Alarum Technologies Ltd. Q2 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Alarum Technologies Conference Call for the Second Quarter 2025. This conference call is being recorded. I will now turn the call over to Kenny Green, Investor Relations at Alarum. Kenny, please go ahead.

Thank you. Good day to all of you, and welcome to Alarum's conference call to discuss the results of the second quarter of 2025. I would like to thank management for hosting this call. Today, we are joined by Shachar Daniel, Alarum's CEO; and Shai Avnit, CFO. Shachar will begin the call with an overview of the quarter, followed by Shai, who will review key elements of the financials. Finally, we will open the call to our listeners for the question-and-answer session. Before we get started, I want to highlight the 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 and underlying assumptions and other statements that are different than historical facts. For example, when we discuss our guidance, our future strategy and longer-term vision, our potential for continued sustainable future growth and value creation, sustainable growth, estimated margins and long-term profitability, the potential of long-term collaborations, events in the AI landscape, demand for and expansion of our products and services and customer base, future opportunities, momentum and success we are using forward-looking statements. 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 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 Reports on Form 20-F filed with the Securities and Exchange Commission on March 20, 2025, 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 those 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 call, the company will also present non-IFRS key business metrics. Non-IFRS key business metrics the company uses our EBITDA, adjusted EBITDA, non-IFRS gross margin, non-IFRS net profit or loss, non-IFRS basic earnings or loss per share or ADS. The exact definitions and reconciliations of these non-IFRS key business metrics are described in the company's financial results press release, which are available on the Investors lobby of Alarum's website. These non-IFRS measures may differ materially from the similarly titled measures used by other companies and should not be considered in isolation from or as a substitute for financial information prepared in accordance with IFRS. And now I will turn the call over to Shachar Daniel, Alarum Technology's Chief Executive Officer. Shachar, please go ahead.

Thank you very much, Kenny. Good morning, everyone, and thank you for joining us today to discuss our results and recent business developments. To highlight our financial results, we reported second quarter revenue of $8.8 million, net profit was $0.3 million and adjusted EBITDA of $1 million. Our results were well ahead of the expectations, which we announced with quarter 1 results and in line with the upgraded guidance we issued in early June. I will start with AI market drivers. The key market driver for our strong performance is the huge sales from massive amounts of training data for foundational AI models. The recent trend for Alarum in particular, is that our customers are increasingly including some major companies, both AI players and e-commerce companies and the associated deal size potential for this type of customers are much larger as well. We now have customers ranging from major tech giants to emerging start-ups as well as the small customers that we have traditionally worked with. As data is becoming significantly more valuable in today's world, these customers and potential customers are turning to us to help them overcome the growing barriers to data access from compliance to geographical distribution and traffic unblocking. We have recently launched new projects with several large-scale AI and e-commerce platforms including one of the world's largest online marketplaces in Asia. This particular customer has launched a very large data collection project with us for a new advanced generative AI model under development that may continue over the coming few months. While a lower margin compared to our margins in the past year and while revenues are not yet guaranteed and are consumption-based, potentially if we generate them, they are expected to be significant for Alarum over the coming months. These collaborations and others we have recently launched cover use cases such as large-scale data collection labeling as well as collection from model fine-tuning with fresh and accurate public data. As their evolution reshapes every industry, our offerings from our flagship Data Collector and Website Unblocker to a highly robust and expanding proxy network are quickly becoming foundational to how companies collect public web data. Our products enable our customers to acquire a massive amount of data, the key fuel to the AI boom. The market for reliable, scalable, and correct data is broadening massively and accelerating among more and more players as more models are launched or upgraded. Models must be trained, retrained, and fine-tuned daily with new data consistently. And to do that, they need infrastructure like ours to collect it. The opportunities that we have ahead of us with data having become the most valuable commodity on the planet is a once-in-a-generation opportunity. Alarum is positioned perfectly amidst all the current data capture trends, and we are aiming to invest and pursue as many of the opportunities ahead that we reasonably can. We have already started and will continue to invest strongly in our infrastructure to support the significant new demand as well as in our ability to meet the extensive needs of major customers. The investment in our IP proxy infrastructure enables us to support more throughput and serve more of the native demand with fast ROI. As I mentioned, the work we are doing with the major customers is being done at lower gross profit margins because the revenue and long-term potential is so high. In addition, the overall investment in expanding our proxy network increased the cost of sales, but it also has the long-term benefit of optimizing our network infrastructure and product delivery. Therefore, by design, we are currently showing lower margins. Over the short, mid, and long term, our investments will allow us to serve more and more customers and importantly, meet the needs of the major AI players, all of which are investing hundreds of millions of dollars on each model they launch. We want to make sure we are well positioned to capture an increasing portion of that growing pie. We are also growing our high-quality talent pool and developing a cooperative site of data collection products designed for the AI era. This is through our R&D investments to expand our capabilities and broaden our product portfolio. The goal is not only to attract new customers but also to be able to cross-sell to existing customers and meet more of our customers' data needs under one roof. While I hope I've been able to share my vision for capturing the opportunity ahead of us, I do want to highlight that it is not likely to be a straight path up, especially over short periods. It is very early days, and the market we are operating in is still in its infancy and taking shape. It is highly dynamic and unpredictable. And given our major customers cannot articulate their needs more than a few short months ahead. They may be powered by major customers as they de-risk the data, stabilize models or adjust strategies, which may have outsized impact. Volatility is high, and we are planning accordingly. I urge investors to judge our development over periods of many quarters, not quarter-by-quarter. Alarum is ultimately focused on playing the long game. We are building the business not just to meet today's and tomorrow's massive short-term needs, but also over the mid- to long-term to become the destination for any company, whether major players, start-ups, or small businesses with significant data collection needs. In summary, with focused execution, a forward-thinking innovative approach and growing interest from AI-driven customers, our goal is not just to participate in the AI revolution but to become one of the central companies spreading it. As I've already shared with you, given the tremendous opportunity we see ahead, we have made a strategic decision to increase our investment by leveraging our profitable operation and reinvesting earnings back into the company. We are investing in innovation, in infrastructure, and growing our customer base and in deepening collaboration with some of the world's largest and most influential companies. While the goal is to remain profitable overall, we may sacrifice short-term profitability for what we believe will be massive long-term revenue and much higher profit stretching over longer periods. At the same time, we remain focused on efficiency and disciplined execution with backing from our strong balance sheet with cash and liquid investments of approximately $25 million. Alarum stands in the perfect position to benefit from everything going on today in the AI market, and we look forward to cementing our position at the very core of this market. Handing it over to you now, Shai.

Thank you, Shachar, and hello, everyone. I will begin by reviewing our key financial results for the second quarter of 2025, comparing them to the same period last year unless stated otherwise. After that, I will provide our guidance for the third quarter of 2025. Detailed definitions and reconciliations of our non-IFRS key business metrics are available in our Q2 2025 financial results press release. As a quick note, the figures I’ll discuss are rounded for clarity and ease of reference. Now, turning to our financial performance. In the second quarter of 2025, revenues reached $8.8 million, slightly down from $8.9 million in the second quarter of 2024. This slight decrease is attributed to a different mix of customers in 2025, as we have seen significant growth in the AI segment, which has largely replaced customers from other segments. Consequently, our net retention rate was 0.98. As Shachar mentioned, we made the strategic decision to reinvest earnings into scaling operations, expanding infrastructure, and broadening our IP proxy network. This positions Alarum well to capture long-term value and meet the demand from major AI-driven customers. During this transition, we are committed to managing operations efficiently while progressing toward long-term goals. Our non-IFRS gross margin for the second quarter of 2025 was 63%, down from 78% in the same quarter last year. In the third quarter, we have begun working with a highly strategic customer, expected to increase our revenues by around $3 million per quarter. However, as noted in our press release, we anticipate low profitability margins in the early stages of engagement with these customers, leading to a further decline in gross margins for the third quarter. Operating expenses in the second quarter of 2025 totaled $5.4 million, compared to $4.2 million in the second quarter of 2024, primarily due to increased salary costs in R&D as we grow the team to accelerate product development. We expect to continue investing in our capabilities, particularly in R&D, to seize upcoming opportunities. In the second quarter of 2025, we recorded a financial income of $400,000, contrasting with a $2.5 million expense in the same period last year. This shift to financial income was mainly driven by interest income generated from our cash in 2025, while in 2024, we recorded a high expense due to the fair value increase of warrants issued in 2019 and 2020, which was reversed in the latter half of 2024. These warrants will expire within a month, eliminating any future impact of this item. Our non-IFRS net profit was $0.3 million for the second quarter of 2025, compared to a net loss of $0.4 million in the same quarter last year. Adjusted EBITDA in the second quarter of 2025 was $1 million, down from $3.4 million in the second quarter of 2024. The share count stands at 70.9 million ordinary shares or 7.1 million U.S. listed ADSs. On a fully diluted basis, the count is 80.9 million ordinary shares or 8.1 million ADS. Basic and diluted earnings per share for the second quarter of 2025 were $0.04 per ADS on a non-IFRS basis, compared to a loss of $0.05 in the same quarter of 2024. As of June 30, 2025, the company's shareholders' equity rose to a record $29.1 million, increasing from $26.4 million on December 31, 2024. Our cash, cash equivalents, and long-term investments, including accrued interest, stood at $25 million as of June 30, 2025, unchanged from the end of 2024. This is due to a positive pretax cash flow being offset by a one-time $1.7 million tax payment in January 2025 related to NetNut's 2024 taxable income. Alarum's solid cash balance allows us to invest strategically while focusing on sustainable value creation. Looking ahead to our outlook for the third quarter of 2025, our guidance is based on current customer orders and backlog. We anticipate revenues in the third quarter of 2025 to be around $12.8 million, with a range of plus or minus 7%, representing about a 78% year-over-year increase. We expect third quarter adjusted EBITDA to be about $1.1 million, with a range of plus or minus $0.5 million. This guidance includes the initial impact of a new large-scale AI data project, anticipated to contribute approximately $3 million in revenues during the third quarter. Since we are still in the early stages of this project, the full scope and duration remain unclear. As I mentioned earlier, we are optimizing infrastructure and cost structures, which we expect will limit near-term profitability from this project, impacting overall profitability in the third quarter. To summarize, 2025 continues with strong momentum, a solid balance sheet, and growing market interest. We remain focused on generating long-term sustainable value for our stakeholders. With that, we will now open the call to the question-and-answer session.

The first question today is coming from Brian Kinstlinger of Alliance Global Partners.

I just want to dig a little bit into that large customer ramp, in the third quarter you're highlighting. I missed part of your prepared remarks. So I'm a bit confused on why it's not generating incremental EBITDA and the gross margin will be low. Is it a paid proof of concept? Is there major discounts? And if this service does continue, I understood that you are unsure the time or the length. Will the pricing dynamics or economics change that you would be able to generate more traditional margin contribution?

Okay, Brian. There are a few factors contributing to the lower margins at this time compared to our standard customers or projects. First, this is a new product that involves a combination of various products, primarily focused on data sets. The project is on a large scale, and the demand developed very quickly. Consequently, we are currently establishing the infrastructure costs for this extensive data requirement. This situation represents a significant differentiation from other products or projects we have undertaken, mainly because the cost of goods sold, particularly the infrastructure for this project, is considerably higher at this moment. As a result, the margins are lower.

Okay. So first of all, is that infrastructure technology or people? And then the second question to that is...

Technology.

Sorry?

It's technology infrastructure, servers and all related.

Yes. Right. Now, in order for the margin to recover, you'll need to see significant volume increases from $3 million a quarter for this product, not necessarily from this customer, to help the margin recover. Is that accurate or not?

Yes, it depends on various factors. Since we've just begun this project, we're hopeful about our efforts, similar to what we've done in the past when things were unclear in our financials. Whenever we launch a new product at scale, we are adjusting the cost structure, particularly relating to infrastructure and network costs. We're aiming to improve our cost structure and infrastructure costs for this project. If the revenue structure remains the same next quarter and this project continues to contribute similarly, we will need to generate more projects for our customers while maintaining our standard gross margins. Importantly, this type of project is not the only product our customer is purchasing from us. We view this as a strategic opportunity for cross-selling and upselling over time, not just limited to this product or project. This customer is actually buying a wide range of our products, making it a crucial partnership for us; we are not evaluating it solely based on financial metrics like EBITDA profitability.

Great. Two more questions. The first one is, what is the product? And how is it different than the products you have right now?

Well, you mean this product compare to our other products?

You're saying this is a different product and you're hiring R&D to develop a new infrastructure for this product. Is it something different and it's a cross-selling opportunities. So can you describe what it is?

Yes, the scale, the amount of the data, the volume, the bandwidth, okay? It's bandwidth that is something unbelievable, it's a huge amount of bandwidth. And due to this, the cost of the network, the servers, the cloud computing is at this stage, we are reshaping it. We already improve it all the time. This is the major difference from our products that you saw till today.

Okay. The last question is, outside of this customer, can you talk about the broader customer base? Is their usage generally going to be increasing compared to the first half of the year? And then maybe speak to the pipeline of new logos?

This quarter's results show notable growth compared to the previous one, and the projections for the next quarter indicate significant expansion beyond just the upsell from a current customer. We are observing a strong trend in the demand for data and intelligence from various clients, particularly those seeking insights to train their models or provide analytics to their customers. Many new clients are entering our pipeline during this favorable period for the industry. We are committed to meeting not just the demands for infrastructure and scalability—which is why we are heavily investing in our network and infrastructure—but also the requests for new features and products from our customers. There is a substantial demand for innovation, and we are actively working to meet this by hiring new talent and expanding our R&D team. This reflects our current situation and focus.

The next question is coming from Kingsley Crane of Canaccord Genuity.

Huge congrats on these results and the traction you're seeing. It's definitely a big moment for the company. I want to start just bigger picture, it sounds like there's been a changing of the guard a bit in the customer base, and that's kind of why we're seeing that lower NRR this quarter. But I mean, in your opinion, do you think that this could eventually result in higher customer lifetime value, more stability on a quarter-to-quarter basis? I realize that we're going to see surges, it's not going to be linear, but just curious about that.

Great question. I'll elaborate. We measure our NRR by comparing four quarters to the four quarters before, four times. For instance, this quarter’s first measurement started in the third quarter of 2023, and then we take four measurements and average them. We chose this method because we believe it reflects big data which should be less volatile, ensuring one quarter's performance doesn't skew results too much. However, I want to be honest that this approach might be a bit misleading right now. We've seen significant trends over the past year to a year and a half: some sectors have dramatically reduced their product demand due to changes in their industries, while on the other hand, there’s a notable rise in demand from AI companies entering the market. If we measure NRR on a quarter-over-quarter basis from Q1 to Q2 and then project it into Q3, we notice significant growth from our current customers, which is very encouraging. We hope this trend continues since the demand for AI seems to be substantial and lasting. As we progress, past measurements will gradually phase out since we drop the oldest measure each quarter. Over time, the retention and lifetime value of our customers will become more apparent, shifting the focus away from our earlier performance. Currently, however, the calculations are still heavily influenced by past data. I hope that clarifies things.

Right. It makes perfect sense on the metric, and I think understood on the structural trends as a whole. So just to touch a bit on this customer. You mentioned it was an existing customer in the release. Has this been a long-standing customer? How impactful were they to Q2 results?

This customer, how impactful it was in the Q2?

Yes. Basically, are they ramping up from nothing, and maybe you wanted to not be specific, I guess.

No, we didn't start from scratch. We've been working with this customer for a few months, about a quarter and a half. The engagement began earlier since it involves extensive negotiation and proof of concept. They selected us, and the ramp-up has been gradual. In this quarter, while they aren't our largest customer, they contribute a significant amount of revenue. Recently, there's been a notable increase in their usage, not in an exponential way, but they are currently utilizing more than one of our products, including our scraper and IP proxy across several departments. We are expanding our services with them into even more departments. This project is quite remarkable.

Right. So regarding the expected contribution, I think we are still a bit new to the guidance in general. How much visibility do we have into the current $3 million? Specifically, how much is committed so far? Also, how variable might that spending be in Q3? I understand that Q4 and beyond is a different situation.

Yes, two-thirds of the quarter is already behind us since we're nearing the end of August. As we look ahead to September, we have confidence and trust in our projections for the upcoming month. Regarding the next quarter and the short term, I want to emphasize the importance of this particular project with our current customer. It represents a significant and material amount, and not only because of this, but also due to the margins of these projects and their overall impact on the company’s gross margins. While the demand for this project is predictable, its duration is similar to that of other projects and customers, which remain at high levels. We are seeing a tremendous demand and diversifying our customer base and product offerings, which should enhance our sustainability during this remarkable growth phase. However, I must mention that this market is currently undergoing a revolution and is quite unpredictable. Companies are reshaping their business models, understanding their needs, and figuring out the direction of their LLMs, including when they might be profitable and how they can monetize them. We are actively involved in these discussions as a key part of the ecosystem. It’s not straightforward to understand the business dynamics, data requirements, and consumption levels to project our future numbers accurately. This is the current landscape. As time progresses, we will gain more insights. At this moment, the demand is increasing, but it’s important to be clear that it is not entirely predictable and is quite volatile. We hope for sustainability, but that is the reality we face.

That makes perfect sense. So for the last question, we've talked about this a bit, but I'm trying to determine the range of outcomes for gross margin. Can we expect that the additional revenue in Q4 and Q1 will come with a similar component gross margin as this large project? Or should we anticipate that gross margin will improve in Q4 as you optimize?

Okay. In Q4, we anticipate that growth and retention, as well as revenues, will primarily come from our existing business, products, and customers, both new and current, who are asking for similar offerings. Our current cost of goods sold can accommodate an increase in demand and clients. If something new arises, it could influence our cost of goods sold and gross margins. Generally, we expect our gross margin to remain healthy with organic growth. I want to highlight again, after discussing this for over a year, that we are seeing increased demand in our industry. The landscape is highly competitive, and we aim to leverage our profitable operations and expertise. We are investing to enhance our network, strengthen our servers, improve cloud computing capabilities, and expand endpoints to meet potential demands. We believe we are at a pivotal moment of significant change in the industry. By integrating ourselves with major customers and sectors, we can achieve substantial benefits. We are pushing our efforts as far as possible while remaining efficient and recognizing our limits, but we see an incredible opportunity at this stage that we cannot afford to miss.

At this time, I would like to turn the floor back over to Mr. Daniel for closing comments.

Okay, everybody. So thanks a lot for your time today. We look forward to hosting you again on Alarum Technologies' next results call. Thank you very much.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.