Alarum Technologies Ltd.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Alarm Technologies Corporate Update Conference Call for the three and six month 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. If you have a question, please press the star followed by one on your touchtone phone. If you would like to withdraw your question, please press the star followed by two. If you're using speaker equipment, please lift the handset before making your selections. This conference is being recorded today, August 24, 2023. Before we get started, I will read a disclaimer about four looking statements. This conference call may contain, in addition to historical information, four 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 forward-looking statements. Potential risks and uncertainties include those discussed under the heading Risk Factors and Alarms 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.

Thank you very much, operator, and welcome everyone to Alarm Technology's 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 accomplishments. Before we begin, I want to quickly note that the conciliation tables for any NANGAP or non-IFRS metrics reference of 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. 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 all-your-own subsidiary, CyberKick. I would like to take this opportunity to elaborate on this decision and its future effects. As you may know, CyberKick'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 provides a potential to generate future revenues in consumed resources and investments that result in current operational losses, resulting in unprofitable 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 products and the service to our current plane users, and this allows 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 infrastructure solution unit, NetNap, will continue to grow and gain new leading partners and customers. We believe that this strategic decision to scale down the consumer internal infrastructure segment will allow us to keep a lean economy and sustainable operations for CyberKick and improve our overall bottom line. I would like now to refer to recent progress of our enterprise in the inductor 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 a grow. 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. NetNet Markets 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 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 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 continues to expand, and we are witnessing growing demand for new segments. For example, we recently announced on onboarding of new customers 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. In the second quarter of 2023, we also signed an agreement with Terrazone, which was the exclusive reseller for our legacy cybersecurity solutions for the sale of our enterprise cybersecurity business. Allowance consideration for this transaction is 70% 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 Pahot 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 total debt and liabilities by $1.6 million. All the actions detailed thus far followed an amazing record quarter. First, our continued growth, representing the 10th consecutive quarters of growth in revenue, 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 $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 reaching profitability is a critical milestone for our company and to 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 customer while balancing our worth with financial stability. I would like now to turn the call over to Shai to discuss the financial for the quarter in more detail.

Shai.

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 the 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 Shahar. 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 administrative expenses as a result of the results patent proceeding 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, the 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 project professional efficiency. 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 a 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. Companies' 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 it permits 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 or 5.17 million ADS outstanding.

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

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 have 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 non-financial 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 10th 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 quarter ahead, while maximizing our long-term business potential through focus growth initiatives. 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 new-term profitability. The journey ahead is exciting and filled with promise, and we are optimistic yet vigilant about securing the future of allowance. 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.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment,

It may be necessary to pick up your handset before pressing the star keys. Our first question comes from Brian Kinslinger with Alliance Global Partners.

Please proceed with your question.

Hi, guys. Thanks for taking my questions. First, I saw a cyber kick in your pre-announcement with 18% of the second quarter's revenue. What about TerraZone? What percentage of the second quarter revenue was this business?

Zero percent.

Zero. Okay. 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 The cyber kick business is probably lower margin, but I'm not 100% sure.

Yeah, so you are totally right. As I mentioned in my pitch, the main reasons to reduce, to go down a little bit or even more in the cyber kick 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.

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?

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%, and we're expecting to be around 70% and even better.

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 second quarter in the third and the fourth quarter. Is that right?

Yeah.

Yeah. Great.

And then could you give us some more detail?

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

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.

Is this a subscription? Is this a license? Is this pay-as-you-go? How...

okay so uh basically uh the biggest portion of our customers are working on a on a on a monthly recurring 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 second is the bandwidth you know it's the volume of the traffic in gigabyte, terabyte, et cetera. So for example, if you are a customer, you can buy a package of, I don't know, 10 tera for one month, 20 tera for three months, et cetera, et cetera. Some of our customers, the bigger customers, are using our platform on a kind of a pay-as-you-go, meaning at 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.

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?

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

And those salespeople sit where?

95% based in our headquarter in Israel, Tel Aviv.

We have almost zero touch with our customers. Everything is automated. We're trying everything and it 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 the 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, And from West Europe, East Europe, they're very exciting teams. From Asia Pacific, et cetera.

Lastly for me, is there any way to quantify your pipeline for ongoing operations? And I guess I'm curious. We've had 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?

So you mean that you see some companies that are reducing their tech budget budget?

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? Okay.

So first, I think we discussed about it a 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 see even 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, so the average duration of a lead that is converting to be a customer is between two weeks to three weeks. So the pipeline duration is very short, if you understood what I mean. So we are not calculating pipelines. 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. Sometimes, most of the time, it's significantly higher. And this is why we are experiencing month over month growth, growth over quarter growth, and of course, year over year growth. What is that retention rate? I can calculate the, sorry?

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

Okay, so it's a, you know, retention rate, it's an indicator, it's a KPI that it looks like that we are going to expose, we are going to expose, I guess, next year because you know, 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.

Okay. Thank you so much.

You're welcome, Brian.

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

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

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

Okay.

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 meet you in the next quarter to describe and elaborate about our progress

and financial. Thank you very much.

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