Alarum Technologies Ltd. Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Alarum Technologies First Quarter 2023 Corporate Update Conference Call. This conference is being recorded today, May 30, 2023. Before we get started, I will read a disclaimer about forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Forward-looking statements include statements about plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are different than historical fact. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties include those discussed under the heading Risk Factors in Alarum's annual report on Form 20-F filed with the Securities and Exchange Commission on March 31, 2023, and any subsequent filings with the SEC. All such forward-looking statements, whether written or oral, made on behalf of the company are expressly qualified by these cautionary statements, and such forward-looking statements are subject to risks and uncertainties that we caution you not to place undue reliance on these. At this time, I'd like to turn the call over to Shachar Daniel, the company's CEO. The floor is yours.

Thank you very much, and welcome, everyone, to Alarum Technologies' First Quarter 2023 Earnings Results Conference Call. As is customary, with me is Shai Avnit, our Chief Financial Officer. Today, I will provide a brief review of our business operations; summarize our accomplishments, including the pivotal milestone of achieving positive adjusted EBITDA for the first time in our history. And then I will turn the call over to Shai, who will discuss our first quarter financial results before we open the call to questions. Before we begin, I want to quickly note that reconciliation tables for any non-GAAP or non-IFRS metrics referenced on these calls are available in the press release we published earlier today. With that said, I would like to start by saying, I'm incredibly proud of the entire Alarum team for their contributions to our first-ever positive cash flow from operating activities and positive adjusted EBITDA quarter, alongside our ninth consecutive quarter for revenue growth. Reaching positive cash flow from operating activities and adjusted EBITDA for the first time is a major milestone for Alarum and achieving it while sustaining substantial growth is an extraordinary achievement. A key driver for this performance was our enterprise Internet access, or NetNut, which operates in the fast-growing data access market and became profitable on an IFRS basis for the first time during the first quarter. After doubling NetNut's network infrastructure last year, we now have the capacity to support and process billions of client requests, which helps us drive rapid growth in the first quarter. Our expanding global presence is being met with surging demand and rapid adoption, which helped drive monthly subscriptions. We are proud to see NetNut becoming one of the strongest and best-known brands in its field in North America and Europe, and we are thrilled to witness similar access in the Asian market. To support our scaling efforts, we have expanded our regional sales team and developed meaningful partnerships, investments that have already yielded new large customers. NetNut's performance can be further attributed to the high level of customer satisfaction with our network performance and offerings. As a result, we have seen increased customer retention, a spike in new directed traffic to our network, and a rise in our customer spending. As the data and Internet access solution market continues to develop and expand, we feel well-positioned to capitalize on this growing interest. One such development that we are capitalizing on can be seen in our first quarter entry into the end-to-end retail AI market. Retail intelligence data vendors play a crucial role in providing retailers, brand owners, and e-commerce businesses with the ability to track and analyze the entire retail processes from product sourcing to consumer purchasing. These platforms offer valuable insights into pricing and availability, product reviews, inventory analytics, competitor pricing intelligence, and more. By analyzing this data, businesses can uncover hidden opportunities and make better-informed decisions, ultimately leading to the development of effective retail strategies. NetNut's cloud services empower retail intelligence vendors to collect retail data at scale from multiple websites and data sources worldwide. By utilizing our service, vendors can access essential business-related data without the need to develop complex data collection solutions, allowing them to focus on their core business. In today's data-driven world, accessing large amounts of data is imperative for businesses across various sectors, providing a wealth of opportunities for us. NetNut's innovative platform, which combines data collection scale and anonymity, enables us to provide targeted data for retailers that help businesses make data-driven decisions, such as understanding customer behavior, optimizing supply chain management, gaining insights into competition, identifying new opportunities, and ultimately enhancing their business functions and profitability. On the consumer side, where we employ a more flexible business model, we launched a new white-label Internet access privacy solution after the end of the quarter. Part of a multi-month effort to enhance our service portfolio, we believe the launch of our new white-label Internet access privacy solution for consumers is opening up new opportunities for us outside our traditional customer base and will further drive our growth in the quarters ahead. In addition to our marketing efforts, we are already in discussions with several vendors interested in offering this solution to their consumers under their own brands. Overall, we remain on a clear path to profitability, and our results showcase our ability to drive revenue growth while maintaining operational efficiency. Revenues increased to a record high of $5.7 million in the first quarter, up approximately 41% year-over-year and up nearly 10% sequentially. In addition to significantly growing revenues, as mentioned earlier, we generated our first-ever positive adjusted EBITDA during the first quarter, a major milestone for us and a tremendous improvement over the adjusted EBITDA loss of $3.2 million in the year-ago period. We believe that our ability to successfully manage our resources while maintaining growth positions us on the right path to accelerate our journey to net profitability. We recognize that reaching profitability is a critical milestone for our company, and we remain focused on achieving this goal while continuing to invest in our products and services. We also believe that our efforts to optimize our resources have contributed to our financial position and will facilitate our substantial growth in the future, as we continue to deliver exceptional value to our customers while balancing our goals with financial stability. I would now like to turn the call over to Shai to discuss the financials for the quarter in more detail. Shai?

Thank you, Shachar, and hello, everyone. As I discuss our first quarter 2023 financial results, I will be making comparisons to the first quarter of 2022 as well as the fourth quarter of 2022. Revenue for the first quarter of 2023 totaled $5.7 million, up approximately 41% over the $4 million generated in the first quarter of 2022. Compared to the fourth quarter of 2022, which saw revenues of $5.2 million, revenues were up nearly 10%. The 2023 first quarter revenues were driven primarily by organic growth in the enterprise access business revenues. Gross profit increased to $3.8 million, up 77% from $2.1 million in the year-ago period, driven primarily by increased efficiency of resources in the enterprise Internet access business and lower user acquisition costs in the consumer Internet access business, all resulting in minimal increases in our cost of revenues relative to our strong revenue growth. This resulted in gross margins as a percentage of revenue of 66% compared to 53% in the first quarter of 2022. Our Q1 2023 operating expenses decreased 36% year-over-year to $4.2 million, down from $6.7 million in the first quarter of 2022. This tremendous improvement was driven primarily by a 56% drop in general and administrative expenses as a result of the resource patent proceeding in May 2022, a 28% decrease in sales and marketing expenses, and lower R&D expenses. As a result of the above changes in revenues and expenses, net loss for the first quarter of 2023 was $0.7 million or $0.02 per share, down significantly from a net loss of $4.7 million or $0.16 per share in the first quarter of 2022. As of March 31, 2023, shareholders' equity totaled $12.9 million or approximately $3.93 per outstanding American depositary share compared to shareholders' equity of $13.3 million on December 31, 2022. The reduction is due mainly to the company's net loss during the quarter on an IFRS basis. As of March 31, 2023, the company's cash and cash equivalents balance totaled $3.7 million compared to $3.3 million on December 31, 2022. The company's cash balance does not account for up to an additional $2.2 million in funds available under its credit facility and investment financing. And lastly, I wanted to touch base on our share count as it stands today. On an outstanding basis, we have around 33 million ordinary shares representing 3.3 million ADSs. On a fully diluted basis, we currently have around 50 million shares or 5 million ADSs outstanding.

Thanks, Shai. I would like to take a moment to reflect on Alarum's accomplishments and share our aspirations for the future. Today, Alarum stands as a testament to the ambitious goals we set for ourselves in recent years. Our key growth engines have been realized, and our significant competitive advantages have been crystallized. Both our financial and non-financial key metrics are moving in the right direction and aligned perfectly with our strategic vision. Not only did we achieve record revenue in the first quarter, but we also marked our ninth consecutive quarter of revenue growth. Achieving our first-ever quarter of positive adjusted EBITDA is an important milestone on our path to profitability. We remain agile and committed to paving our way to profitability in the quarters ahead while maximizing our long-term business potential to focus on growth initiatives. Regarding our share price, we acknowledge that there is a gap between the company's true performance and the market's perception of our business and achievements. Bridging this gap is one of our primary goals for 2023, and we are dedicated to raising awareness about our sustainable growth and development, both in the U.S. and beyond. I also want to reiterate an important point made by Shai a moment ago. Our cash balance increased to $3.7 million during the first quarter, up from $3.3 million at the year-end of 2022. And this does not account for up to an additional $2.2 million in non-dilutive financing we have available to us. As such, we are in a great position to continue executing and see no near-term scenario requiring us to raise additional funds. I would like to take this opportunity to express my gratitude to our shareholders for their trust, confidence, and ongoing support. As we look ahead, we have a well-defined strategic roadmap that encompasses technological innovation, continuous growth, and near-term profitability. We are optimistic about the future of Alarum and are diligently building our business plan to support our efforts for improved financial results. In closing, thank you for joining us today, and we look forward to updating you on our progress in the coming quarters. Now I would like to open the call for any questions. Operator, please go ahead.

Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners.

Nice numbers. Can you quantify roughly what percentage of revenue comes from consumer versus enterprise and the year-over-year growth rates you saw during the first quarter? Interested in what drove also the best sequential quarter in revenue dollars in quite some time.

All right. Brian, thank you. So regarding the split of the revenues, it's around 60% for NetNut and 40% for all of our CyberKick. This means around 60% for the enterprise business and around 40% for the consumer business. Brian, could you please repeat the other questions?

Yes, I'm curious about the year-over-year growth rate. It sounds like NetNut's growing faster. Maybe if you can roughly give us year-over-year growth rates for these two businesses.

Year-over-year, are you referring to the split between the enterprise and the consumer?

Yes, yes. Did NetNut grow by 50% while CyberKick grew by 30%, something like that?

Yes, yes, yes. No problem. Shai, do you want to take it? Shai? Shai, you are muted.

Yes. Brian, do you mean the ratio that we experienced during 2022?

No, Shai, the first quarter.

I mean, in the first quarter of 2023, what were the year-over-year growth rates of enterprise versus consumer?

The growth of enterprise versus consumer or each one of the...

No, Shai. If you will take only the enterprise in the first quarter of 2022 versus the enterprise in the first quarter of 2023, yes.

Okay. Okay. So it's not one against the other, but... The enterprise access for businesses or enterprises grew almost double. It was about 90% growth, year-over-year.

Yes. And then as you think about the macro, you certainly did fantastic sequentially. Can you talk about the impact, if any, on both businesses, enterprise, consumer? And how these growth rates might change or not change?

Okay. The impact of what brand?

The challenging macro.

We have talked about the challenging macro environment several times over the past year, which has persisted for at least that long. Currently, we are not observing any significant impact on our situation. If conditions worsen, we cannot predict the outcome. However, if they remain stable or improve, we have not seen any substantial negative effects on the business. In fact, if global conditions start to improve, we anticipate that growth could become even better, indicating a higher potential driven by the economic situation we've experienced up to this point.

Okay. And then I think it would be helpful, now that NetNut's doubling, and it's all organic, maybe remind investors of the benefits that enterprises get from choosing NetNut over other solutions.

Okay. I will split my answer into two parts, in general and over other solutions. So in general, in today's world, especially due to the penetration of AI in our lives, data is crucial. Everyone needs data. Everyone needs to collect data. Due to the competitive environment, everybody needs to know every minute, every hour what's going on in each and every sector. I invite everyone, by the way, to watch our presentation on the website, so you'll see the number of use cases and the industries that are using these kinds of solutions. In order to collect data and scale anonymously to obtain real data, companies are utilizing a set of products. We are one layer in the world of data collection. We are the infrastructure layer; meaning, without the infrastructure, you cannot collect data. The next stage is the collectors, the data collection tools, and the scrapers. The final stage is the AI tools that can analyze the data and yield more accurate insights. This is the layer we are currently at. We have plans and are always thinking about how we will move into the next layers, meaning the next stages in our industry, in the data industry. Regarding the competition, as I mentioned, we are one of the biggest brands, and our most significant competitive advantage is the fact that we have a very solid network. We have global coverage, with more than 1,000 locations, giving our customers a very good success rate when they attempt to collect data. This is the primary reason for high customer satisfaction, increased retention, and why our brand has become one of the best in this space.

Great. That's helpful. And then you mentioned in your prepared remarks a stronger retention rate for NetNut. Is there any way to quantify today what it is versus a year ago? If you can't give numbers, has it improved, maybe how much? Just trying to grasp what we're talking about.

Okay. So, Brian, to be totally transparent and honest with you, we just started a few months ago to utilize third-party products to establish accurate and clear KPIs for our retention, churn, lifetime value, etc. So I don't have the precise numbers yet. We are still in the process, but I can tell you that at least retention has doubled.

Got it. And you recently launched a new white-label enabled privacy application. How do you expect it's going to open new opportunities? Is your primary target channel partners or resellers? Or are you selling...

No.

Or is this a direct white label? Just help me understand.

No, no. It's not a strategy change. Our main target is our direct approach; we are selling directly to our consumers. We just opened a new opportunity for, not resellers, but other consumer vendors to white-label our products. We believe we are still assessing the economics behind it, but we think that if it goes well and the economics make sense, it can be a very nice additional revenue channel for our product.

Okay. The last question I have is about expenses. Lastly, as revenue grows from the first quarter, should we expect adjusted EBITDA to increase? Or will management choose to increase expenses for customer acquisition?

You mean, in this quarter?

No, I'm talking about in general. Management teams have different strategies on capital deployment. Do you hope that as revenue grows 20%, EBITDA will grow 20%? Or will it grow much slower as you increase your expenses on customer acquisition?

Yes, I understand your question. So if you remember, I've been talking with the audience for years. And I said all the time that, at the end of the day, it's a kind of game between EBITDA and growth. As we stated already last year, we started our journey to profitability. However, we don't want to hinder our growth with our innovation and our customers. We will stay in this mode as you see these reports and financials in this quarter. We are not only looking to be profitable because, to be honest, if that were our only target, we could see even better numbers this quarter and the next quarters. But, as I mentioned a few minutes ago, we want to penetrate and leverage the fact that we have hundreds of customers utilizing our platform and begin to release new products to enter new markets and cross-sell to our customers, which is the most beneficial form of customer acquisition. Therefore, we will try to maintain the balance between revenues and profitability. I cannot be very clear about whether you will see a 20% growth in revenues yielding a 20% growth in adjusted EBITDA. But more or less, that is the target.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Daniel for any final comments.

Okay. So thank you very much for joining us today. We look forward to continuing to update you on our progress. Thanks.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.