Alarum Technologies Ltd.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Alarm Technologies third quarter 2024 corporate update conference call. During today's presentation, all parties will be in a listen-only mode. Following management's presentation, the conference will be open to questions. If you have a question, please press star followed by the number one on your touchtone phone. If you would like to withdraw your question, please press star followed by the number two. If you're using speakerphone, please lift the headset before making your selections. This conference is being recorded today, November 25th, 2024. Before we get started, I would like to read a forward-looking statements disclaimer. 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 or formats, 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 an alarms annual report on Form 20F filed with the Securities and Exchange Commission on March 14, 2024, 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. On the call, the company will also present non-IFRS key business metrics. The non-IFRS key business metrics the company uses are EBITDA and adjusted EBITDA, non-IFRS gross margin, non-IFRS net profit or loss, and non-IFRS basic earnings or loss per share or ADS. The exact definitions of these non-IFRS key business metrics are described in the company's third quarter of 2024 financial results press release. I'll now turn the call over to Sachar Daniel, Alarm Technologies CEO. Mr. Daniel, the floor is yours.

Thank you and welcome everyone to Alarm Technology's third quarter 2024 results conference call. Join me on today's call with Shai Avnit, our CFO. I will discuss with the development, the progress of our strategic initiatives, and our longer-term vision. Shai will read the financials and provide our Q4 2024 and full year 2024 guidance. I will conclude the prepared remarks with a summary and will then open the call for your questions. I am pleased to share that in Q3 2024, we continue to bear the fruits of our strategic shift to focusing on NetNet, our data collection business unit. NetNet contributed nearly 100% on both a quarterly and accumulated business. We topped the full year 2023 revenues during the first three quarters of 2024. Total Q3 2024 revenues hit the high end of our guidance as revenues came in at $7.2 million, of which $7 million were attributed to NETMAC. We exceeded our Q3 2024 adjusted EBITDA guidance, recording an adjusted EBITDA of $1.4 million. We demonstrated once again continuing success in cash flow generation. Testament to our profitable business model, our cash and cash equivalents at the end of the quarter increased to $24 million. Our strength cash balance position us to invest in opportunities that will drive a long-term success, allowing us to focus on expanding our business and laying the groundwork for sustained growth. Consistent with our strategy and long-term vision, in Q3, we significantly adverse our main growth engines. We increased our market share in the IP proxy network, the IPPN segment, and further, penetrated to the data collection and labeling market. Our focus on forming the broadest data collection and insights offering positions us to effectively address evolving market needs while driving long-term value for our stakeholders. I will start with the IPPN. Our expanding IP network is a key asset to serve diverse industries and companies relying on our IP proxy network for their critical data needs. We have significantly enhanced its infrastructure coverage and endpoints. At the same time, we prioritize improving our capacity to handle larger traffic volumes, aligning with a strategy to build a scalable and profitable infrastructure for future growth. One of our main product enhancements introduced this quarter was a new dashboard, which significantly improved our customers' experience and already received excellent feedback from Forbes users and potential customers. Through our YPPN, organizations can access public online sources with data regularly updated based on IP, location, and other demographic attributes. We enable them to securely and anonymously capture reliable data while protecting their sensitive research and online activities. What clearly sets us apart in the scale of our network is stability, strong performance, and our ongoing global expansion. Building on the strength of our IP network, let's move to the second pillar of our growth strategy, the data collection and labeling market. On our Q2 call, I shared with you that we had started generating initial engagements with new customers for our website unblocker products, and that we are seeing a growing pipeline of opportunities for these products, which has been tested and rated as a market leader by industry experts. We recently reached an important milestone in executing our strategy. The Fortune 200 company that began using our IPPN product in the third quarter expanded its subscription by adopting our unique website and blocker in less than three months. Two impactful factors make this win stand out. First, wholesale, the fact that they added the website and blocker shortly after subscribing for our IPPN. Second, the significance of this win lies in the extensive, large-scale evaluation conducted. The new customer, operating a multi-million cross-region network, and the multi-billion US dollar business chose our solution to enhance automation and its own customer spending while gaining a competitive edge. The website unblocker is a crucial enabler for our entry into the multi-billion dollar data collection and labeling market. It provides our customers with enhanced data access and improved operational efficiency, allowing them to penetrate to new markets gain deeper insights into customer behavior and optimize their strategies. One notable market trend we are seeing in the increasing demand for datasets. As companies face growing challenges in accessing reliable and up-to-date data, our planned AI data collector solution will offer a major advantage by providing continuous access to how to find data, giving our customers a competitive edge. The AI data collector will enable companies to quickly create a collector in just minutes. Thanks to its initiative, no-code interface, its advanced AI will automatically adapt to website changes, ensuring continuous data collection with minimal downtime. We all value the importance of data in every aspect of our lives. The considerable investment we have made in NetNet in the recent years serve us as the key to our entry into the data world. The rapid growth of artificial intelligence further validates the core principle behind this investment, highlighting its potential to drive innovation and unlock new opportunities. At this point, I would like to highlight the key trends we are seeing and share the metrics you consider most important and insightful in evaluating our most recent progress. First, the website and broker. It's clear that the market recognizes the value of this solution and we are addressing a real and pressing need. Alongside the success we have already shared, we are seeing a significant demand in the market reflected in an expanding pipeline. While it's early to project immediate revenues impact, it's clear that our innovative, high-quality solution is in demand. In Q4, in line with the projected year-over-year growth, we expect to continue to enjoy strong, solid customer retention rates across most verticals. Our growth strategy in the dynamic data collection market emphasizes the importance of consistent investment in our network serving as the foundation for expanding our customer base and driving success and adoption of our innovative new products. At Alarum, we put clear emphasis on achieving sustained growth and profitability. I will now turn the call over to Shai for a review of the financial. Shai, go ahead.

Thank you, Shachar, and hello, everyone. I will start today with a summary of the key financial results of the third quarter and first nine months of 2024, comparing them to the same period in 2023 results, respectively, unless otherwise stated. I will then provide guidance for Q4. All figures have been rounded for simplicity. Let's move on to the results. Revenues in Q3 2024 were at the high end of our guidance, reaching $7.2 million, up 6.6% from $6.8 million in Q3, 2023. The net apportion represented 97% of the total revenues, increasing to $7 million in Q3, 2024, and up 13.7% from $6.1 million in Q3, 2023. Non-IFRS gross margin for the third quarter of 2024 was 73.6% compared to 79.4% in Q3 2023. The change in gross margins is correlated to our strategic decision to invest in expanding and broadening our IP network, enabling us to serve our customers' requirements for stability, responsiveness, and speed. we can now support much higher customer demand and revenues with only marginal costs. Operating expenses in Q3 2024 were $4.1 million compared to $3.7 million in Q3 2023. In Q3 2024, we recorded non-cash finance income of $3.5 million compared to a non-cash finance expense of $700,000 in the corresponding quarter in 2023. The difference is mainly due to a fair value decrease of warrants issued between 2019 and 2020 related to the lower share price from June 30, 2024 to September 30, 2024. The vast majority of the warrants are due to expire in 2025. IFRS net profit increased to $4.2 million for the third quarter of 2024, up from a net profit of $1.1 million in Q3 2023, mainly as a result of the higher finance income. We exceeded our adjusted EBITDA guidance for the third quarter of 2024. We reached $1.4 million. This is compared to the $1.9 million adjusted EBITDA in the third quarter of 2023. While revenues increased year over year, they were offset by the higher cost of sales and operating expenses. Our current share count is 68.9 million ordinary shares or 6.9 million ADSs on a fully diluted basis The count is 80 million ordinary shares or 8 million ADSs. Q3 2024 non-IFRS basic earnings per share was 2 cents per share or 20 cents per ADS compared to 3 cents basic earnings per share or 25 cents per ADS in Q3 2023. As of September 30, 2024, The company's shareholders' equity rose to a record of $25 million, up from $13.2 million on December 31, 2023. The increase in net profit, combined with the warrant and option exercises, contributed to this $11.8 million increase. Q3 2024 marked the fifth consecutive quarter of generating cash flow from operations. The company's cash and cash equivalents balance at the end of Q3 2024 was to $24 million, up from $10.9 million as of December 31st, 2023. Our cash position enabled us to continue investing in our strategy and grow our business responsibly. Turning to guidance, we anticipate Q4 2024 revenues to continue the year-over-year growth trend and estimate revenues of $7.5 million plus minus 3%. As a reminder, the net net portion of our revenues in Q4 2023 was $6.8 million. Q4 2024 adjusted EBITDA is expected to range from $1.3 million to $1.7 million. To summarize my part, Our Q3 2024 results and guidance for the remainder of the year 2024 reflects solid performance, which is supported by a robust balance sheet. With that, I'll hand the call back over to Shahar.

Thank you, Shahar.

Alarm has once again delivered strong results. As a company built for the long haul, we main focus on expanding our customer base and investing in technological innovations. Our expanding network allow us to serve an increasing number of customers, driving scalable and profitable growth across multiple sectors now and in the future. We are committing to launching new products that meet the evolving needs of the market, positioning us to address market demands while creating long-term value for our stakeholders. We align the grind for future success as a leader in the global data collection market through innovation, strategic asset creation and the focus on both short and long-term results. We will now open the call for the Q&A session. Operator, please.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 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 key. One moment, please, while we poll for your questions. Our first questions come from the line of Kingsley Crane with Canagorge Annuity. Please proceed with your questions.

Hi, thanks for taking the questions. So it's great to see that you're upgrading the IPPN network. Just curious, would like some more clarification. So are those investments For those fully made in Q3, do you feel that they were customer-driven or internally driven? And I guess, how should we expect gross margins to trend going forward? And do you think that you could make more of these investments in the future as well? Thanks.

Okay, thanks. Thanks for this question.

So I will split my answer for two parts. So, first of all, regarding the first part of your question, so, you know, at the end of the day, it's a combination of the feedback that we are getting from customers, which is driving all the time internal decisions and investments. As a basic, in the IP proxy network, you know, market and customers' needs, You always need to serve the customers with a fast and reliable network, and you always need to invest in your network, which is a kind of a game between revenues and investment in the COGS, which is basically the network for your question, in order to keep on the balance and to keep on the growth margins. So the answer is yes. Our purpose is to stay more or less in the same growth margins unless we will see a unique opportunity for one-time investment or something like this that maybe we don't have something like this on the table but looking to the future in general that we will see an opportunity to increase significantly our network and maybe it will have a short-term impact. the growth margins but for sure for the long term it will the impact would be a higher growth rate and of course a greater growth margins hope it answered your question okay yes that's helpful and so on the fortune 200 customer when that's that's a great example thanks for including that

We'd just love to think more through about how expansive that deal is, what the revenue uplift has been so far, and then to the extent that you can get a sense, are they a customer that could continue expanding over the next year or two years?

Yes, so first of all, bear with me because, you know, these kind of customers are basically very sensitive to their confidentiality. So at this point of time, I cannot expose the number, but it's a respectful number. It's just the beginning, meaning, as I mentioned in the script, in the call, so basically they went both directions, also for the IPPN and cross-served with the hand blocker. And they started with a lower traffic in order to evaluate the system and the purpose, if it all goes well, again, according to their strategy, is to triple and maybe more than triple their traffic and then directly it will impact the revenues of this customer and it's supposed to be a long-term engagement. For this point of time, it's a six months, but it's supposed to, they're supposed to renew and even to extend the duration of this engagement.

Okay, and then last one for me, and I'll pass it on, is I just want to think through NRR at 142 is quite strong. We've net nuts growing, you know, single digits. So I guess just to add this another way, and perhaps we can think offline, like what percentage of customers are still with NetNut this year? Or how could we think about the existing customer expansion and the net new customer contribution in Q3?

Okay, so basically, I guess you can guess that in our stage, most of the revenues are coming in a specific quarter. are coming from existing customers from previous quarters. So something like, let's say, 80% or more are resulted of our current customers from their retention from previous quarters. So this is for your first question. For your second question, you know, the NRL, indicator that indicates on four measures that we are doing you know every time four quarters versus the previous four quarters and then we do it four times and then we take the average so regarding your question you can guess from this KPI which is which is common in our industry that the the typical customer is over the time, over four quarters versus four quarters, we do 42% more than in his initial period. That's the average customer. That's the typical customer. That's why our NRL is 1.42. And maybe in the next quarters, according to your question, maybe we can deep dive a little bit and expose some more data regarding shorter terms, regarding customers that are coming from the previous or maybe two previous quarters. But for this point of time, this is the official KPI that can indicate to your question. Hope it answered your question.

Okay, that's helpful. I think we can sync up more later. But that's it for me. Thank you so much.

Thank you very much. Appreciate it.

Thank you. Our next questions come from the line of Brian Kitzlinger with Alliance Global Partners. Please proceed with your questions.

Hi, good morning. Thanks for taking my questions. Just kind of a follow-up, and maybe I missed it as part of the answer. Last quarter, you highlighted you had dozens of new customers that generated $400,000 in first-month revenue. Do you provide that metric that's comparable in the September quarter? And I guess I'm curious from a bigger picture, Have you seen any changes in the paces of business development?

Okay, so no, I didn't mention it this time. We'll do it from time to time. But if you already asked, I can tell you that in this quarter, it was better than the previous one, this indicator, this KPI. And what was your second question, Brian?

I guess I'm wondering if you're seeing any changes to the pace of business development you know, as we've started and we're halfway through the fourth quarter, more than halfway?

So first of all, I guess you heard that we released the guidance. So we project to close this quarter with $7.5 million plus minus 3%. So in high-level business as usual, I don't see any something significant that I can mention that would be interesting for you.

Okay. On the website Unblocker, can you describe how you're pricing this project? Is it usage-based? Is it a recurring monthly charge? It's a minimum that has upside. And then how does it scale? Is it usage or is there some other factor that drives expansion of any customer, not even this customer?

Okay, so in high level, the same pricing model like the IPPN, based on duration and usage and bandwidth or amount of requests, it depends. As we just started and we are slowly, slowly increasing our customer base, we are still investigating what is the best pricing model for us. versus the best pricing model for our customers and the best way to scale up. But for this point of time, it's based on bandwidth, mostly on requests and duration. You can buy X amount of requests for one month, for three months, for six months, for one year, etc.

Okay. Staying with the website and Blocker, can you quantify the number of evaluations you have going on or your initial target customers, ones that are already customers of other Alarm applications? I guess you mentioned the expanding pipeline, so I'm looking for any quantitative details.

Okay, so we need to differentiate between the pipeline and current customers. And regarding your question, I will explain. The Unblocker product is... is a little bit different than the proxy network, meaning instead of being an infrastructure, it's a product that is dedicated for websites and is very sensitive for changes in websites and needs to handle millions or more than millions of requests. meaning you need to have a great infrastructure and the economics behind it to make sense because we are profitable and we want to stay profitable in the same levels. So we took a decision a few months or even a few quarters ago in this case of the iron blocker to go step by step And for example, the winning with this Fortune 200 company was a big step for us because this was the point we decided to go one level up with biggest customers and use cases, and then to stop, to investigate, to get the feedback for the customers, and then to go to the next phase and add some more customers. So for this point of time, we have the few first customers, The most important of these customers is the one that we mentioned. But the pipeline looks very good. We have dozens of customers that are waiting to get our solution and that are in touch with us. And basically, with each one of them, we defined timeline and the goals. And hopefully in the next quarter and the next, next quarter, every quarter we can elaborate and explain what are the milestones that we crossed and the amount of customers that joined our platform.

Okay. Lastly, could you discuss how the set of customers that were facing industry challenges that resulted in your lower consumption during the September quarter, you know, the trends there, are there any signs of recovery? And maybe you can highlight the industry or whether that industry is seeing improvement that could lead to those customers coming back and increasing their usage.

Okay.

So basically for this question, so I will start with something. Okay. So as you know, we continue to add new customers every quarter. At this point of time, these specific customers haven't returned to increase the usage. And, you know, this is a natural part of ongoing business dynamics. All in all, you know, our focus remains on improving retention rates, while simultaneously driving growth by adding new customers and upselling to our existing ones. Because, you know, churn will always be, you know, that quarter, the previous quarter, it was most significant. So it comes to reality with the results. But you know, churn is part of the business. Our target from one side, you know, we have an account management team and the customer success team that they need to make sure that their retention, the customers will stay with us and the retention rate will go higher and higher. But churn will happen. And from the other side, our purpose is to add more and more customers, more and more verticals to decrease the risk. And from the other side for our current customers and not just to retain them, but to upsell and cross-sell them with new products, innovative products, and et cetera.

Okay, thank you. Thank you very much.

Thank you. Our next question has come from the line of Mike Killian with Shore Equity Group. Please proceed with your questions.

Hey, guys. Congratulations on the quarter. I have two questions. First one is you also filed the F3 for a capital raise. Could you touch base on that? Do you have anything in the pipeline looking forward to that? And with $24 million of cash on the books, is there an immediate need for capital? I'll follow it up with my next question after this.

Okay, thank you very much. So I will start and say that, as you saw and everybody saw, as we reported today and in the last few quarters, we are profitable and well-funded. So we have no actual short-term plans to do so. The renewal of the shelf, I don't know if you are aware of it or not, but it's a technical common practice which provides us with flexibility to raise capital if needed in the future. It ensures that we are prepared for strategic growth opportunities like M&A and strengthens our ability to respond to market conditions if they come up. But it's a technical comment and that's what we did today. Just renewing ourselves.

Okay. And follow-up onto that, basically, Shai addressed some warrants that basically expire the end of 2025. Can you touch base on the number of warrants still out there and what their exercise prices are?

Yes, Shai, you want to pick it?

Yes, I will take it. We're talking about, as I said, on warrants that were issued a long time ago. They were issued to investors back then when we raised money in 2019. Let me just draw for you the numbers. We are talking about total of, let's say, the whole series, it's about 240,000 warrant, which means it's about less than 3% than the total fully diluted basis of the equity. And the exercise prices are mainly, I would say, around $33, and some of them are $12. So some of them are basically in the money or close to the money, and some of them are quite far out of the money, according to the share price today.

Shall I just say again the number in ADS? Yes, it is in ADS. Ah, okay. Sorry. It's in ADS, 240,000 ADS.

Okay.

And we have about $8 million ADS on fully diluted basis.

Okay.

Okay, wonderful.

Potential opportunities to raise $5 million to $8 million just strictly through exercise of warrants on a minimal amount of shares. That's great. Thank you.

Okay. Thank you very much.

Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to Shahar Daniel for any closing comments.

Okay, so thank you, everyone, for your time today. As always, we look forward to hosting you on Allowum Technologies Q4 2024 and full year results call. Thank you very much.

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