Alarum Technologies Ltd (ALAR) 2022 Q2 法說會逐字稿

Greetings and welcome to the Safe-T Group Ltd. second-quarter 2022 earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Gersten, Director of Investor Relations for Safe-T Group. Thank you. You may begin.

Thank you, Melissa. Good morning, ladies and gentlemen, and welcome to the Safe-T Group's Second Quarter of 2022 earnings results conference call. I'm Steve Gersten, Director of Investor Relations for Safe-T Group.

Before we get started, I will read a disclaimer about forward-looking statements. This conference may contain, in addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding Safe-T Group.

Forward-looking statements include information 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 materially 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 filed with the Securities and Exchange Commission on March 29, 2022, 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. Go ahead, Shachar.

Thank you very much, Steve, and welcome, everyone, to today's 2022 second-quarter corporate update conference call for Safe-T Group with me is in Shai Avnit, our CFO. I am very proud to share our great financial results and our tremendous recent business developments. The last quarter is another milestone in the execution of Safe-T's long-term strategy.

At the beginning of 2019, after we concluded 2018 with revenues of $1.4 million, we initiated a new acquisition strategy in order to strengthen and expand our product portfolio. Today, proudly, three years after the launch of our new [path], we can say that one, we are at a sales rate that is almost 20 times higher than in 2019.

Second, we moved to a recurring subscription-based revenue model, which means that our revenues are more predictable, and that the company would benefit from these revenues over the coming years. So the company's losses in the last two years were mostly due to IP-related litigation expenses, as well as the investments in fiber for enterprises.

We managed both issues efficiently by reaching a final settlement with respect to the IP-related dispute and transferring the cost of fiber for enterprise for a business partner. As a result, you are now witnessing a decrease in our loss, a rate that will continue to improve and accelerate in the coming quarters.

Fourth, furthermore, driving much of the company's losses, our investment and -- not losses -- expenses in acquiring customers that will bear fruit in phases in the coming years is the company's business model. Our talented team and the growth over recent quarters allowed us to bring onboard strategic funding that will allow us to continually grow our business.

Looking forward, we remain firmly focused on our cost reduction plans, improving the efficiency of the business. And together with our new products and investment into our customer acquisition program, we expect to not only drive significant additional revenue growth but deliver improved financial performance in the months ahead.

The second quarter of 2022 was highlighted by the achievement of several operation milestones in our mission to continue our growth. In the first half of 2022, we delivered record revenues of $8.8 million, an increase of 181%, and $4.8 million in the second quarter, an increase of 168%.

This increase in revenues is attributed mainly to our customer consumer business but was supported by our privacy business for enterprises. Our antivirus privacy business unit NetNut reached breakeven, excluding non-continuing legal expenses related to the patent litigation, which was dismissed following our settlement.

Since we acquired NetNut, it has achieved rapid growth in revenues; started at $800,000 in 2017 to $5.3 million in 2021 and reached $3.6 million in the first half of 2022. It is our intention to implement some of the successful elements from NetNut acquisition into our working plans for our consumer privacy and cybersecurity business.

As mentioned earlier, in May 2022, we announced the dismissal of patent litigation against NetNut, which was resolved by settlement. As a result, we expect a substantial reduction in general and administration cost in NetNut, which will be reflected also on a consolidated basis. We achieved a reduction of our net loss by 33% in the second quarter of the year compared to the first quarter of 2022.

This cost reduction is expected to accelerate in the first quarter of 2022. During May and August, we secured $2 million in non-dilutive credit line from a leading Israeli bank and a strategic financing of up to $4 million. This strategic financing includes potential future funding, which would be priced at a premium valuation for the company.

We are extremely proud to have secured those additional funding through creative financing initiatives that supported company growth without impacting our shareholders at the current market valuation. Those recent initiatives, which can add more than $5 million to our working capital, are not reflected yet in our current cash resources as this reflects the status for the period ending June 30 and will enable us to facilitate our continued growth.

We plan to allocate these funds to support our customer acquisition program. Customers in our business, our main assets, and investment in user acquisition price translate into future high-margin recurring revenues. As we discussed in the past, our model estimates revenues for each acquired customer for the duration of their lifetime LTV periods.

Under these plans, a significant portion of our sales and marketing expenses reflected in our P&L is simply our investment in acquiring users, which we believe that according to our model will drive -- will translate into more predictable future revenue streams.

We started our investment in customer acquisition in the second half of last year, and we successfully generated a growing future revenue stream from subscribers. These customers are and will be an important asset to be a driver of value for Safe-T and the shareholders.

After several months of investing into sales and marketing to acquire a current customer base for our first consumer product, we are confident in the sales and marketing efficiency of our acquisition program and the capabilities to attract profitable subscribers.

Our privacy solution for consumers includes thousands of paying users that utilized our products to date. These solutions are keeping online users' information private and secure and in an encrypted secured layer for online privacy.

Over the past few months, we substantially expanded our reach by launching solutions that support a leading operating system in the world. Building upon the strong revenue foundation produced by our initial customer, [Apple iOS] products, we started the expansion of our portfolio, which will drive additional future growth.

This effort began with the launch of Ad Blocker Pro an anti-malvertising -- which is malicious advertising -- solution for Apple iOS devices earlier this year. In July, we launched our first consumer privacy solution for Microsoft Windows. The new desktop privacy solution prevents the use of personal data, online activity, and history from being accessed or monitored by Internet service providers, advertisers, and third parties.

Our latest release was the production of our consumer privacy solution for Android mobile devices, including smartphones and tablets. Utilizing advanced encryption technologies, this new privacy solution prevents the use of personal data from being accessed or monitored. By blocking the ability to track or monitor users' online activity and history, personal information remains private.

Importantly, these new products across multiple untapped platforms will generate additional revenue streams for the company. It is our intention to continue developing and launching new and advanced easy-to-use privacy and cybersecurity tools to help protect consumers, no matter which platform or operating system they use.

As for our enterprise cybersecurity solution, we continue to preserve our position in the market through our strategic collaboration with Verizon on sales and development of our joint ZoneZero Zero Trust Network Access Software.

We believe that these steps will allow us to maintain the value of our IP and [strategy in sales] while enjoying a reduction in expenses, which are just now starting to positively impact our operating results. But before going further, I would like to turn the call over to Shai to discuss the financials for the quarter. Shai?

Thank you, Shachar. I will summarize our second-quarter 2022 financial results, which are compared to our second-quarter 2021 results, unless otherwise stated. All figures in this summary were rounded up for simplicity.

Revenue for the second quarter of 2022 totaled $4.8 million, and revenue for the first six months ended June 30, 2022, was $8.8 million. These compared to revenues of $1.7 million and $3.1 million, respectively, for the equivalent periods in 2021.

The increase in revenues is due to the consolidation of CyberKick's revenues following the completion of its acquisition on July 4, 2021, and a steady increase in enterprise privacy business revenues.

Gross profit for the second quarter of 2022 was $2.6 million compared to a gross profit for the corresponding period in 2021 of $0.8 million only. The increase in gross profit was primarily driven by the increased revenue. Gross profit for the first half of 2022 was $4.7 million compared to a gross profit for the corresponding period in 2021 of $1.2 million.

Research and development expenses for the second quarter totaled $0.9 million compared to $0.8 million in the second quarter of 2021. Research and development expenses for the first half of 2022 totaled $2.3 million compared to $1.5 million in H1 2021.

The increase is attributed to the consolidation of CyberKick's research and development expenses, and the development of new products was partially offset by a reduction in the research and development expenses of the enterprise security segment due to the agreement with Verizon.

Sales and marketing expenses for the second quarter of 2022 amounted to $2.6 million [and] compared to $1.3 million in the second quarter of 2021, and $5.7 million for the first six months of 2022 compared to $2.4 million in the first six months of 2021.

The increases are mainly attributed to the consolidation of CyberKick's sales and marketing expenses, primarily its [media] costs, and they were partially offset by a reduction in the sales and marketing expenses of the enterprise security segment due to the agreement with Verizon.

General and administrative expenses totaled $2 million and $4.2 million for Q2 2022 and the first half of 2022, respectively, and compared to $1.5 million and $2.6 million in their respective periods for 2021. The increases are mainly due to higher professional fees, predominantly legal, in connection with NetNut's patent-related proceedings, which were resolved by settlement on May 17, 2022.

IFRS net loss for the second quarter of 2022 totaled $3.2 million or $0.10 basic loss per ordinary share compared to net loss of $2.4 million or $0.09 basic loss per ordinary share for the second quarter of 2022. For the first six months of 2022, IFRS net loss totaled $7.9 million or $0.26 basic loss per ordinary share compared to a net loss of $4.9 million or $0.20 basic loss per ordinary share in the first six months of 2021.

Non-IFRS net loss. We use non-IFRS net loss measures, which reconcile the effect of some non-cash expenses or income and certain other expenses, as we believe it reflects better the performance of our business.

Non-IFRS loss for the second quarter of 2022 totaled $2.5 million or $0.08 of basic loss per ordinary share compared to a loss of $2.2 million or $0.08 basic loss per ordinary share in the same period for 2021. For the first six months of 2022, non-IFRS net loss totaled $5.9 million or $0.19 basic loss per ordinary share compared to a net loss of $4.2 million or $0.17 basic loss per ordinary share in the first six months of 2021.

Company's cash and cash equivalents for the six months ended June 30, 2022, totaled more than $4 million compared to $3.8 million as of December 31, 2021. This company's cash balance does not account for up to additional $5.6 million in future funds under its recently secured credit facility and investment financing.

As of June 2022, shareholders' equity totaled $17.3 million or approximately $0.57 per outstanding American Depository Share compared to shareholders' equity of $24.2 million on December 31, 2021. The reduction is mainly due to the company's operating loss during the period December 31, 2021, through June 30, 2022.

Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 32.6 million ordinary shares or ADSs. On a fully diluted basis, we currently have around 48 million shares or ADSs outstanding. With that, I'll turn the call back over to Shachar.

Thanks, Shai. In summary, during the second quarter this year, we made considerable progress toward implementation of our strategy. We delivered on our goal to present continued significant growth and expand our position in the consumer business.

Looking ahead, we have a well-defined roadmap for execution, innovative technology and established expansion plans, and most importantly, the funds to support it well into 2023. We plan to continue investing in each of our segments, encourage further growth, as well as to explore potential integration and migration of our existing technology throughout our business.

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

(Operator Instructions) Jason Kolbert, Dawson James.

Good morning, guys. Congratulations on the quarter. Just wanted to understand a couple of things. Where was the greatest growth, and how much growth was organic versus inorganic? And what also -- can you just repeat what was the outstanding common share count? I got the fully diluted number at approximately $48 million. What was that common number you're using?

Okay, Jason, thanks. So I will start from the organic and non-organic. So basically, I think the most important information is you can take a look only one part of it and see the organic growth quarter over quarter, one quarter back, two quarters back, and three quarters back, okay?

So basically, most of our growth -- not most -- all of our growth in the last three quarters is [organically]. Besides that, if you go back -- and you can see that we -- only in our cyber security -- on our privacy for consumer, for enterprises, which is basically the organic growth because in the in the previous quarter last year we didn't have yet the consumer, only for the third quarter, we can see also a two-digit organic growth.

So meaning, we are growing organically, [un-organically], if you compare it to last year or if you compare it to the previous quarter, et cetera. Regarding the shares, so we have a total of 48 and floating of 32 million shares, if this [follows] your question.

Okay, good. It's 32. Thank you. And if we were to project a double-digit organic growth rate, call it 15% or 20% compound annual growth rate or a sequential growth rate, at what point -- and I can certainly do the math -- it looks like you're going to be close to breakeven in the next year or two. Does that seem reasonable to you?

Okay. So you said something very important. You can do the math by yourself because according to our current growth rate, we can be profitable early or -- let's say in one year from now. The question is what will be the decision because if we want -- for example, in my pitch, I just described the new products that we launched.

And I mentioned again and again. I know that it sounds like everyone's favorite, but in our case, when we acquire a consumer, we are not losing. We are investing because it is a monthly subscriber. So we had seen the first -- second month, you can lose. But if you have a good product, well-established products, you will have a great return in the next years.

So the question is how much money we want (technical difficulty) in consumer [position] for new products. In the privacy business for enterprises -- [as much as] I can say very proudly -- but it's the first time we bought a company two years ago, and after 2.5 years, we bought it from almost $1 million (technical difficulty) but it's profitable.

We know how to bring a business to be profitable [because it is] still growing. And now, we would need to take we -- will need -- so we did take the decision regarding the [B2C], the privacy and security for consumers.

I agree 100%. The question is the efficient use of your capital and the return on invested capital is greater if you the redeploy that capital. And I guess that's my last question, which is, where do you get the most bang for your buck at this point with any capital that you have?

Is it in the sales and marketing that's driving that growth rate, or are you looking -- at this point, what strategic acquisitions are you thinking to make that would complement your revenues and continue to support this very, very solid growth rate?

Okay, good question. So basically, we don't have any plan -- any strategic plan to add additional acquisitions in the coming periods. We think that we have a great business, that our funds came and -- came into our current businesses and showed significant growth, significant numbers, and significant and impressive new products.

But if something will come in, we would have an ad hoc opportunity that we will not miss. So we will consider it. But most of the capital, we are investing in the house, in our great and talented team, to develop new and innovative products and, of course, incentives marketing because you see the results. We know how to do it.

Great. Thank you so much. Congratulations on the quarter.

Thank you.

(Operator Instructions) Brian Kinstlinger, Alliance Global Partners.

Great. Thanks so much for taking my questions. Can you start with sharing what percentage of the recurring revenue you'll be sharing for the first five years under the privacy solutions with your lender, and how that will impact gross margin, which is, I assume, where you'll see the impact? And then, how do you expect this funding is going to drive stronger revenue growth if at all?

Sorry, Brian, but the line -- when someone is asking, [it's a little bit] broken, [not on your side]. I have a little background noise, so if you can say it again and then slower because I can barely hear you.

Okay. Let me take off my -- give me one second. Maybe I'll --

No, it's not yours. The line is a little bit broken. I can barely hear you, so if you could just [say it] again?

Okay, certainly. So I wanted to start by understanding what percentage of recurring revenue are you going to be sharing for the first five years under the privacy solution with your lender, how that's going to impact gross margin, and then how you expect that will impact revenue growth as well?

Okay. So if I understand you correct, you are asking [in the next side] what are the future revenues that we have now according to our formula and model for the next five years in our consumer business. This is your question?

No. You got the funding, right? A non-diluted funding.

The funding, that's right, the new funding.

Yeah, are you going to share some piece? So what's the impact on gross margin? What's the revenue share? And then, how will it drive stronger revenue growth?

Okay. So, Shai, correct me if I'm wrong, but the funding is zero. We'd have a zero impact in our financials on the gross margin, on the revenues, yes?

Yes, correct. It will affect, Brian, only on the financial expenses because it's considered as financing, as like a loan. So all our margins [belong] to this financing -- will be shown under the operating profit or loss margin and the financial expenses, so it won't affect the gross margin and the operating margin.

And what is that percentage of each sale, is it 50%? And after five years, is it 50%? Are you paying 50% in financing fees?

No. So let me explain it, okay? So there are two steps. One step still gets to the investors. If it goes well, they will get this loan back. And then, after this step, after five years, not more -- till five years and not more than five years, we will have a [rev] share of 50% only on the specific consumers that we have acquired with this specific investment. So they have a roof, okay? It cannot be more than five years.

Right. But the press release says there's a revenue share. And so, what does that revenue share? Even if it's in financing expenses, what's the revenue share right away for all incremental sales?

So only for this specific product, for the [Android] product -- if you remember, we have a product for iOS -- only for the specific consumers that were required by this specific investment, at the beginning, it's 100%. 100% is going to the investors, okay? It's going to the investor still. Its coverage is long. And then, after this, it's 50% each, meaning a rev share of 50% till five years. After five years, it's going back 100% to Safe-T.

Got it. Okay. That's helpful. And then, can you talk about how the partnership with TerraZone is going? I think you previously said it would drive customer acquisition in the second half of the year and as well as drive expenses down. So just talk about how successful this has been. Does it need more education on TerraZone's part? Any update would be helpful.

To be honest, I don't have any important or something to update at this stage. TerraZone has arranged now with Safe-T products. They made some very significant developments in the product. As I mentioned a quarter ago, all the product now is in the cloud. They develop the full suite for organizations. They have a few very, very interesting customers and a few engagements, but it's still in their beginning.

They are adding some layers from their portfolio, so I cannot say now something that will be significant at this stage. Hopefully, at the rest of the year -- next quarter, we will have something to update. And then, of course, it can be also significant update, so we will do it in the next financial, [so we will be specific there.]

Okay. And then I think you mentioned to one of Jason's questions that the consumer can be lost quickly, so you invest once you win that consumer. What is the churn in the consumer business?

What is the -- what again? The churn?

The churn rate.

Okay. So we are talking about the churn rate internally a lot. By the way, it's a good question because I can give you so many answers because there are so many ways to measure a churn. I can tell you now that we are not measuring according to churn, but we have our formula that says that every consumer we acquire, in five years, we'll triple the investment. We'll have an ROI that is 3 times, almost 3 times than the investment, okay?

It takes into account the churn. It takes into account the lifetime value, the average lifetime value. It takes into account many other factors. And most importantly, it takes into account our current -- [this side of the market, as a standout] in market benchmark that we have because, really, we have experts in this area. So this is the most important formula.

By the way, this is the formula that -- the investors, both of them, and also the commercial bank and the strategic investors that came in -- totally showed -- made a significant due diligence on our numbers and our results till now. And they truly believe in this formula, that's why they put their money in it.

Okay. And then, I guess lastly, can you quantify how much lower you expect operating expenses to be in 3Q compared to 2Q? I think if I calculate in 2Q, they were 5.5, but it sounds like legal expenses are coming down, and the sales and marketing from the enterprise solution business is going to be coming down. So how much lower do you see operating expenses?

I prefer, Brian -- [if you don't prefer] -- just to say that now, we are in the end of the second month of the third quarter, meaning two-thirds of the quarter behind us. We expect to see -- as I mentioned in my pitch, we expect to see the trend of net loss that are growing and that are decreasing in this quarter, in the next quarter, even a significant decrease.

If it's very important to you, I can ask Shai, but I think this is the most important information [because] the end of the day, it's the bottom line, which is the net loss.

Yes, I just -- there's only two of us covering the stock, and we'd like to manage the expectation of what you already know. That's one of the reasons I asked. But whatever you feel you should share is great.

Well, good.

Okay. Thank you.

Thank you very much, Brian.

(Operator Instructions) Thank you, ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Daniel for any final comments.

Okay. Thanks, everyone, for joining us today. We look forward to continuing to update you on our progress.

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