Alarum Technologies Ltd

NASDAQ:ALAR

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

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. [Operator Instructions]. 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.

[Shachar Daniel, Co-Founder, CEO & Director]

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 accomplishment.

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 as 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 achieved 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 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 who identified that while the business model provides a potential to generate future revenues in consumed resources and investments that result in current operational losses, resulting in non-profitable revenues for the short term. We therefore decided to recalculate 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 playing users, and this allow 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 to its sales in the short term, we trust that our Enterprise Internet Access solution unit, NetNut, will continue to grow and gains new leading partners and customers. We believe that this strategic decision to scale down the Consumer Internet Access segment will allow us to keep a lean and sustainable operations for CyberKick and improve our overall bottom line.

I would like now to refer to 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 two quarters ago. 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. NetNut market was valued at $2.2 billion in 2022 and is expected to expand to a compound annual growth rate of 28.9% from 2023 to 2030 to reach $17.1 billion. We believe that continuing positioning of the company as a leader will contribute to establish 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, lastly, we recently announced an onboarding of new customer operating in the artificial intelligence, AI recruitment market. In addition, we have partnered with a team of elite intelligent 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. Allowance 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 debt -- total debt and liabilities by $1.6 million.

All the actions detailed thus far followed up an amazing record quarter. First, our continued growth, representing 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 of $1.1 million high 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, as I explained. 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 switching profitability is a critical milestone for our company, and we remain focused in achieving this goal while continuing to invest in our products and services. We also believe that our efforts to optimize our resources have contributed to our financial position, and will facilitate our sustainable growth in the future as we continue to deliver exceptional value for our customers while balancing our works 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?

[Shai Avnit, CFO]

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 quarter -- period in 2022. The increase in revenue is due to an 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 only. 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 2023.

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 only, 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 come to $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 2023. 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 share -- 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 the 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.

With that, I'll turn the call back over to Shachar.

[Shachar Daniel, Co-Founder, CEO & Director]

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 the recent years, and Alarum's current position is definitely a testament of the remarkable journey and the milestones we have achieved to date. As we look back, we are minded 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 nonfinancial 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 of a 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 to focus growth initiatives.

I would like to take this opportunity to express my acknowledgment to our dedicated employees and partners, as to our shareholders for their trust, confidence, and ongoing support. As we look ahead, we have a well-defined strategic road map 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.

[Operator]

[Operator Instructions]. Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

[Brian Kinstlinger, Alliance Global Partners]

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?

[Shachar Daniel, Co-Founder, CEO & Director]

0%.

[Brian Kinstlinger, Alliance Global Partners]

0%? Okay. And then -- so then, is a good starting point for the third quarter's revenue about 80% of the second quarter, given CyberKick? And then can you discuss what the gross margin of the continuing operation is? I assume it's a little bit better given the CyberKick business is probably lower margin, but I'm not 100% sure.

[Shachar Daniel, Co-Founder, CEO & Director]

Yes, so you are totally right. As I mentioned in my pitch, the main reason to reduce -- to go down a little bit or even more in the CyberKick business is to improve our bottom line, which is the gross profitability and the net profitability of the company. So yes, we're expecting to see an improvement in those two indicators in the next quarter.

[Brian Kinstlinger, Alliance Global Partners]

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?

[Shachar Daniel, Co-Founder, CEO & Director]

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.

[Brian Kinstlinger, Alliance Global Partners]

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?

[Shachar Daniel, Co-Founder, CEO & Director]

Yes.

[Brian Kinstlinger, Alliance Global Partners]

Yes. Great. And then could you give us some more detail -- Go on. I was just going to say, could you give us some more detail on the AI recruitment market customer you discussed? What is Alarum actually doing for this customer? I'm not sure I quite understood. And what technology are they using?

[Shachar Daniel, Co-Founder, CEO & Director]

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

[Brian Kinstlinger, Alliance Global Partners]

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

[Shachar Daniel, Co-Founder, CEO & Director]

Okay. So, 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, et cetera.

So, for example, if you're a customer, you can buy a package of, I don't know, 10 tera for one month, 20 tera for three months, et cetera. Some of our customers, the bigger customers, are using our platform on a kind of pay-as-you-go. Meaning in the end of each month, they are subscribing to our platform, and in the end of each month, we are calculating the volume and the bandwidth they use, and we are charging them.

[Brian Kinstlinger, Alliance Global Partners]

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?

[Shachar Daniel, Co-Founder, CEO & Director]

95% of our -- let's say, more than 90% are direct sales.

[Brian Kinstlinger, Alliance Global Partners]

Right. And those salespeople sit where?

[Shachar Daniel, Co-Founder, CEO & Director]

95% based in our headquarters in Israel, in Tel Aviv. We have almost zero touch with our customers. Everything is automated -- that’s fine, everything in between is actually automated. Some of them -- some of our customers are even based on a self-service model. I mean, they are subscribing to our platform, paying, and starting to use it with the limitations of duration and bandwidth.

But 95% of our team is in Israel, even more, 98%. From the other side, I'm very proud that we have a team that is currently a group of universal teams coming from all over North America, from Europe, from South Africa Israel, West Europe, and East Europe. A very exciting team from Asia Pacific, et cetera.

[Brian Kinstlinger, Alliance Global Partners]

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?

[Shachar Daniel, Co-Founder, CEO & Director]

So, you mean that you see some companies that are with -- do you see them take out by your side…

[Brian Kinstlinger, Alliance Global Partners]

Essentially, we've seen bookings get delayed, right, contract awards of all sorts of products and services are getting delayed. And then my other question is, is there a way to quantify what your pipeline of opportunity is in the near term?

[Shachar Daniel, Co-Founder, CEO & Director]

Okay. 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 will go better in the world, we receive a more significant growth. But still, we are meeting and even better 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 is converting to being -- to be a customer between is two weeks to three weeks. So, the pipeline duration is very short, if you understand what I mean. So, we are not calculating the pipeline. The most important indicator from our perspective is the retention rate of our customers month-over-month. And then even if we have a small churn, the new customers and the upsell for current customers are higher than this churn.

It's sometimes -- most of the time, it's significantly higher. And this is why we are experiencing month-over-month growth, quarter-over-quarter growth, and of course, year-over-year growth. So --

[Brian Kinstlinger, Alliance Global Partners]

What is that retention rate?

[Shachar Daniel, Co-Founder, CEO & Director]

I can calculate -- sorry?

[Brian Kinstlinger, Alliance Global Partners]

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

[Shachar Daniel, Co-Founder, CEO & Director]

Okay. So, it's -- retention rate is an indicator. It's a KPI that it looks like we are going to expose -- we are going to expose, I guess, next year because to measure retention rate, there are a lot of ways to measure, so, I don't want to mislead you or the audience. But I can tell you that in the last 12 months, the retention rate is amazing, really amazing.

[Brian Kinstlinger, Alliance Global Partners]

Okay, thank you so much.

[Shachar Daniel, Co-Founder, CEO & Director]

You're welcome, Brian.

[Operator]

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

[Shachar Daniel, Co-Founder, CEO & Director]

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

[Operator]

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

[Shachar Daniel, Co-Founder, CEO & Director]

Okay. So, 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 about our progress and financials. Thank you very much.

[Operator]

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