Alarum Technologies Ltd. Q3 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 nine months ended September 30, 2023. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, conference will be opened for questions. This conference is being recorded today, November 28, 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 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 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 Risk Factors in Alarum's annual report from 20-F filed with the Securities and Exchange Commission 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 all 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's Technologies third quarter 2023 earnings results conference call. As is customary with me, Shai Avnit, our Chief Financial Officer, is here. I am pleased to highlight some key achievements and strategic directions that have shaped our recent performance and our vision for the future. Before we begin, I want to quickly note that reconciliation tables for any non-GAAP or non-IFRS metrics referenced on this call are available in the press release we published earlier today. We are thrilled to announce that we have achieved our first-ever profitable quarter. This significant milestone is a testament to the dedication and hard work of our team and demonstrates our commitment to delivering value to our shareholders. At the end of 2022, we made it our leading goal to strive for profitability. We are excited that in the third quarter, we have managed to achieve our goal and announced a net profit of $1.1 million. As mentioned, our success can be attributed to the strategic decisions we have made in recent years. We have successfully executed acquisitions that have boosted our capabilities in line with our vision and direction. We have also been agile in making decisions like scaling down low-margin revenues, allowing us to allocate resources more efficiently towards growth and profitability. Most importantly, we are focused on our successful business NetNut, our Enterprise Data Collection business. When we took this strategic decision, we knew it might impact our revenue stream. We are happy to present a positive trajectory with minimal impact due to our directional decision; $6.7 million revenues for the quarter represent a significant growth in our enterprise business and excellent performance quarter-over-quarter. Our accumulated revenues from the beginning of 2023 amounted to a standing $19.4 million, exceeding revenues for the whole year of 2022. In a short period of time, we have managed to generate record revenues and net profit for the first time. Additional highlights for the third quarter include an attractive gross margin of 77% and recorded adjusted EBITDA of $1.9 million. In July 2023, we announced the closing of a $4.25 million private placement; a private placement we reached as senior management, including myself, took part due to a strong belief in its promising prospects. The investment further strengthened our balance sheet; we are well-funded with approximately $8 million in cash as of September 30, 2023, no debt, and a lower amount of loans. I would like now to elaborate on our Enterprise Data Collection business, NetNut. NetNut was acquired in 2019 with annual revenues of approximately $3 million. Over the past few years, we have transformed NetNut from a small company with minimal revenues into a market leader in the IP Proxy Network segment. This achievement has positioned us at the forefront of the data industry infrastructure layer. Over the last two years, we have invested significant resources to build one of the fastest, most reliable, and advanced networks. In the past few quarters, we have expanded our product offerings and expanded our footprint in the data collection market estimated at $17.1 billion by Frost & Sullivan. This market is driven by the growing importance of data-backed decisions for businesses, the necessity of a constant flow of data; it is supported also by the AI-based product expansion, in which data collection and labeling play a critical role in model development, accuracy, and functioning of AI systems and products. In addition, the social media segment, in which monitoring and understanding social media activity enable more effective marketing and improving user experience through digital marketing growth. NetNut is a well-known brand in its field, enabling us to constantly identify and penetrate new market segments. Among our recently entered customer segments are the artificial intelligence, sales intelligence market, feeder market, AI recruitment markets, and more. In each field, NetNut has already won multiple new customers and continues to do so. Our vision is to continue our growth in the IP Proxy Network vertical, building on the strength and success we have achieved thus far. As the data collection market rapidly grows, it is our mission to introduce new innovative products to meet new emerging needs. In this regard, we took our first step this quarter by releasing our new product in this vertical, the SERP API Scraper. Our overarching goal for the future is to leverage our success in the infrastructure layer of the data collection industry with dozens of satisfied successful customers already on board. We aspire to become the one-stop vendor for all the chain and needs of our customers, providing comprehensive solutions that span the entire data collection process from infrastructure to data extraction and beyond. I want to mention one more remarkable achievement by NetNut, the granting of our U.S. patent that further strengthened the company's assets and innovation. I would like now 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 third quarter 2023 financial results from continuing activity, which are compared to our third quarter of 2022 results from continuing activity unless otherwise stated. All figures in this summary were rounded up for simplicity. Revenue for the third quarter of 2023 totaled $6.7 million, and revenue for the first nine months ended September 30, 2023 was $19.4 million. This compared to revenues of $4.8 million and $13.4 million, respectively, for the equivalent period in 2022. The increase is attributed to the organic growth in the enterprise access business revenues despite a reduction in the consumer access business revenues. Gross profit for the third quarter of 2023 was $5.2 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 revenues. Gross profit for the nine months of 2023 was $13.5 million compared to a gross profit for the corresponding period in 2022 of $7.3 million. Our third quarter 2023 operating expenses decreased 25% year-over-year to $3.7 million from $5 million in the third quarter of 2022. This decrease is mainly due to operational strategy scaling down in the consumer internet access business. Operating expenses in the first nine months of 2023 sum to $20.8 million, an increase of 22% from the $17 million in the first nine months of 2022. The increase reflects recording a one-time goodwill and intangible asset impairment loss of $8.5 million in the second quarter of this year, which is related to the CyberKick cash-generating unit due to the decrease in its forecasted operating results. This increase was partially offset by the company's success in minimizing the actual operating expenses in this segment as well as reducing the general and administrative expenses from $5.3 million to $3.2 million due to lower professional fees. As a result, after the impact of finance expenses and tax benefits, IFRS net profit for the third quarter of 2023 reached $1.1 million or $0.03 basic profit per ordinary share, compared to a net loss of $2.3 million or $0.07 basic loss per ordinary share for the third quarter of 2022. For the first nine months of 2023, IFRS net loss totaled $7.3 million, mainly due to the CyberKick impairment losses or $0.20 basic loss per ordinary share compared to a net loss of $9.4 million or $0.30 basic loss per ordinary share in the first nine months of 2022. The company monitors key business metrics to help evaluate and establish budgets, measure the effectiveness of sales and marketing efforts, and assess operational efficiencies. The non-IFRS key business metrics the company uses are EBITDA and adjusted EBITDA. EBITDA is a non-IFRS financial measure that we define as a net profit or loss before depreciation, amortization, interest, and tax. Adjusted EBITDA is a non-IFRS financial measure that we define as EBITDA, further adjusted to remove the impact of impairment of goodwill, if any, and share-based compensation. Adjusted EBITDA for the third quarter of 2023 was positive at $1.9 million compared to adjusted EBITDA loss of $1.6 million in the same period of 2022. For the first nine months of 2023, adjusted EBITDA totaled positive $3 million compared to an adjusted EBITDA loss of $6.5 million in the first nine months of 2022. The company's cash and cash equivalents as of September 30, 2023, totaled $7.7 million compared to $3.3 million as of December 31, 2022. As of September 30, 2023, shareholders' equity totaled $10.9 million or approximately $1.87 per outstanding American depositary 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, offset by the September 2023 private placement. Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 58.6 million ordinary shares of 5.86 million ADSs. On a fully diluted basis, we currently have around 81.4 million shares or 8.14 million ADSs outstanding. With that, I'll turn the call back over to Shachar.

Thanks, Shai. 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. 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 financials and non-financial key metrics are moving in the right direction and aligned perfectly with our strategic vision. In conclusion, we are extremely proud of our recent achievements, especially our first profitable quarter and the growth we have experienced in our core business segment. We are excited about the future as we continue to expand our footprint in the data industry, delivering value to our customers and shareholders alike. Now I would like to open the call for any questions. Operator, please go ahead.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Brian Kinstlinger from Alliance Global Partners. Please proceed.

Great. Thanks. I've got several questions. First, I wanted to talk about the expense base of the business. Is it the first time we're seeing results excluding CyberKick. So just…

Can you change your volume? I can hardly hear you.

Okay. Hold on. Can you hear me now?

Yes.

Great. So first, I wanted to talk about the expenses. It's the first time we're seeing the results, excluding CyberKick. So the gross margin of 77% is it sustainable and what would drive that to increase or decrease from here? And then, I'm curious on the OpEx side, are there any significant investments you need to make and are there any significant variable costs to sales?

Okay. First of all, hello. To address your first question, we have reduced our CyberKick business, which means that a significant portion of our costs is no longer part of our expenses. Additionally, as mentioned in the past regarding our enterprise data business, we have successfully improved our cost of goods, and this, combined with revenue growth, has allowed us to achieve a gross margin of 77%. Looking ahead, particularly to next year, we believe that our current operating expense structure will remain relatively stable without major changes. In terms of whether we need to make significant investments to maintain our growth, we do not foresee the need for substantial investments to support our growth trend in the IP Proxy Network market, including the initiatives I discussed previously. One of our main goals for next year is to advance to the next level in the data business, specifically in the product layer for scrapers and related offerings. While we will need to invest to expand into these markets, we do not anticipate any significant changes to our current expense structure.

Great. And then on the internet access piece that's driving growth, how are you differentiating from the competition? Why are enterprises choosing your solution and what does the competitive landscape look like?

Okay. So I'll keep it very simple. It's a question of brand and performance. Maybe brand is driven by the performance. As I mentioned also in the last two years, and by the way, we are going to do it all the time, but we invested a lot in our product, in our network, in the stability of our network, in the geographical coverage. In our space, customers are very sensitive to performance, speed, downtime, etc. The size of our network and the stability of our network allow us to work with big customers with huge demand, and that's what made us a leader in this space along with another two or three companies. If I look back two and a half years ago, I think that we went from being in the eighth or seventh place in this space to becoming one of the first three leading vendors. Again, this is due to stability, performance, support, sales teams, etc. Regarding the competitive advantage, these are the main topics.

Great. And then, you mentioned some new customer wins in the AI intelligence market and also entering the fintech market. Can you just maybe tell us where these customers are generally located, and can you also describe how they're using your technology?

Yeah. Of course, it's all about data. In this space, I think 80% of our customers are based in the U.S., and the rest, I think we have one in the Far East, maybe one or two in Europe. But basically, most of them are in the U.S. In these spaces, it's all about data. Imagine that you have pricing intelligence, recruitment intelligence, or others—when you say intelligence, they have their own algorithm that knows how to analyze data from many web and internet sources to be able to scrape and collect this data on a large scale. They must use our kind of products behind the same; regarding the AI tools. At the end of the day, all these industries are based on data that they need to collect from the web. They need to get transparent data; they need to not be blocked; they need to simulate themselves as if they are coming from all over the world to get the relevant data in the relevant geographical zone. Without our products behind just for their domain or from their premise, they cannot do it. They must have automatic tools behind, and our IP proxy is mandatory for them to have and to get the data and analyze it.

Got it. So you're enabling AI to do their analytics algorithms? Yeah.

The analytics is from their side.

Yeah. Okay. I'm going to ask one more question, and then I'm going to get back in the queue if no one else asks questions. I have a couple more. I'm just curious with the recent offering, what the fully diluted share count is today. Again, I'll get back in the queue and ask some more.

Fully diluted, okay. So — yes.

Yes. It's about 8.1 million ADSs.

Great. I've got a few more. I'll get back in the queue and hit star one again.

Okay. Our next question comes from George Moore from Carter Terry. Please proceed.

Hi, guys. Congratulations. What a very good quarter. My question is real quick. It goes two-fold. Is the impact of scaling down on this consumer segment, right? With that, are you still driving revenue from there? When will that ultimately end and then going along with Brian's question on the growth of Alarum's vision for the next couple of years? How do you expand and grow off of that?

Okay. So thanks for your questions. Thanks for the compliment. I will merge your two questions into one answer from my side. So as I mentioned, yes, we took a decision to scale down the consumer business. When I'm saying scale down, we are not investing anymore, not in R&D at this point or in consumer acquisition. We are just maintaining our current product and currently bearing fruit from our current customers that are paying on a monthly basis. When we took this decision, we took into account that we were going to lose maybe significant revenues. But for the future, it's the right strategy for the company. We are very happy that even from a revenue perspective, the impact is minimal, almost zero, and from profitability and strategy and focus of the company, the impact is huge. So at this point of time, the revenues from our consumer business are not material compared to the enterprise business and basically, it's going to stay like this for the foreseeable future. Regarding your question, sorry, for the vision. The vision is basically to expand our product penetration in current markets, continue to develop innovative products in additional segments of the data collection market and leverage them with our current customer base, meaning that the data collection market and space, like many other spaces, are built from layers. Now we took a step in leadership in our layer of the infrastructure, which is the IP proxy network. We have hundreds of satisfied customers. The next stage is to offer them also the product, the scraper, the data sets, the AI tools, the insights, or the analytics of the data, which direction that we will choose to come and say, 'Okay, you are working with us anyway, you are very satisfied, you prefer to work with one vendor than to split your infrastructure and your solutions for few vendors, so now let's cross-sell these customers with our new and innovative products.' This is our strategy on how to take the market, and we see that it currently works quite well. We released the first product just in the middle of 2023, and the future looks very bright from this perspective. I hope it answers your question.

Yes. Thank you. I'll go back in the queue.

Thank you.

Our next question comes from Emily Patterson, who is a Private Investor. Please proceed.

Good morning. My question is pretty quick and simple. Does the path to profitability come at the expense of growth?

Sorry, but I didn't hear you well.

Yes. Can you hear me now?

Yeah, now it's better.

Okay. My question is pretty quick and simple. Does the path to profitability come at the expense of growth?

Okay. So it's a very, very good question. So basically, our transition to profitability was made possible thanks to a calculated balance that we made between growth and profit. It is our intention to continue keeping this balance that will allow the company to continue growing alongside sustaining itself. As we did it before, management will consider both aspects all the way. For example, if we decide to invest in the development of a new product or a new demand or new markets, to invest more in marketing to enter new segments, all these actions will be taken in order to sustain future growth and profitability, meaning we've approved the word and more important to ourselves that our current business can be profitable and can fund itself. Our intention is to stay profitable and to stay efficient. Of course, that if we see an amazing opportunity for expanding, developing, investing in R&D or in new markets, maybe we will take a decision to change this balance a little bit, but the direction is this direction. I hope it answered your question.

It does. Thank you so much.

Thank you.

Our next question comes from Robert Smith from the Center Performance Investing. Please proceed.

Thanks for taking my questions. Congratulations on your steps to profitability. You mentioned that in a particular area that you've been addressing that you lead from eighth or ninth to about third. Can you give me some idea as to the first two companies that are basically ahead of you at this point and what kind of volume of business they do?

These are two companies I can mention based on my understanding of the industry, as we don't have formal data on them since they are private entities. The leading company in this space is an Israeli firm called Bright Data. The second company is a European entity named Oxylabs, which is associated with a major VPN consumer. Both are established leaders in the market, having started their operations a few years before us. While I don’t want to provide specific figures, I can say that both companies are generating over $100 million annually, are profitable, and are experiencing growth.

Thanks so much. I’m grateful. Good luck.

Thank you.

Our next question comes from Brian Kinstlinger from Alliance Global Partners. Please proceed.

Great. I want to follow up on one of the questions that was just asked. I'm curious, if the KPIs that you look at in order to give you confidence that you can continue this growth path for the next 12 months to 18 months. And is that growth path similar to the growth that you're seeing currently in the business? Is it a little bit slower? Is it a little bit faster just trying to understand that piece.

Okay. First of all, it's not only in our company or space; the major KPI in order to maintain growth and a sustainable business is the retention of the current customers. The purpose, of course, is to have a minimal amount of churn, and of course, the second target is to have new customers or assessments that will be higher than the churn month-over-month, and by this, we can maintain the current customers, current stream of revenues, and to grow. From this perspective, I can tell you that in the last let's say, one and a half, six, eight, seven quarters since we invested a lot in our network and the stability of our products and the performance of our product, we see an amazing retention for most of our customers. Some of them are in an annual mode, some of them in six-month subscriptions; basically, most of them are in a monthly recurring revenue basis. This is our space and this is also the competition. So we are trusting the level of satisfaction of our customers and the professionalism of our business development and sales team that will maintain them in addition to bringing new customers and growing sales of our new products. Regarding the growth, this year, we grew in amazing numbers, more than I expected, which was a pleasant surprise; hope it will be a pleasant surprise all my life from this kind of growth. The target is to keep the growth all the time. We are a growth company by bringing new customers, by listing new products, and by growing sales by access. Now to tell you if we will have the same rate of growth, the target is yes, it's to grow. Of course, we have our target numbers. We have our budget and we know what we want, but I don't want at this point to talk about numbers, just to say that we trust our team, trust the industry, the market that is growing, the AI that is coming in, the data-driven decisions announced by many huge organizations, the fact that everybody needs data, and understand that data is the lifeblood of everything, also providing us a level of trust that we will grow together with the market and the fact that we are one of the leading brands in this space.

So just a follow-up, can you share what churn is today and maybe what it was three years ago? And then in addition, is there any pipeline metrics that measures your potential new customer wins over the next 12 months to 18 months? Is there any way to track that?

Yes. Churn is not a single number. It can be measured in various ways. We have our own methods, but it's complex to explain. I can tell you that our current churn is approximately 2 to 2.5 times better than what it was two years ago. In the next quarter, we plan to release key performance indicators for our retention, churn, and customer lifetime value. This will make it easier for me to discuss these topics in the investors call. At this moment, I prefer not to provide a detailed explanation of our churn and LTV formulas to avoid any confusion.

And can you discuss in any way pipeline to evaluate the new customer side of the equation?

We have now basically a pipeline of millions of dollars that we are discussing, negotiating, and are in trial, proof of concept. We call it trial, but it's the same as proof of concept in our pipeline. Some of them have a very short sales process, which can take one to two weeks. By the way, most of our customers are in a very short sales process, and some of them will take time because there are big organizations that have the chain of approvals; you need to go through the diligence, procurement, diligence scores, etc. But we have a pipeline of millions from new money perspectives for 2024 that according to our formulas, we have probabilities, some of them running at 70%, some at 90%, some at 50%. We have our formulas that generate from this formula our projections for new customers and new app courses for the next four quarters of 2024.

Okay. The last question I have is— I believe from your pre-announcement of the numbers, I think you said you generated operating cash flow. Can you share what your third quarter operating cash flow is? And as we think about going forward, should adjusted EBITDA somewhat track cash flow or will it be lumpy?

So as we announced, Shai, correct me if I am wrong, our operating cash flow is around $1.5 million for the quarter.

Yes, we said more than $1.5 million, a bit more than this.

A bit more. The adjusted EBITDA is $1.9 million. Your question, Brian, is what is the difference in the next...

There was a similar ratio we should think about going forward of cash flow to adjusted EBITDA.

Shai, do you want to explain?

As we see it, there shouldn't be any huge differentiation going forward, at least for the foreseeable future between the EBITDA and the generation of cash from operating activities.

Right. All right. Thank you so much. Certainly, a 20% operating margin on a smaller business, although, it’s not even smaller, is much better than breakeven operating results. So congratulations.

Thank you very much, Brian. I appreciate it.

Thank you.

Our next question comes from Robert Smith from the Center Performance Investing. Please proceed.

Yes. Just a couple of more questions. First, do you feel that you have the financial resources to proceed without raising additional capital in the foreseeable future, say, in the next 12 months, 18 months?

Yes.

Okay. And secondly...

Just to add more comments, besides that maybe we will take a decision in the future to have special events like M&A or something like this. But for our current operations, our current cash in the bank, and of course, the fact that we are not burning money, the opposite is true; we are generating cash. So we don't need to waste money.

Okay. And are you hiring people now?

Of course. All the time.

And how would you characterize the availability of talent out there?

In Israel?

Well, whoever is possibly to help you in growing the business.

I'm saying it proudly: Israel is full of talent, but it also has a lot of great companies. I can say — by the way, I didn't discuss this because it's not measurable, but I can say also proudly that due to the fact that — due to these numbers and the success of the company, employees want to work in a place that demonstrates success and like a winning place. We see a trend that a lot of CVs of employees are sending to us. A lot of employees want to work here. Sometimes we can even do hunting for talent from other companies. At this point in time, with the help of God, I will say this: we are an attractive place for employees. Of course, in Israel, the talent is a very expensive resource.

Are you impacted by what's happening in geopolitical and everything that's happening in the Middle East there?

Are you asking if we see any impact on our business?

Well, I mean through personnel.

Yeah, personnel. Yes, of course, we have some employees that are in the army now. Most of them are in the intelligence units, so they are sitting in front of computers, but they are still in the army. Our country is more important than everything, so we are supporting them. Our employees and I know that one of the targets of our enemies is to undermine our economy. Even if someone is not in the army now, we feel that our contribution and value to the country is to work harder to maintain the economy of this country and to show our enemies that nothing will break us. We are starting to succeed in recovering from this, and by the way, to do it even better because the motivation and spirit of everybody now in Israel is much higher than in regular days.

So best wishes for your future prosperity.

Thank you very much.

This concludes our question-and-answer session. I would like to turn the floor back over to Shachar Daniel for closing comments.

Thank you, operator. Thank you all for joining us today. Thank you for your continued support, and we look forward to continuing to provide positive updates on our future progress.

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