Alarum Technologies Ltd. Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Alarum Technologies Corporate Update Conference Call for the three and six months ended June 30, 2023. This conference is being recorded today, August 24, 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 provision 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 facts. 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 or SEC on March 31, 2023, and in 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, and 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, operator, and welcome, everyone, to Alarum Technologies' second 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 and summarize our accomplishments. Before we begin, I want to quickly note that a reconciliations table for any non-GAAP or non-IFRS metrics referenced on these calls are available in the press release we published earlier today. At the end of 2022, we marked our leading goal to set our path toward profitability. We are excited that the second quarter this year is validating our persistence with impressive achievements, including the achievement of $1.1 million in adjusted EBITDA. As part of our focus on profitable revenue generation, we decided, commencing July 2023, to scale down our investment in the Consumer Internet Access segments operating under our wholly-owned subsidiary, CyberKick. I would like to take this opportunity to elaborate on this decision and its future effects. As you may know, CyberKick's business model is based on acquiring new users to download and use our solutions. Following an analysis of recent market conditions, including the cost of acquiring such users, we've identified that while the business model provides a potential to generate future revenues, it consumes resources and investments that result in current operational losses, leading to non-profitable revenues in the short term. We therefore decided to recalibrate our focus mainly to allow for the acceleration of our plans to become profitable. We believe that this decision will have several effects on the company. On the business side, we continue to maintain our product and the service to our current paying users, allowing us to bear fruits from past investments by generating revenues with minimal costs. On the financial side, we are able now to focus on profitable activities and to generate positive cash flow. Although this segment might experience a reduction in its sales in the short term, we trust that our Enterprise Internet Access solution unit, NetNut, will continue to grow and gain new leading partners and customers. We believe that this strategic decision to scale down the Consumer Internet Access segment will allow us to keep lean and sustainable operations for CyberKick and improve our overall bottom line. I would like now to refer to the recent progress of our Enterprise Internet Access segment, NetNut. NetNut was acquired by us in 2019 with annual revenues of approximately $3 million. Today, it is driving our overall growth, achieving ongoing growth in revenues and becoming profitable for the last two quarters. NetNut is one of the top five notable players in its field, and its reputation precedes it as a strong brand with a robust and reliable network. The NetNut market was valued at $2.2 billion in 2022 and is expected to expand at a compound annual growth rate of 28.9% from 2023 to 2030 to reach $17.1 billion. We believe that our continued positioning as a leader will contribute to establishing a fair market share in the future. During the past year, we took many actions to provide our customers with a scalable and advanced method that answers all their needs. Our capabilities today allow our users to access massive amounts of data in a high-speed and user-friendly interface. Our customer base continues to expand, and we are witnessing growing demand for new segments. For example, we recently announced the onboarding of a new customer operating in the artificial intelligence recruitment market. In addition, we have partnered with a team of elite researchers for the development of our innovative web data collection solutions. In the second quarter of 2023, we also signed an agreement with TerraZone, which was the exclusive reseller of our legacy cybersecurity solutions for the sale of our Enterprise Cybersecurity business. Consideration for this transaction is 7% of the fully diluted share capital of TerraZone. With our growing ability to generate income and by diligently managing our resources and optimizing our operational processes, we have also been able to pay off the loan to the United Mizrahi-Tefahot Bank Ltd. and close the revolving line of credit which was previously reported to have been extended through May 25, 2024. This credit was predominantly spent as part of the user acquisition program of our Consumer Internet Access segment, which as I explained earlier, we have decided to scale down. By repaying this loan, we have reduced the company's total debt and liabilities by $1.6 million. All the actions detailed thus far follow an amazing record quarter. First, our continued growth represents the tenth consecutive quarter of growth in revenues, amounting to $7 million in the second quarter of 2023 and $12.7 million for the first six months of 2023. Following our first-ever quarter of positive cash flow from our operating activities and positive adjusted EBITDA in Q1 2023, our adjusted EBITDA in the second quarter of 2023 climbed to an impressive $1.1 million compared to an adjusted EBITDA loss of $2.4 million just in the same period last year. Our IFRS net loss amounted to $7.7 million, which includes the implication of goodwill and intangible assets impairments in the amount of $8.8 million from the consumer segment. We believe that our ability to successfully manage our resources while increasing our profitable revenues positions us on the right path to accelerate our journey to net profitability. We recognize that achieving 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. Our efforts to optimize our resources have contributed to our financial position and will facilitate our sustainable growth in the future, as we continue to deliver exceptional value for our customers while balancing our work 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. I will summarize our record quarter 2023 financial results, which are compared to our second quarter 2022 results unless otherwise stated. All figures in this summary were rounded up for simplicity. Revenue for the second quarter of 2023 totaled $7 million and revenue for the first six months ended June 30, 2023, was $12.7 million. This compared to revenues of $4.8 million and $8.8 million, respectively, for the equivalent period in 2022. The increase in revenue is due to organic growth in our Enterprise Internet Access business. Gross profit for the second quarter of 2023 was $4.5 million compared to a gross profit for the corresponding period in 2022 of $2.6 million. The increase in gross profit was primarily driven by the increased revenue. Gross profit for the first half of 2023 was $8.3 million compared to a gross profit for the corresponding period in 2022 of $4.7 million. Our Q2 2023 operating expenses increased 110% year-over-year to $12.8 million, up from $6.1 million in Q2 2022. This amount of operating expenses includes $8.5 million of the Consumer Internet Access goodwill and intangible assets impairment, as explained by Shachar. Excluding it, total operating expenses amounted to $4.3 million, down 30% compared to Q2 2022, mainly due to lower media costs in the Consumer Internet Access segment and a drop in general and administrative expenses as a result of the results patent proceedings in May 2022. Operating expenses in the first six months of 2023 totalled $17 million, up 33% from the $12.8 million in the first half of 2022 for the same reason, the Consumer segment goodwill and intangible assets impairment. As a result, the IFRS net loss for the second quarter of 2023 totaled $7.7 million or $0.23 basic loss per ordinary share compared to a net loss of $3.4 million or $0.10 basic loss per ordinary share for the second quarter of 2022. For the first six months of 2023, IFRS net loss totaled $8.4 million or $0.25 basic loss per ordinary share compared to a net loss of $7.9 million or $0.26 basic loss per ordinary share in the first six months of 2022. The company monitors key business metrics to help it evaluate and establish budgets, measure the effectiveness of the sales and marketing efforts, and assess professional efficiencies. The non-IFRS key business metrics the company uses are EBITDA and adjusted EBITDA. EBITDA or EBITDA loss is a non-IFRS financial measure that we define as the net profit or loss before depreciation, amortization, and impairment of intangible assets, interest, and tax. Adjusted EBITDA or adjusted EBITDA loss is a non-IFRS financial measure that we define as EBITDA or EBITDA loss, is further adjusted to remove the impact of impairment of goodwill and share-based compensation. Adjusted EBITDA for the second quarter of 2023 was positive at $1.1 million compared to adjusted EBITDA loss of $2.4 million in the same period in 2022. For the first six months of 2023, adjusted EBITDA totaled positive $1.2 million compared to a net loss of $5.8 million in the first six months of 2022. Company's cash and cash equivalents for the six months ended June 30, 2023, totaled $3.8 million compared to $3.3 million as of December 31, 2022. As of June 30, 2023, shareholders' equity totaled $6.1 million or approximately $1.76 per outstanding American depository share compared to shareholders' equity of $13.3 million on December 31, 2022. The reduction is due mainly to the goodwill and intangible assets impairment recorded in the second quarter of 2023. Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 35.2 million ordinary shares or 3.52 million ADSs. On a fully diluted basis, we currently have around 51.7 million shares of 5.17 million ADS outstanding.

Thank you, Shai. I would like to take a moment to reflect on Alarum's accomplishments and show our aspirations for the future. We undertook ambitious growth in recent years, and Alarum's current position is definitely a testament to the remarkable journey and the milestones we have achieved to date. As we look back, we are reminded of the challenges we have overcome, the innovations we have founded, and the growth we've experienced. Our collective efforts have led us to expand our market presence, create groundbreaking products, and build strong partnerships that have fueled our success. These achievements underscore our ability to adapt and thrive in a dynamic business landscape. 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 align perfectly with our strategic vision. Not only did we achieve record revenue in the second quarter this year, but we also marked our tenth consecutive quarter of revenue growth and achieved an impressive positive $1.1 million adjusted EBITDA. We remain agile and committed to paving our way to profitability in the quarters ahead while maximizing our long-term business potential and focusing on growth initiatives. I would like to take this opportunity to express my acknowledgment to our dedicated employees and partners, as well as our shareholders for their trust, confidence, and ongoing support. As we look ahead, we have a well-defined strategic roadmap that encompasses technological innovations, continued growth, and near-term profitability. The journey ahead is exciting and filled with promise, and we are optimistic yet vigilant about securing the future of Alarum. We are diligently building our business plans 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 Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Hi guys, Thanks for taking my question. First, I saw CyberKick in your pre-announcement was 18% of the second quarter's revenue. What about TerraZone? What percentage of the second quarter revenue was this business?

0%.

Is a good starting point for the third quarter's revenue about 80% of the second quarter, considering CyberKick? Can you also discuss what the gross margin of the continuing operation is? I assume it's slightly better since the CyberKick business likely has a lower margin, but I'm not entirely sure.

Yes, you are correct. As I mentioned earlier, the primary reason for making adjustments in the CyberKick business is to enhance our bottom line, focusing on both gross and net profitability. We anticipate improvements in these two metrics in the upcoming quarter.

So, give us a sense for what the gross margin of the continuing operation looks like. And as you scale the business, where could this go?

So, as you know, it's a kind of a projection and we are in the middle of the quarter, but basically needs to be higher than the current 65%. We are expecting to be around 70% and even better.

Great. And then just make sure I understood what you just said as well as one of your answers. Given CyberKick, we're losing money, you see adjusted EBITDA improving from the second quarter, the third, and the fourth quarter. Is that right?

Yes.

Yes. Great. Could you provide more detail on the AI recruitment market customer you mentioned? What is Alarum doing for this customer? I'm not sure I fully understand. What technology are they using?

Okay. So basically, most of the AI companies, technologies, and products are based on data collection from the web. Our basic product allows our customers to collect data anonymously at scale from the web. So, these companies, it's not only this, we have some other AI customers that are using our platform to collect data from the web at scale, again, as I mentioned, and anonymously.

And how is this a subscription? Is this a license? Is this pay-as-you-go? How?

Okay. Basically, the biggest portion of our customers are working on a monthly recurring revenue basis. It's a subscription and it's assembled from two factors. One of them is the duration, so it can be one month, three months, six months, and 12 months, and the second is the bandwidth. It's the volume of the traffic in gigabytes, terabytes, etc. For example, if you're a customer, you can buy a package of, I don't know, 10 terabytes for one month, or 20 terabytes for three months, etc. Some of our customers, the bigger customers, are using our platform on a kind of pay-as-you-go basis. Meaning, at the end of each month, they are subscribing to our platform, and at the end of each month, we calculate the volume and the bandwidth they use, and we charge them.

And just remind me, for the data collection business, this is mainly a channel partner selling this? Or is there a direct sales aspect as well?

More than 90% are direct sales.

Right. And those salespeople sit where?

95% of our team is based in our headquarters in Tel Aviv, Israel. We have minimal direct interaction with our customers, as nearly everything is automated. Some of our clients even operate on a self-service model, allowing them to subscribe to our platform, make payments, and begin using it with certain limitations on duration and bandwidth. While 95% of our team is in Israel, that number goes up to 98%. I’m also proud of our diverse team, which includes members from North America, Europe, South Africa, and Asia Pacific.

Lastly for me, is there any way to quantify your pipeline for ongoing operations? And I guess I'm curious, we've had some — a fair amount of companies discuss some weakening tech budgets. Are you seeing that at all? And is that impacting or do you expect it to impact short-term decisions?

So, first, I think we discussed about it a few times in the past. I'm very happy that even though the economic status in the world is still not in a good position, we are still experiencing growth and growing demand. On the other side, maybe when things improve globally, we could see more significant growth. But still, we are meeting and even exceeding our expectations. From a pipeline perspective, due to the fact that it's a subscription and the fast sale, the average duration of a lead that converts to being a customer is between two to three weeks. So, the pipeline duration is very short. The most important indicator from our perspective is the retention rate of our customers month-over-month. We have a small churn but the new customers and the upsells for current customers are higher than this churn, often significantly. This is why we are experiencing month-over-month growth, quarter-over-quarter growth, and of course, year-over-year growth.

What is that retention rate?

I can calculate — sorry?

What is that retention rate? You're saying that's the most important, so what is that retention rate?

Okay. The retention rate is an indicator. There are many ways to measure it, so, I don't want to mislead you or the audience. I can tell you that in the last 12 months, the retention rate is really exceptional.

Okay, thank you so much.

You're welcome, Brian.

And there are no further questions. Therefore, I will hand the call back over to Shachar Daniel for closing remarks.

Operator, what did you say? That there are no further questions?

Correct. We reached the end of the question-and-answer session.

Okay. Thank you very much, everyone, for joining us on this conference call. Again, I want to thank you for your trust in the company, and I'm looking forward to meeting you in the next quarter to describe and elaborate on our progress and financials. Thank you very much.

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