Alarum Technologies Q2 2023 Earnings Call Transcript

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August 24, 2023

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Alarm Technologies Corporate Update Conference Call for the 3 6 Months Ended June 30, 2023. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions.

Operator

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 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 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 holding statements.

Operator

Potential risks and uncertainties include those discussed under the heading Risk Factors in Alarm'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 caution you not to place undue reliance on these. At this time, I'd like to turn the call over to Shikhar Daniel, the company's CEO. The floor is yours.

Speaker 1

Thank you very much, operator, and welcome everyone to Alarm Technologies' Q2 2023 Earnings Results Conference Call. As is customary with me is Shay Avnet, our Chief Financial Officer. Today, I will provide a brief review of our business operations and summarize our accomplishments. Before we begin, I want to quickly note that reconciliations tables for any NAND GAAP or non IFRS metrics referenced on this course are available in the post release we published earlier today. At the end of 2022, we marked as our leading goal to set our path toward profitability.

Speaker 1

We are excited that the Q2 this year is validating our persistence with impressive achievements, including the achieved of 1.1 $1,000,000 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, Cyberkik's 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, we identified that while the business model provided potential to generate future revenues in consumed resources and investments that result in current operational losses, resulting in a non profitable revenues for the short term.

Speaker 1

We therefore decided to recalculate our focus mainly to allow our to allow for the acceleration of our plans to become profitable. We believe this decision will have several effects on the company. On the business side, we continue to maintain our product and service to our current paying 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 Internal Structures Solution Unit, NetNut, will continue to grow against new leading partners and customers.

Speaker 1

We believe that this strategic decision to scale down the consumer internal 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 Doctor segment, NetNat. NetNat was acquired by us in 2019 with annual revenues of approximately $3,000,000 Today, it is driving our overall growth, achieving ongoing growth in revenues and becoming profitable for 2 quarters ago. NetNut is one of the top 5 notable players in its field and its reputation presales it as a strong brand with a robust and reliable network. Net net market was valued at $2,200,000,000 in 20 20 2 and is expected to expand to a compound annual growth rate of 28.9 percent from 2023 to 2,030 to reach $17,100,000,000 We believe that continuing positioning as the company as a leader will contribute to establish a fair market share in the future.

Speaker 1

During the past year, we took many actions to provide our customers with a scalable and advanced network 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 continue to expand, and we are witnessing growing demand for new segments. For example, lastly, we recently announced on onboarding of new customer operating in the artificial intelligence AI recruitment market. In addition, we have partnered with a team of elite intelligence researchers for the development of our innovative web data collection solution.

Speaker 1

In the Q2 of 2023, we also signed an agreement with TerraZon, which was the exclusive reseller for 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 TerraZon. With our growing ability to generate income and by diligently managing our results and optimizing our operational processes, we have also been able to pay off the loan to the United Mizrahi Safot 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.

Speaker 1

By repaying this loan, we have reduced the company's debt total debt and liabilities by $1,600,000 All the actions detailed thus far followed us an amazing record quarter. First, our continued growth representing the 10th consecutive quarters of growth in revenue amounting to $7,000,000 in the Q2 of 2020 served and $12,700,000 for the 1st 6 months of 2020 served. 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 Q2 of 2023 climbed to an impressive of $1,100,000 high compared to an adjusted EBITDA loss of $2,400,000 just in the same period last year. Our IFRS net loss amounted to $7,700,000 which includes the implication of goodwill and intangible asset impairments in the amount of $8,800,000 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.

Speaker 1

We recognize that reaching 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 software has contributed to our financial position and will facilitate our sustainable growth in the future as we continue to deliver exceptional value for our customer while balancing our work with financial stability. I would like now to turn the call over to Shai to discuss the financials for the quarter in

Speaker 2

more detail. Shai? Thank you, Shahar, and hello, everyone. I will summarize our record quarter 2023 financial results, which are compared to our Q2 2022 results unless otherwise stated. All figures in this summary were rounded up for simplicity.

Speaker 2

Revenue for the Q2 of 2023 totaled $7,000,000 and revenue for the 1st 6 months ended June 30, 2023 was $12,700,000 This compared to revenues of $4,800,000 $8,800,000 respectively for the equivalent quarter period in 2022. The increase in revenues is due to an organic growth in our Enterprise Internet Access business. Gross profit for the Q2 of 2023 was $4,500,000 compared to a gross profit for the corresponding period in 2022 of $2,600,000 only. The increase in gross profit was primarily driven by the increased revenue. Gross profit for the first half of twenty twenty three was $8,300,000 compared to a gross profit for the corresponding period in 2022 of $4,700,000 Our Q2 2023 operating expenses increased 110% year over year to $12,800,000 up from $6,100,000 in Q2 2023.

Speaker 2

This amount of operating expenses includes $8,500,000 of the consumer Internet goodwill and intangible assets impairment as explained by Shahar. Excluding it, total operating expenses amounted to $4,300,000 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 proceeding in May 2022. Operating expenses in the 1st 6 months of 2023 come to $17,000,000 up 33% from the $12,800,000 in the first half of twenty twenty two for the same reason, the consumer segment goodwill and intangible assets impairment. As a result, the IFRS net loss for the Q2 of 2023 totaled $7,700,000 or $0.23 basic loss per ordinary share compared to a net loss of $3,400,000 or $0.10 basic loss per ordinary share for the Q2 of 2023. For the 1st 6 months of 2023, IFRS net loss totaled $8,400,000 or $0.25 basic loss per ordinary share compared to a net loss of $7,900,000 or $0.26 basic loss per share per ordinary share in the 1st 6 months of 2022.

Speaker 2

The company monitors key business metrics to help it evaluate and establish budget, measure the effectiveness of the sales and marketing effort 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 Q2 of 2023 was positive at $1,100,000 compared to adjusted EBITDA loss of $2,400,000 in the same period in 2022.

Speaker 2

For the 1st 6 months of 2023, adjusted EBITDA totaled positive $1,200,000 compared to a net loss of $5,800,000 in the 1st 6 months of 2022. Company's cash and cash equivalents for the 6 months ended June 30, 2023, totaled $3,800,000 compared to $3,300,000 as of December 31, 2022. As of June 30, 2023, shareholders' equity totaled $6,100,000 or approximately $1.76 per outstanding American depository share compared to shareholders' equity of $13,300,000 on December 31, 2022. The reduction is due mainly to the goodwill and intangible assets impairment recorded in the Q2 of 2023. Lastly, I wanted to touch base upon our share count as it stands today.

Speaker 2

On an outstanding basis, we have around 35,200,000 ordinary shares or 3,520,000,000 ADSs. On a fully diluted basis, we currently have around 51,700,000 shares of 5,170,000 ADS outstanding. With that, I'll turn the call back over to Shahar.

Speaker 1

Thank you, Shai. I would like to take a moment to reflect on Alarm's accomplishments and share our aspirations for the future. We undertook ambitious goals in the recent years and Alarm'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 reminded of the challenges we have overcome, the innovations we have pioneered 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.

Speaker 1

These achievements underscore our ability to adapt and thrive in the dynamic business landscape. Our key growth engines have been realized and our significant competitive advantages have been crystallized. Both our financial and non financial key metrics are moving in the right direction and aligned perfectly with our strategic vision. Not only did we achieve record revenue in the Q2 this year, but we also marked our 10th consecutive quarters of revenue growth and achieved an impressive of a positive $1,100,000 adjusted EBITDA. We remain agile and committed to paving our way to profitability in the quarters ahead, while maximizing our long term business potential through focused growth initiatives.

Speaker 1

I would like to take this opportunity to express my gratitude 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 roadmap that encompasses technological innovations, continued growth and near term profitability. The journey ahead is exciting and speed with promise, and we are optimistic yet vigilant about securing the future of Alarm. 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.

Speaker 1

Now I would like to open the call for any questions. Operator, please go ahead.

Operator

Thank you. At this time, we will be conducting a question and answer Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Speaker 3

Hi, guys. Thanks for taking my questions. First, I saw CyberKik in your preannouncement was 18% of the 2nd quarter's revenue. What about CaraZone? What percentage of the Q2 revenue was this business?

Speaker 3

0%. 0. Okay. And then so then is a good starting point for the 3rd quarter's revenue about 80% of the 2nd quarter given CyberKick? And then can you discuss what the gross margin of the continuing operation is?

Speaker 3

I assume it's a little bit better given the CyberKick business is probably lower margin, but I'm not 100% sure?

Speaker 1

Yes. So you're totally right. As I mentioned in my pitch, the main reasons to reduce to go down a little bit or even more in the CyberPeak business is to improve our bottom line, which is the growth 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. Or

Speaker 3

so. 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?

Speaker 1

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.

Speaker 3

Great. And then just to 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 2nd quarter in the 3rd and the 4th quarter. Is that right?

Speaker 1

Yes.

Speaker 3

Yes. Great. And then could you give us some more detail

Speaker 1

Go on.

Speaker 3

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

Speaker 1

Okay. So basically, most of the AI companies' technologies products are based on the 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.

Speaker 3

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

Speaker 1

Okay. So basically, the biggest portion of our customer are working on a monthly recurring revenue basis. It's a subscription, and it's assembled from 2 factors. 1 of them is the duration. So it can be 1 month, 3 months, 6 months 12 months.

Speaker 1

And second is the bandwidth, the volume of the traffic in gigabyte, terabyte, etcetera. So for example, if you're a customer, you can buy a package of, I don't know, 10 tera for 1 month, 20 tera for 3 months, etcetera, etcetera. Some of our customers, the bigger customers are using our platform on a kind of a 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.

Speaker 3

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?

Speaker 1

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

Speaker 3

Correct. And those sales people sit where?

Speaker 1

95% based in our headquarter in Israel and Tel Aviv. We have almost zero touch with our customers. Everything is optimized everything in the team is actually automated. Some of them some of our customers are even based on a self-service model and they are subscribing to our platform, paying and starting to use 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 team coming from all over, from North America, from Europe, from South Africa, from Israel, from West Europe, East Europe, a very exciting team from Asia Pacific, etcetera.

Speaker 3

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?

Speaker 1

So you mean that you see some companies that are reducing their take out and take budget by

Speaker 3

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?

Speaker 1

Okay. So first, I think we discussed about it few times in the past. I'm very happy that even the economical status in the world is still not in a good position. We are still experiencing growth and growing demand. From the other side, maybe when things will go better in the world, we'll receive a more significant growth, but still we are meeting and even better our expectations.

Speaker 1

From a pipeline perspective, due to the fact that it's a subscription and the fast sales, so the average duration of a lead that is converting to being to be a customer is between 2 weeks to 3 weeks. So the pipeline duration is very short, if you understood what I mean. So we are not calculating 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.

Speaker 1

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

Speaker 3

What is that retention rate?

Speaker 1

I can calculate sorry?

Speaker 3

What is that retention rate? You're saying that's the most important. So what is that retention rate?

Speaker 1

Okay. So retention rate, it's an indicator. It's a KPI that it looks like 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.

Speaker 3

Okay. Thank you so much.

Speaker 1

You're welcome, Brian.

Operator

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

Speaker 1

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

Operator

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

Speaker 1

Okay. So thank you very much everyone for joining us on this conference call. Again, I want to thank you for all your trust in the company and looking forward to meet 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.

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