public owned companies are always restricted by budgets. Moreover, local supply seems to be a buying criteria. As stated by MSAB’s CEO:

“We have chosen to establish offices locally as many of our customers prefer to do business locally. Our success is based largely on having personnel who know the local market and who have the capacity to quickly build trust with our customers.”

Employees

When it comes to the relation to employees, I think the right word for MSAB is: OKAY. The salary is OKAY compared to similar jobs in Sweden, and the grade that its employees gives the company is OKAY compared to competitors. “Lagom” would be the Swedish term for MSAB’s employee relation.

Executives

Among executives, there are a lot of incentives to develop the company well in the long-term. 22% insider ownership, spread out over several executives and board members, is a great indication. An indication that’s less great is that this is a reduction of insider ownership by around 10% since the beginning of 2016.

MSAB seems to be doing a good job in developing and promoting its personnel. The executive team consists of only 2 persons, but there has been no turnover (at least not in the latest decade). They earn about SEK 2 million per year, which isn’t out of line at all.

An anecdote is that Carl Bildt, the former Swedish prime minister and later minister for foreign affairs, is on the board of directors.

Valuation + Key financials

MSAB has experienced rapid growth since 2012, and the valuation for the company is showing that. 33% ROA is exceptional profitability.

Financially, MSAB is doing well too. It has no liabilities carrying interest payments and a high current ratio. It also has a huge cash position, 70% of the total assets in the balance sheet. The debt/equity ratio is fine as well, meaning there’s room for some debt-driven expansion if necessary.

One thing that’s worryingly is that the company doesn’t reinvest a lot of its profit, almost 90% goes into dividends. With the valuation that MSAB is currently at, I would prefer almost no dividend. It has a lot of growth to accomplish if the valuation should be considered reasonable.

On the other hand, the company doesn’t require any money spent in investment activities, almost 100% of profits are owner’s earnings. Costs for development of new software are accounted for in salaries and wages, and apart for that, no large investments are needed.

Market

Recent WannaCry (ransomware) breaches of cybersecurity, and terror acts, such as the one in Stockholm in April, will lead to an increased demand for forensic products. Mobile phones have become one of the most important evidences in modern crime investigation according to the (now former) FBI director, James Comey. The market is riding the digitalization trend and is growing fast. The estimated CAGR is a growth of 11% per year to 2020, and there are no signs of it slowing down.

The digital forensics market is worth about USD 2 B, which puts MSAB at a market share of around 1,5%. There’s room for further growth, in other words.

Lately, an intense debate has been going on regarding heavily encrypted devices. The developers of mobile devices, such as Apple, wants to keep a high customer integrity. On the other hand, federal police want to solve crimes and be proactive to improve citizens’ safety. Heavy encryption creates obstacles for companies such as MSAB, but if I would have to bet on a horse in this race, it would be the one of increased citizens surveillance. If Apple (or any other phone developer) develops too tough encryption so that federal police can’t get their work done, I think it will be regulated.

Another recent movement in the market is that of decentralization. Police officers are now the ones to make the initial extraction and analysis of data, a job that only could be handled in labs before.

Competitive landscape

The competitive landscape for MSAB is concentrated since the market is niched. Four main competitors have been identified:

  • Cellebrite
  • AccessData
  • Guidance Software
  • Magnet Forensics

AccessData

Headquatered in the US, this company has about 250 employees working with digital forensics and management of enterprise information, globally. It is more diverse than MSAB, offering mobile solutions and computer solutions as well. Has been focusing its service lines as of late, selling off two companies. One in incident resolution solutions (2015) and another in data analytics for risk compliance (2014). It seems to provide great customer service and their new CEO is recruited from Guidance Software, another of MSAB’s competitors.

Cellebrite

Has been awarded the 4:cast’s nomination for greatest phone forensic software and digital forensic organization for 8 consecutive years. Their product is called UFED. The company is focused not solely on software, as MSAB, but also on hardware. Moreover, they are selling products related to mobile lifecycle improvements. About 500 employees worldwide, and a headquarter in Israel. Positive for MSAB is that in January 2017, Cellebrite had a data breach where it lost 900 GB of customer information. This might have a negative effect on branding and sales in the upcoming years.

Guidance Software

US-based, Guidance Software is the largest competitor of MSAB seen to the number of employees. It has around 600 of them worldwide with sales to customers outside of the US accounting for 24% of revenue. Guidance offers digital forensic solutions and corporate governance products. It has the best computer forensic product on the market, and has been awarded a title for this 7 consecutive years, by SC Magazine. In May 2017, they moved into mobile forensics as well.

Magnet Forensics

A new competitor for MSAB, Magnet Forensics has had an amazing growth the last few years. It released its first product in 2011 and is now considered one of the greatest in digital forensics. Its solution can be used both for mobile and computer devices. 80% of employees are in Canada, which means around 150 of them at the moment. Magnet Forensics’ “claim to fame” is that it has a product that can extract and recreate deleted data on devices better than competitors.

MSAB and its competitors are all involved in extracting, analyzing and managing digital data for criminal investigations. In their product segment, within the forensic market, they differentiate from one another by also offering computer forensics or not. MSAB and Cellebrite don’t do this, while the other competitors do. MSAB is, so far, the only actor involved in vehicle forensics, which I see as a sign of strength. Vehicles are becoming more and more digitalized and should have the possibility to carry important data for crime investigations in the future.

Regarding geographies, MSAB is the company that’s most global. The CEO, Joel Bollö, states that the geographical spread is a strong competitive advantage, as it’s an important buying criteria for customers. A common denominator is that all the companies are represented in the UK and the US. Note that I’ve only included the geographies where MSAB is present. For instance, the figure doesn’t disclose that Cellebrite is well-established in Israel.

When it comes to product development, MSAB seems to be doing a little bit better than the average main competitor. It’s a tough comparison to make, but MSAB is not falling behind in this category at least. What is a bit worryingly is that Guidance Software just (beginning of May) entered the market and AccessData recently released a new version of their core product.

All in all, I think it’s fair to say that MSAB does have a few stronger competitors. These four are probably the toughest in the market though, and they do not represent all of it. Even if MSAB isn’t able to keep up with the absolute top, it still has a chance to outgrow the market and win shares from other, weaker, competitors.

Moat

Intangibles is a tiny figure in the balance sheet, so I assume that the company doesn’t hold any patents. The industry itself doesn’t seem to have any barriers of entry. One of the competitors, Magnet Forensics, was a one-man company up until a couple of years ago.

There’s some “stickiness” involved in the business model of today’s forensic products. All the major competitors, MSAB included, offers training services for its customers to be able to use the products properly (this is old-fashioned by the way, someone should disrupt here). This will decrease the likelihood that a customer replaces their old solution with a new one from a competitor. A double-edged sword for MSAB, since they want to outgrow the market as well as keeping their old customers.

Risks

MSAB is operating within an industry that’s characterized by rapid development and innovations. One risk is therefore that competitors develop better products that makes MSAB’s services outdated.

Another one is the political risk. Although I don’t find this likely, there’s a possibility that politicians change their minds, and puts people’s integrity before people’s safety (wops, don’t want to become too political here, but I think my standpoint is obvious). In that case, demand for MSAB’s products would decrease drastically.

In its annual report, the company states that one risk is to not be able to attract great co-workers. This is a risk that every company must consider, but it’s especially preeminent in the IT business. MSAB should do OKAY here, but there are certainly other companies that attracts the top talents more.

DCF

Given a price of about SEK 1,3 billion, I find the company too expensive at this point. For me to buy, I’d have to expect one of the following:

  • Revenue growth of 20%+ for a number of years to come
  • Steady profit margin of 35%+

Or a combination of the two. Considering the expected market growth, the recent movements from competitors, and the prior growth and profits of the company, I don’t find these scenarios to be likely.

Therefore, I give the company two out of five elks.

What do you think of MSAB? Leave your digital footprint, in the form of a comment, here. MSAB doesn’t have computer forensics yet, so they won’t trace you!

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