Alarum Technologies Ltd (ALAR) 2021 Q3 法說會逐字稿

Greetings and welcome to the Safe-T Group third quarter and 2021 earnings results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Steve Gersten, Director of Investor Relations. Thank you, may begin.

Thank you, operator. Good morning, ladies and gentlemen, and welcome to Safe-T Group's third-quarter 2021 earnings results conference call. I'm Steve Gersten, Director of Investor Relations for Safe-T Group. Joining us on the call today is Shachar Daniel, CEO; and Shai Avnit, CFO of Safe-T Group.

Before we get started, I will read the 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 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 of performance and underlying assumptions, and other statements that are different than 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 from expectations reflected in these forward-looking statements.

Potential risks and uncertainties include those discussed under the heading, Risk Factors in Safe-T's annual report on Form 20-F filed with the Securities and Exchange Commission on March 22, 2021, and in any subsequent filings with the SEC. All such forward-looking statements, whether written or oral made on behalf of the company, are expressly qualified by these cautionary statements and such forward-looking statements are subject to risks and uncertainties, and we caution you not to place undue reliance on these.

At this time, I'd like to turn the call over to Shachar Daniel, the company's CEO. The floor is yours.

Thank you, Steve. And welcome, everyone, to Safe-T Group's 2021 third-quarter earning results conference call. As is customary, with me is Shai Avnit, our Chief Financial Officer.

I would like to provide a short overview of our business operations, summarize our accomplishments, and then turn the call over to Shai, who will briefly discuss the financial results of the third quarter before we open the call to questions.

We are very excited to present a truly significant quarter, which I believe begins to represent the company's outlook and transformation we worked towards for the past year and a half with the key word of execution. Over the third quarter of 2021, we are focused on expanding our value proposition to the privacy and cybersecurity markets for consumers and enterprise.

During the last quarter, we witnessed the huge potential of the market we were operating as confirmed by a surge of M&A deals around the world. More than $1 billion in acquisition in the last few months strengthened our confidence in the opportunities ahead of us and reconfirms the untapped value of our innovative portfolio of privacy and cybersecurity technologies. Entering the consumer sector with a variety of solution built on a recurring revenue business model, the acquisition of CyberKick has proven to be a strong catalyst for us, as demonstrated by our impressive revenue growth recorded in the third quarter.

Our consumer solution includes privacy product and new innovative cybersecurity tools with unique features for our users. We were very proud to launch our iShield at the end of the quarter and more recently augmented its capabilities with the addition of advanced anti-ransomware protection layer. I believe this product can be a game changer for user as more than 495 million ransomware attacks have been logged in this year according to SonicWall, a leading publisher of ransomware threat intelligence, making 2021 the most costly and dangerous year on record.

While our industry tends to focus on ransomware's highly damaging consequences to large organizations, we are differentiating ourselves by bringing advanced ransomware solution to millions of consumers and small and medium business who typically don't have access to tools to deal with those attacks. As consumer security software spending continued to grow, reaching approximately $7 billion, according to Statista, we remain committed to invest in additional resources in this side of the business in the upcoming quarters because of the large untapped potential we see.

In the enterprise segment, we continue to make progress as well. With the launch of our new web data service solution, we have expanded our enterprise product portfolio. We have already seen significant interest in our web wide data service solution by enterprise customers who are seeking highly scalable and efficient way to collect publicly available data pools that can be used to aid in their data analysis and decision making.

Furthermore, our enterprise cybersecurity solution, ZoneZero, a Zero Trust Network Access, ZTNA product, also gained an important recognition this quarter as Quadrant Knowledge Solutions has named Safe-T as the 2021 emerging leader in the SPARK Matrix analysis for the global ZTNA security market.

Overall, our team continues to make significant progress in our reorganization process that we started two years ago with the goal of building Safe-T Group in the world-leading cybersecurity and privacy company serving both consumers and enterprises. Early evidence of this progress can be seen in our revenue for the quarter, which is a record-wide of approximately $3.4 million, an increase of 137% compared to the equivalent quarter in 2020, exceeding our own $3.2 million estimate, which we pre-announced in October.

But before going further, I would like to turn the call over to Shai to discuss the financials for the quarter in more detail. Shai?

Thank you, Shachar. I will begin with the summary of our third-quarter 2021 financial results, which are compared to our third-quarter 2020 results, unless otherwise stated. All figures in this summary were rounded up for simplicity.

Revenue for the third quarter of 2021 totaled $3.4 million, a 137% increase compared to revenues of $1.4 million for the third quarter of 2020. The increase in revenues is due to the first-time consolidation of CyberKick's revenues for the third quarter, the acquisition of which was completed in July 2021, as well as an increase in enterprise's privacy revenues generated by NetNut, our enterprise privacy business.

Gross profit for the first quarter of 2021 was $1.8 million, representing 108% increase compared to gross profit for the corresponding period in 2020 of $0.86 million. The increase in gross profit was primarily driven by increased revenues.

Operating expenses in the third quarter of 2021, excluding unique expenses such as contingent consideration resulting from our acquisition, totaled $6.2 million compared to $3.2 million in the equivalent quarter of 2020. The increase is mainly due to CyberKick's first-time consideration as well as the increased enterprise privacy operation.

Overall, we believe that operating expenses in the first quarter were higher than average due to a number of one-time events, which are not expected to reoccur, with leverage expected to decline as a percentage of sales going forward.

As of September 30, 2021, the company's cash and cash equivalents and short-term investment balances were almost $13 million, down from $19.3 million reported at the end of the previous quarter, primarily due to a $3.7 million cash payment for the acquisition of CyberKick. Based upon our internal plans, ongoing cost reduction efforts, and expected level of capital investments into new products and technology, we believe we have adequate cash on hand to fund operations through 2022 and into early 2023.

The International Financial Reporting Standard net loss in Q3 2021 totaled $3.7 million or $0.12 per share or ADS as compared to a net loss of $1.3 million or $0.08 per share or ADS. Non-IFRS net loss in Q3 2021 totaled $3.2 million or $0.10 per share or ADS compared to a loss of $1.6 million or $0.10 per share or ADS, same as in Q3 2021.

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

Thank you, Shai. In summary, during the last quarter this year, we made significant progress towards implementation of our vision, including delivering significant consecutive quarterly revenue growth, acquiring the innovative technologies, and adding talented entrepreneurs to our team. On a personal note, we are not indifferent to the share price and capital markets. Although the broader capital markets are reaching new highs, we do not believe that this trend has translated to the micro-cap and small-cap companies like Safe-T.

As our financial results indicate, we are building a high-growth company with high gross margins. While the company is currently investing in its growth in the short term over the coming quarter, we believe our fixed costs will stabilize and revenues will continue to grow significantly, producing a higher level of profitability. Our Board and team are committed to building the value of our business as a top priority and believe it will become greater because of the decisions being made now.

Alongside our commitment to improving our business operations, we are also committed to expanding awareness of Safe-T with new investors through most frequent contact and participation at investment conferences. As part of this and our desire to be more engaged and transparent, we did launch a new corporate and investor website. This will provide investors with a better understanding of our business focus, financials, and our corporate governance, and enables investors to better communicate with us. I invite you to check it out.

Looking ahead, we have a well-defined roadmap of execution, technology, innovation, and expansion plans for the near term. Established security and privacy markets are growing into a global multibillion-dollar opportunity in response to the incredible surge in cyber-attacks on organization and individuals. We will continue to develop our position as a leading provider of private and cybersecurity solution, and we are well positioned to capitalize on the hyper growth our sector is experiencing.

With that, I would like to open the call for any question. Operator, please go ahead.

(Operator Instructions) Michael Shaw, Shaw Family Office.

Good morning. Thanks for taking my call. Shachar, can you give us an update on the status of the ZTNA market or your Zero Trust product?

Okay. Good question. Thank you. So basically, we believe that Zero Trust Network Access, as we call it, ZTNA as a security architecture, is certainly gaining acceptance though in the enterprise market because of its many advantages over traditional VPN approaches. I don't know if you're aware, but basically the solution is come to replace the old and legacy VPN. I should note, however, that as a new architecture, as everybody can imagine, customers are taking a careful approach to implementing the technology as they are facing the challenge of replacing a legacy infrastructure, not only in the ZTNA. It happens in all markets.

Due to this, we started to push last quarter and accelerate over the last few months, our Zero Trust Network Access to internal users within identity-based Zero Trust Solution that offers seamless integration to multifactor authentication, MFA formats; and secure access control, supporting both non-web protocols and legacy infrastructure. We believe that this approach touching the pain points of our customers, layering it on top of all account forms of MFA would be easier and faster to adopt to our customers since they get the benefit of enhanced access security while addressing the immediate challenges. This is also an easier first step for adopting our full solution.

In short, I can assure you and us that the move to ZTNA is happening and will happen as noted in the multiple industry experts and research reports published by firms like Gartner, Forrester, and more recently Quadrant Knowledge Systems. But we are still early in the deployment process.

Great. Thank you very much.

(Operator Instructions) Brian Kinstlinger, Alliance Global Partners.

Great. Thanks. In terms of Zero Trust, can you talk about what the contribution roughly as a percentage wise is to revenue? And as you said, it's early stages for your company. How long do you think before it becomes a meaningful catalyst to revenue?

Okay. Thanks, Brian. Good question. By the way, it's more or less the same answer as the previous one, but I will elaborate.

So basically, we built the platform in the last one, one and a half years. We are engaging with customers and its partners all over the world trying to be the first that will come into this market together with some giants and some other competitors. At this stage, a contribution is to the revenues, so the revenues of the company is low. We fully believe that our new approach of providing ZTNA for internal users, allowing organization to be connected -- to connect legacy infrastructure to MFA, will it give us a boost this quarter or the next quarters. And we will start to see in 2022 a significant value or benefit or contribution to the revenues from our ZTNA solution.

Great. Okay. So 2022, we should start to see a little bit more. And then can you talk about the early discussions around the iShield launch? What's the go-to-market strategy? Is it direct? Are you using partners? And how do you see this impacting 2022 revenue? Also, what's the pricing for this solution?

Okay. So we launched a solution a few weeks ago. The go-to-market in the consumer business is a little bit different than the enterprise business. The go-to-market, first of all, in the first stage is just only direct. I think that one of our big upside and advantages is the fact that we have -- I can assume the best digital sales and marketing guys, maybe globally, that knows how to push consumer product.

We started with the first bulk of around 1,000 users. We stopped. We are reviewing the feedbacks from these first consumers, then we'll push another bulk and another bulk. And it looks -- and according to the procedure, in the first quarter or the second quarter of 2022, we will take it to, as we call it, to mass production or to GA status.

We see a huge value, a huge contribution of this iShield to our portfolio and hopefully to our revenues next year. We consider to consolidate this product with some other consumer products that we have in our portfolio to everyone -- [at least], with one full solution. But we will take a decision over the way. But the go-to-market strategy is the only direct, to your question.

Great. And then (multiple speakers) -- yeah, when you say direct, is that phone calls, is that e-mails, texts, all of the above? How do you reach consumers?

Digital advertising, mainly.

Right. Got it. Okay. And then can you -- maybe at a high-level breakdown, Safe-T legacy, NetNut, CyberKick, Chi Cooked and -- then as you think about those different businesses, which will grow the fastest in 2022, and why do you think?

Yeah, I think it's a little bit tricky question because we did not talk yet about projection for other for next year. But I can tell you in high level that -- and to be totally honest with you, we push the [old] business: the privacy, the security, the consumers and the enterprise. And we truly believe that each one of them can bring that huge value next year. I can tell you that according to this quarter and the start of the fourth quarter, we see a nice growth, we see nice results in each one of them.

So I don't have enough data now in order to provide a kind of breakdown of the revenues for next year, but we trust all of our products at this stage. Of course, if we see something that is -- that's why we have a lot of confidence in our offering in Safe-T because we did a variety of solution to a variety of markets and segments. And then if we see that something is going very well, then we can push it and we can prioritize it. Or vice versa, the opposite. If something is breaking, then we can stop it a little bit, hold it, fix it, and in parallel, push the others. So -- but I don't have an accurate information to provide at this stage, Brian. Sorry.

Okay. Okay. And then I may have missed it. Can you quantify the total one-time expenses in the quarter or non-recurring expenses? And can you talk about what these expenses were for?

Most of the expenses in this quarter were for the acquisition of CyberKick.

And what were the total that ran to the income statement that won't reoccur?

Okay. Shai, do you want to answer here?

Yes. Hi, Brian. (multiple speakers) Obviously -- yes, I'm on the line. Obviously, these are [numbers that fare]. We didn't release it in the PR, but there were some expenses related to the acquisition, and there are also some expenses related to an IT issue we are dealing with. We believe that these two costs will not repeat themselves in the same level -- cost acquisitions at one-time, and the IT will not repeat itself in the same level going forward the quarters.

Right, but that doesn't really help us. We'd like to know, as investors, what -- how much your cash burn? Or it looks like an EBITDA is not recurring. So is it $1 million in acquisition and IT issues? Is it less, is it more? And are the IT issues complete, are they fixed?

Shai?

Regarding the IT issue, Shachar, better if you answer it. The acquisition costs are basically over. (multiple speakers)

Yes, I will summarize. So we have two main issues this quarter, one-time expenses related to cash with the burn rate. One of them, as Shai mentioned and I mentioned initially before, we had a one-time peak expense, which was related to the acquisition. If we will not have another acquisition and we don't have something planned for the near term, so this is behind us, of course.

The second is the IT issue. So we truly believe that the mass or the big part is behind us. We are now negotiating on kind of two settlements with a third-party company that we had the issue. So basically, it looks like that it's going to reduce dramatically. But of course, if something will change, we will announce.

Okay. And lastly, can you share what the average share count was in the third quarter?

The average what? Sorry.

The common share count.

Share count?

Outstanding. ADS.

Okay. Shai?

Yes, we had pretty steady throughout the whole quarter. We have three -- 30 million ADSs or shares now. It's the same number, steady over the quarter. 30 million.

13 million? One three?

No, 30. 30.

Three zero.

Three zero. Exactly.

Got it. Okay. Thank you.

It's just -- in the beginning of the quarter, we issued some shares to the CyberKick's founder. It was on for -- from July and since then, we are steady over the quarter.

Okay. Thank you.

You're welcome.

Lee Alper, Hammock Investors.

Thanks for taking the time. Can you give us some idea whether we might be able to see some insider or management buying the stock as the prices really come down?

Okay. So this is an important topic. And our entire -- sorry, again. This is an important topic, and the one entire team is focused on. Okay? At this stage, all I can say is that we have reviewed this matter with our lawyers. And we are currently exploring options for management to buy shares in the open market, of course, subject to the allowed trading windows that -- we have a trading window according to our policy. So yes, it's on the table, we're discussing about it. And of course, as it happens, I guess, you will know.

Okay. Thank you.

You're welcome.

[Robbie Johnson].

Yes. My question is how do you see the balance between your burn rate and growth?

Okay. Thank you. It's a strategic question. I will touch it a little bit. I guess it's strategic not only for Safe-T but for most of the companies. But as we noted in the PR and in my remarks today, we plan to continue to invest in our growth. And this will drive revenues and give us the scale we need to build our business.

We produced strong margins currently over 50% in the current quarter with the potential to go higher; and topline growth will drive improvements in operating income as well as cash flow. We are focusing on the management of cash and believe that growth in revenues will significantly outpace any growth in operating expenses and will take the company to the place and to a thing that it needs to be. And this is how we will execute our vision.

And I wish you a Happy Hanukkah.

Hope we answered your questions. Chag Sameach. Happy Hanukkah. Thank you.

[Matthew Jennings, Landmark Financial].

Hey, guys. Let me just say a fantastic quarter and probably one of the better growth stories I currently see in this marketplace.

Thank you very much.

So obviously, you guys are having record sales right now, record revenues. I'm curious to know why the company hasn't provided more updates or press releases around the deals it's making with these customers. You've been relatively quiet with actual contracts. I know that you've had a number of press releases about partnerships, but I'm more interested in the updates provided on deals.

Okay. Yes. It's a question that I'm facing with the investors all over the quarter. So it's a great opportunity to explain a little bit. First of all, we understand the need to communicate the progress we are making in the business. And we are committed to improving our transparency in this regard. For example, however, in the enterprise, our customers are interested in privacy and security. And by the very nature of our products, they do not want to share with the world the approaches and the technologies they are deploying.

In the consumer business, although there is a lot of activity, we think that in these stages we just started, it is too early in the process to provide metrics that investors will value as we need some time to further establish our track record.

So just to summarize, we are touching very sensitive areas for our customers: their privacy, protecting their privacy products that are protecting their privacy, and the cybersecurity products that are protecting their facility and infrastructure. Most of the customers don't want to expose nothing related to this. They prefer to stay behind the scenes, and they prefer that nobody will have even a clue what kind of products are protecting their infrastructure.

And this is something that we are facing with. We totally understand your need as an investor to get these PRs and announcement, but I'm sure that the numbers are talking on themselves. And hopefully, as we will grow, we will have more opportunities to announce. Hope it answers your question.

Yes, it did. Thanks.

Thank you.

[Dan Pidmick].

Hello, Shachar. Can you explain more about the situation now with the lawsuit of NetNut with the Luminati or Bright Data?

I think that I can elaborate only on the items that we announced. We have a kind of a process with Bright Data/Luminati. It's a kind of -- I cannot -- I'd say that not related to the SEC rules of a public company. It was more related to the process itself. It's totally under confidential. But if it's very interesting for you, you can take a look. Some of the information is public, but I cannot disclose more than this.

And what do you expect? Do you think that NetNut will go out straight from it or there is going to be some problems?

No. I totally believe -- as we announced, I think that we are facing with a company that has a very weak patent, and we have a lot of evidence for this. And I think that we will -- this process will make us stronger, not the opposite.

Okay, I hope also. Thank you very much.

You're welcome.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Shachar Daniel for any closing comments.

Okay, everybody. So thanks for joining us today and Happy Hanukkah and Chag Sameach for everybody. We look forward to continuing to update you on our progress, and we really appreciate your trust and belief in our company. Thank you very much.

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