Alarum Technologies Ltd. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Alarum Technologies Third Quarter 2024 Corporate Update Conference Call. During today's presentation, all parties will be in listen-only mode. Following management's presentation, the conference will be open to questions. This conference is being recorded today, November 25, 2024. Before we get started, I'll read a forward-looking statements disclaimer. 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, underlying assumptions, and other statements that differ from 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 14, 2024, 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. On the call, the company will also present non-IFRS key business metrics. The non-IFRS key business metrics the company uses are EBITDA and adjusted EBITDA, non-IFRS gross margin, non-IFRS net profit or loss, and non-IFRS basic earnings or loss per share or ADS. The exact definitions of these non-IFRS key business metrics are described in the company's third quarter of 2024 financial results press release. I'll now turn the call over to Shachar Daniel, Alarum Technologies’ CEO. Mr. Daniel, the floor is now yours.

Thank you, and welcome everyone to Alarum Technologies third quarter 2024 results conference call. Joining me on today's call is Shai Avnit, our CFO. I will discuss the developments, the progress of our strategic initiative, and our longer-term vision. Shai will review the financials and provide our Q4 2024 and full-year 2024 guidance. I will conclude the prepared remarks with a summary and we will then open the call for your questions. I am pleased to share that in Q3 2024 we continued to reap the benefits of our strategic shift to focus on NetNut, our data collection business unit. NetNut contributed nearly 100% of both quarterly and accumulated business. We topped last full-year 2023 revenues during the first three quarters of 2024. Total Q3 2024 revenues hit the high end of our guidance as revenues came in at $7.2 million, of which $7 million were attributed to NetNut. We exceeded our Q3 2024 adjusted EBITDA guidance, recording an adjusted EBITDA of $1.4 million. We demonstrated once again continuing success in cash flow generation. Testament to our profitable business model, our cash and cash equivalents at the end of the quarter increased to $24 million. Our strong cash balance positions us to invest in opportunities that will drive Alarum’s long-term success, allowing us to focus on expanding our business and laying the groundwork for sustained growth. Consistent with our strategy and long-term vision, in Q3 we significantly addressed our main growth engines, increased our market share in the IP proxy network segment, and further penetrated the data collection and labeling market. Our focus on forming the broadest data collection and insight offering positions us to effectively address evolving market needs while driving long-term value for our stakeholders. I will start with the IPPN. Our expanding IP network is a key asset to serve diverse industries and companies relying on our IP proxy network for their critical data needs. We have significantly enhanced infrastructure coverage and endpoints. At the same time, we prioritize improving our capacity to handle larger traffic volumes, aligning with our strategy to build a scalable and profitable infrastructure for future growth. One of our main product enhancements introduced this quarter was a new dashboard, which significantly improved our customer experience and has already received excellent feedback from both users and potential customers. Through our IPPN, organizations can access public online sources with data regularly updated based on IPs, locations, and other demographic attributes. We enable them to securely and anonymously capture reliable data while protecting their sensitive research and online activities. What clearly sets us apart in the scale of our network is stability, strong performance, and our ongoing global expansion. Building on the strength of our IP network, let's move to the second pillar of our growth strategy, the data collection and labeling market. On our Q2 call, I shared that we had started generating initial engagements with new customers for our Website Unblocker product, and that we are seeing a growing pipeline of opportunities for this product, which has been tested and rated as a market leader by industry experts. We recently reached an important milestone in executing our strategy. The Fortune 200 company that began using our IPPN product in the third quarter expanded its subscription by adopting our unique Website Unblocker in less than three months. Two key factors make this win stand out. First, the fact that they added the Website Unblocker shortly after subscribing to our IPPN. Second, the significance of this win lies in the extensive, large-scale evaluation conducted. The new customer, operating a multi-million cross-region network and a multi-billion U.S. dollar business, shows how our solution enhances automation and its own customer spending while gaining a competitive edge. The Website Unblocker is a crucial enabler for our entry into the multi-billion dollar data collection and labeling market. It provides our customers with enhanced data access and improved operational efficiency, allowing them to penetrate new markets, gain deeper insights into customer behavior, and optimize their strategies. One notable market trend we are seeing is the increasing demand for data sets. As companies face growing challenges in accessing reliable and up-to-date data, our planned AI data collector solution will offer a major advantage by providing continuous access to pertinent data, giving our customers a competitive edge. The AI data collector will enable companies to quickly create a collector in just minutes. Thanks to its intuitive no-code interface, its advanced AI will automatically adapt to website changes, ensuring continuous data collection with minimal downtime. We all value the importance of data in every aspect of our lives. The considerable investments we have made in NetNut in recent years serve as the key to our entry into the data world. The rapid growth of artificial intelligence further validates the core principle behind this investment, highlighting its potential to drive innovation and unlock new opportunities. At this point, I would like to highlight the key trends we are seeing and share the metrics I consider most important and insightful in evaluating our most recent progress. First, the Website Unblocker. It's clear that the market recognizes the value of this solution, and we are addressing a real and pressing need. Alongside the success we have already shared, we are seeing a significant demand in the market reflected in an expanding pipeline. While it's early to project immediate revenue impact, it's clear that our innovative high-quality solution is in demand. In Q4, in line with the projected year of growth, we expect to continue to enjoy strong customer retention rates across most verticals. Our growth strategy in the dynamic data collection market emphasizes the importance of consistent investment in our network, serving as the foundation for expanding our customer base and driving the success and adoption of our innovative new products. At Alarum, we place a clear emphasis on achieving sustained growth and profitability. I will now turn the call over to Shai for a review of the financials. Shai, go ahead.

Thank you, Shachar, and hello, everyone. I will start today with a summary of the key financial results of the third quarter and first nine months of 2024, comparing them to the same period in 2023, unless otherwise stated. I will then provide guidance for Q4. All figures have been rounded for simplicity. Let's move on to the new results. Revenues in Q3 2024 were at the high end of our guidance, reaching $7.2 million, up 6.6% from $6.8 million in Q3 2023. The NetNut portion represented 97% of the total revenues, increasing to $7 million in Q3 2024, up 13.7% from $6.1 million in Q3 2023. Non-IFRS gross margin for the third quarter of 2024 was 73.6%, compared to 79.4% in Q3 2023. The change in gross margins is correlated to our strategic decision to invest in expanding and broadening our IP network, enabling us to serve our customers' requirements for stability, responsiveness, and speed. We can now support much higher customer demand and revenues with only marginal cost. Operating expenses in Q3 2024 were $4.1 million, compared to $3.7 million in Q3 2023. In Q3 2024, we recorded non-cash finance income of $3.5 million, compared to a non-cash finance expense of $700,000 in the corresponding quarter in 2023. The difference is mainly due to a fair value decrease of warrants issued between 2019 and 2020 related to the lower share price from June 30, 2024, to September 30, 2024. The vast majority of the warrants are due to expire in 2025. IFRS net profit increased to $4.2 million for the third quarter of 2024, up from a net profit of $1.1 million in Q3 2023, mainly as a result of the higher finance income. We exceeded our adjusted EBITDA guidance for the third quarter of 2024. We reached $1.4 million, compared to the $1.9 million adjusted EBITDA in the third quarter of 2023. While revenues increased year-over-year, they were offset by the higher cost of sales and operating expenses. Our current share count is 68.9 million ordinary shares or 6.9 million ADSs. On a fully diluted basis, the count is 18 million ordinary shares or 8 million ADSs. Q3 2024 non-IFRS basic earnings per share was $0.02 per share or $0.20 per ADS, compared to $0.03 basic earnings per share or $0.25 per ADS in Q3 2023. As of September 30, 2024, the company's shareholders' equity rose to a record of $25 million, up from $13.2 million on December 31, 2023. The increase in net profit combined with the warrants and option exercises contributed to this $11.8 million increase. Q3 2024 marked the fifth consecutive quarter of generating cash flow from operations. The company's cash and cash equivalents balance at the end of Q3 2024 was $24 million, up from $10.9 million as of December 31, 2023. Our cash position enables us to continue investing in our strategy and grow our business responsibly. Turning to guidance, we anticipate Q4 2024 revenue to continue the year-over-year growth trend and estimate revenues of $7.5 million plus or minus 3%. As a reminder, the NetNut portion of our revenues in Q4 2023 was $6.8 million. Q4 2024 adjusted EBITDA is expected to range from $1.3 million to $1.7 million. To summarize my part, our Q3 2024 results and guidance for the remainder of the year 2024 reflect solid performance, which is supported by a robust balance sheet. With that, I'll hand the call back over to Shachar.

Thank you, Shai. Alarum has once again delivered strong results. As a company built for the long haul, we remain focused on expanding our customer base and investing in technological innovation. Our expanding network allows us to serve an increasing number of customers, driving scalable and profitable growth across multiple sectors now and in the future. We are committed to launching new products that meet the evolving needs of the market, positioning us to address market demands while creating long-term value for our stakeholders. We are laying the groundwork for future success as a leader in the global data collection market through innovation, strategic asset creation, and focus on both short-term and long-term results. We will now open the call for the Q&A session. Operator, please.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Kingsley Crane with Canaccord Genuity. Please proceed with your questions.

Hi, thanks for taking the questions. It's great to see that you're upgrading the IPPN network. Just curious, would like some more clarification. So are those investments, were those fully made in Q3? Do you feel that they were customer-driven or internally driven and I guess how should we expect gross margins to trend going forward? And do you think that you could make more of these investments in the future as well? Thanks.

Okay, thanks for this question. So I will speak to my answer in two parts. First of all, regarding the first part of your question, it's a combination of the feedback we are getting from customers, which constantly drives our internal decisions and investments. As a basis in the IP proxy network market and customer needs, we always need to serve customers with a fast and reliable network. And you always need to invest in your network, which is a balancing act between revenues and investment in cost of goods sold, which is basically the network for your question, in order to maintain balance and continue growing margins. So the answer is yes. Our goal is to remain at a similar gross margin, unless we see a unique opportunity for a one-time investment or something like this. At this moment, we don't have such an opportunity on the table, but looking to the future in general, we may see an opportunity to significantly increase our network, which may have a short-term impact on the gross margins. However, for the long term, it will undoubtedly lead to higher growth rates and great gross margins. Hope this answered your question.

That's helpful. Regarding the Fortune 200 customer win, that's a great example, and I appreciate you mentioning it. We would like to explore how costly that deal is, what the revenue uplift has been so far, and if possible, whether you can share any insights on whether they could continue to expand as a customer over the next year or two.

Yes, so first of all, bear with me, as these kinds of customers are very sensitive to their confidentiality. So at this point, I cannot expose the specific numbers, but it's a respectable figure. It's just the beginning, meaning as I mentioned in the script, they went both directions, adopting both the IPPN and the Unblocker. They started with lower traffic to evaluate the system and assess if everything goes well. Again, according to their strategy, they expect to increase the traffic significantly, which will directly impact the revenues from this customer, and it is supposed to be a long-term engagement. Currently, the contract is for six months, but it's expected to renew and even extend the duration of this collaboration.

Okay, and then the last one for me, I just want to think through, NRR 142 is quite strong, I believe NetNut is growing in single digits. So I guess just to ask this another way, and perhaps we can think offline on this, what percentage of customers are still with NetNut this year? Or how could we think about the existing customer expansion and the net new customer contribution in Q3?

Okay, so basically I guess you can estimate that at our stage, most of the revenues generated in a specific quarter come from existing customers from previous quarters. So, something like, let’s say 80% or more come from our current customers from their retention from previous quarters. This answers your first question. Regarding your second question, the NRR is an indicator that measures the four quarters compared to the previous four quarters. We do this four times and take the average. So regarding your question, you can infer that from this KPI, which is common in our industry, the typical customer over time would do 42% more than in their initial period. That’s the average customer, which is why our NRR is 1.42. In the next quarters, we might deep dive a bit more and expose some data regarding the shorter terms—a look at customers coming from the previous or the quarters before. But for the time being, this is the official KPI that can address your inquiry. Hope it answered your question, Kingsley.

Okay, that's helpful. I think we can think up more later, but that's it for me. Thank you so much.

Thank you very much. I appreciate it.

Thank you. Our next questions come from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your questions.

Hi. Good morning. Thanks for taking my questions. Just kind of a follow-up, and maybe I missed it as part of the answer. Last quarter, you highlighted you had dozens of new customers that generated $400,000 in first-month revenue. Do you have a comparable metric for the September quarter? And I guess I'm curious from a bigger picture, have you seen any changes in the pace of business development?

OK, so I know I didn't mention it this time. We will release that detail from time to time. But since you asked, I can tell you that in this quarter, it was better than the previous one for that KPI. And what was your second question, Brian?

I guess I'm wondering if you're seeing any changes to the pace of business development, you know, as we've started and are halfway through the fourth quarter, more than halfway?

So, first of all, I guess you heard that we released the guidance. So we project to close this quarter with $7.5 million plus or minus 3%. So at a high level, business is as usual; I don't see anything significant to mention that would be interesting for you.

Okay, on the Website Unblocker, can you describe how you're pricing this project? Is it usage-based? Is it a recurring monthly charge? Is there a minimum that has upside? And then how does it scale? Is it usage or is there some other factor that drives the expansion for any customer, not even this customer?

OK. So at a high level, the pricing model is similar to the IPPN, based on duration and usage and bandwidth or number of requests, it depends. As we’re just starting, and we are gradually increasing our customer base, we are still investigating what the best pricing model might be for us, versus the best pricing model for our customers and the ideal way to scale up. But for now, it's based mostly on bandwidth, amount of requests, and duration. You know, you can buy a specified amount of requests for one month, three months, six months, or one year, etc.

Okay. Staying with the Website Unblocker, can you quantify the number of evaluations you have going on or your initial target customers, those that are already customers of other Alarum applications? I guess you mentioned the expanding pipeline, so I'm looking for any quantitative details?

OK, so we need to differentiate between the pipeline and current customers. Regarding your question, I will explain. The Unblocker product is a bit different than the proxy network. It’s not an infrastructure product; it’s dedicated for websites and is very sensitive to changes in websites. These need to handle millions, or more than millions of requests, meaning you need to have great infrastructure, and the economics behind it must make sense because we are profitable and want to maintain that level. So we made a decision a few months or even a few quarters ago regarding the Unblocker: to advance step-by-step. For example, the win with this Fortune 200 company was significant for us since that was the point we decided to aim for larger customers and use cases, and then to pause and gather customer feedback before moving to the next phase and adding more customers. So at this point, we have a few initial customers. The most significant among them is the one we mentioned. But the pipeline looks very good. We have dozens of customers waiting to access our solution and are in contact with us. With each one, we define timelines and goals. Hopefully, in the next quarter and the following quarters, we can elaborate on what milestones we’ve crossed and the number of customers that have joined our platform.

Okay, lastly, could you discuss the set of customers that faced industry challenges that resulted in your lower consumption during the September quarter? Are there any signs of recovery? And could you highlight the industry or whether that industry is seeing improvement that could lead to those customers coming back and increasing their usage?

Okay, for this question, I will start with this: as you know, we continue to add new customers every quarter. At this moment, these specific customers haven't returned to increase their usage. This is a natural part of ongoing business dynamics. Overall, our focus remains on improving retention rates while simultaneously driving growth by adding new customers and upselling to our existing ones. Churn is always present; it was more significant in the previous quarter, and this aligns with our results. However, churn is part of the business. Our goal, on one side, is to have our account management team and customer success team ensure that customers will stay with us, and the retention rate will continue to increase. On the other hand, we aim to add more customers from different verticals to reduce the risk and not just retain them, but upsell and cluster them with new products, innovative offerings, etc.

Okay, thank you.

Thank you very much.

Thank you. Our next question comes from the line of Mike Killian with Shore Equity Group. Please proceed with your questions.

Hey, guys. Congratulations on the quarter. I have three questions. First one is you also filed the F3 for a capital raise? Could you touch upon that? Do you have anything in the pipeline looking forward to that? And with $24 million of cash on the books, is there an immediate need for capital? I'll follow up with my next question after this.

Okay, thank you very much. So I will start by saying that, as you've seen, and everyone has noted today and in previous quarters, we are profitable and well-funded. So we have no actual short-term plans to raise capital. The renewal of the shelf registration is a common technical practice that gives us flexibility to raise capital if needed in the future. It ensures we're prepared for strategic growth opportunities like M&A and strengthens our ability to respond to market conditions as they arise. So it is a technical procedure, and that's what we did today—just renewing our shelf registration.

Okay. A follow-up to that, basically, Shai addressed some warrants that expired at the end of 2025. Can you touch upon the number of warrants still outstanding and what their exercise prices are?

Yes. I will take that. We're talking about, as I said, warrants that were issued a long time ago, primarily in connection with our fundraising in 2019 and 2020. Let me give you the numbers. We are talking about a total of about 240,000 warrants, which means it's less than 3% of the total fully diluted equity. The exercise prices are mainly around $33, with some at $12. So, some of them are currently in the money or close, while others are quite far out of the money based on the share price today.

And Shai, could you repeat the number in ADS?

Yes, it's ADSs, approximately 240,000 ADSs.

Okay, wonderful. So, there are potential opportunities to raise $5 million to $8 million just strictly through the exercise of warrants on minimal amounts of shares. That's great. Thank you.

Okay. Thank you very much.

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Shachar Daniel for any closing comments.

Okay. So thank you everyone for your time today. As always, we look forward to hosting you on Alarum Technologies Q4 2024 and full-year results call. Thank you very much.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.