Micro Systemation, an Unknown Swedish Microcap
Outlooks and potential of a Swedish technological company
Micro Systemation (MSAB) is a specialist in forensic technology for extracting and analysing data from seized mobile devices. MSAB assists law enforcement authorities such as the police, defence, migration, corrections and customs to carry out their investigations and missions. This unknown company is nonetheless interesting.
In this article we will describe the business model, the metrics, risks and opportunities of this company. We will also identify the growth drivers and outlooks so a potential investor will have all the required information to make a decision.
Company overview
The company aims to develop a faster and simpler ways to secure evidence. Typical users of MSAB’s products are experts within digital forensics, investigators, analysts, and police officers in the field.
MSAB is represented in 16 countries: USA, Canada, Brazil, Australia, India, Japan, Singapore and European countries (Norway, Sweden, Finland, Germany, France, UK, Spain, Italy and Netherlands).
In simple words, MSAB offers system solutions that extract data from mobile phones and other devices.
The company offer revolves around 3 software:
XRY for data extraction. It extracts, decrypts and enriches data from mobile devices. The software is based on the Windows operating system and uses cloud-based storage.
XAMN to analyze the data. It is used for decrypting, enriching, reviewing, visualising and analysing data from mobile devices.
XEC for administration and monitoring. It is designed to help managers and IT departments.
The software are designed to be used on multiple platforms, including laptops, smartphones, tablets, and specialized devices, to suit user needs. To ensure the legal validity of the data, the solution is based on the .xry file format, which ensures that data cannot be manipulated.
There are 3 main regions:
EMEA & Latin America, 58% of the sales
North America, 33% of the sales
Asia & Oceania, 9% of the sales
The business model
The core business consists of licensing system solutions and software. A basic offer contains a license and different types of hardware depending on the product.
The length of a license depends on customer needs with a period between 1 and 3 years.
Since MSAB's core business is primarily software, increased sales lead to only a modest rise in costs (high gross margins). Consequently, MSAB benefits from a scalable revenue model where higher sales significantly boost revenue.
Recurring revenue is slightly above 50% of net sales.
Trends in the mobile forensics industry
MSAB identifies 5 trends in the mobile forensics industry.
Abundance of Data
Trend: Enormous volumes of data overwhelm law enforcement agencies. Nearly seven million apps available across major app stores, with explosive growth in digital devices and data volume.
Impact: High demand for effective mobile forensics tools to secure evidence legally.
MSAB’s opportunity: Provides XRY for unlocking phones, extracting, and decoding data, and XAMN for rapid data filtering and review, including encrypted mobiles.
Need for Scalable Forensic Solutions
Trend: Digital forensic labs struggle to process all seized digital devices. There are 30-60 investigators for every IT forensic officer, highlighting the need for broader evidence extraction capabilities.
Impact: Increased demand for non-specialist solutions.
MSAB's opportunity: Offers solutions helping improve productivity and with pre-programmed workflows for non-specialists.
Lack of IT Training and Forensic Officers
Trend: Insufficient trained officers for mobile forensics in police departments.
Impact: High demand for knowledge to perform extractions and analyses.
MSAB's opportunity: Provides training courses on mobile forensics and advocates for effective digital tool investments.
Privacy Concerns
Trend: Victims and witnesses often avoid reporting crimes to protect their privacy. 42% of rape victims withdraw reports to avoid handing over mobile data.
Impact: Need for selective data extraction to obtain only relevant information.
MSAB's opportunity: Supplier of selective extraction, complying with new legislation for controlled data use.
Evidence Requirements
Trend: Digital device data must be credible and verifiable for court use. Mobile phones are crucial evidence at crime scenes and for criminal planning and communication.
Impact: Strong demand for secure, non-manipulable file formats.
MSAB's opportunity: Provides a secure file format (.xry) with password protection, strong encryption, and detailed log files for verification.
Competition and market share
Top 2 competitors of the company are Cellebrite, Israeli company listed on Nyse, and Magnet, owned by Thoma Bravo.
Cellebrite is way bigger ($2.4B market cap vs less than $100M for MSAB with 10x the sales). The main issue with this competition is that it is growing faster than the market and faster than MSAB.
The primary issue with MSAB is its declining market share. To address this, the company is undergoing a restructuring, which has contributed to the negative results in Q1 2024 and the low net profit margin for 2023. The main goal of this restructuring is to reverse the market share loss.
Focus on the latest earnings
The latest earnings reports were disappointing, with the company reporting a -25% decline in growth and a negative EPS of -0.15 SEK, compared to 0.16 SEK in the previous year. This downturn is largely attributed to challenges in the EMEA region. The new CEO remains committed to the company's transformation, stating, “In the first quarter, we established a new global sales organization, and during the second quarter, we restructured the development department to enhance our capabilities and speed up delivery to market.”
Cautious investors may choose to steer clear of this stock, which is understandable given the recent performance. However, more aggressive investors might see potential for the company to overcome these difficulties and create significant value. It is prudent to wait for the next set of results to determine if the company can rebound and offset the poor performance of Q2.
Market outlooks
Keep reading with a 7-day free trial
Subscribe to Quality Stocks to keep reading this post and get 7 days of free access to the full post archives.