A Quick Take At Alarum 2.0

Why a sky-high NRR of 166 should stop worries about competition..

Reasons to buy

• Industry growth is rampant

• AI training demand materializing

• NetNut generates terrific customer reviews

• Unprecedented NRR at 166% should lessen worries about increasing competition

• The number of customers almost doubled

• New products are arriving

• Gross margin rising, reaching 78% in Q1/24.

• Earnings at $0.45 per share in Q1/24, on track to be well over $2 for FY24

• Cash balance at $15.1M and growing, up from $10.9M at the end of Q4/23

• We think the stock will keep moving up as long as growth remains strong, given the operating leverage the growth is generating.

Introduction

• On the fourth of January this year we bought a position in Alarum Technology (ALAR) for $8.26 for our subscription marketplace on Seeking Alpha. With the stock now almost up 4x in 4.5 months, a pretty nice return, especially as we added on dips at $9.70, $16.76, and $28, the last position on the odd pre-market reaction to the Q1/24 earnings (the headlines indicating an earnings miss while there was a huge earnings beat at $0.45 per share).

• We also wrote two previous articles on Substack (here and here).

• Those earnings solidified our belief that FY24 earnings will come in at $2+ the shares are still cheap.

• Corporate presentation May 2024

Growth

NetNut revenue grew 139% in Q1, a pretty astounding figure but given the multiple sources of growth:

• Market growth

• Market share win

• New customers, NN customer count almost doubled in a year.

• Existing customers spending more, the 166% NRR

• New products

So it's perhaps less surprising NN is growing at triple-digit rates still. This will slow down just by the law of large numbers, but apparently, Q2 still has the same momentum (Q1CC):

all the financial impact, financial KPIs improvement revenues and profitability and others, these positive trends are continuing with us to the second quarter.

Industry growth

IPPN networks are a fairly new phenomenon and are experiencing rampant growth as data has become the new oil as the saying goes, and many quarters of the economy need to have access to data that barriers put up by providers do not hinder the pursuit of data by putting up barriers like:

• Websites blocking access to IP addresses from competitors.

• Many websites change their displayed information based on user IP address, location, and demographic attributes.

• Limits many websites place on the amount of information they send to any one IP address.

We also see demand for training AI models emerging, a new growth vector.

A great core product

The company's NRR (net dollar retention rate), which they define as (Q1CC):

represents the average growth rate for preceding 4 quarters compared to the equivalent period year-over-year of current customers only without the revenues generated from new customers by including upsells and cross-sells on one end and churn on the other end.

keeps increasing, from 144% in Q3/23 to 153% in Q4/23 to a scarcely believable 166% in Q1/24. It's even more remarkable if you consider that they don't have a lot of products for upselling or cross-selling.

They added one product (SERP) in Q4/23, with the second one (a website unblocked) just coming out of beta, both are not generating substantial revenues yet (and are not expected to do so this year).

So the high NRR is almost entirely the product of low churn and customers starting small and then expanding. Management pictured the picture of new customers sampling from different providers and then coming back to NetNut with larger orders, from the Q1CC:

some of our customers when they are starting with us, some of our customers are working in [indiscernible] with few vendors, for high availability to reduce [indiscernible], to leverage negotiation on pricing, et cetera, many, many reasons behind. So some of them are starting to work with us in a low volume, testing the product. And when they see the performance and it goes very well because we dramatically improved our infrastructure and IT in every quarter.

That points to a particularly favorable customer reaction, and this is corroborated by the raving reviews NetNut receives from customers on G2 (4.9 out of 5 stars).

This is very reassuring as there are some worries about price competition, but we're not overly concerned:

• NetNut produces very happy customers coming back for more, as witnessed by extraordinary NRR rates and very favorable customer reviews.

• Price competition is mostly at the low end of the market, NetNut is an enterprise solution.

• The market itself is still expanding rapidly.

• NetNut is distinguishing itself from the competition in several ways.

Differentiation

• Patented tech

• Huge improvement in performance

• New products

About that patented tech (20-F):

The uniqueness of our web data collection service is based on the fact that unlike our competitors that provide predominantly host-based solutions, which require installation of software on third-party uncontrolled end-user devices, we support not only running software on end-user devices, but also routing the customer’s traffic through residential routers of our ISP partners... so the size of our network, the stability of our network, allowing us now to work with big customers with huge demand, and that's what made us to be a leader in this space together with additional two or three companies.

And the company keeps on improving, here is the Proxy Market Research 2024 on performance benchmarks:

The baseline has increased in general, with NetNut and IPRoyal making big yearly improvements (+8.66% and +4.63%, respectively)... Overall, NetNut narrowly performed the best, and it has improved significantly since 2023.

Then there are new products:

• The SERP Scraper API, introduced in Q4/23

• A Website Unblocker, introduced (in beta) in Q1/24 and just life for all customers, is generating positive reviews.

• An upcoming AI scraper

• Plans to move into data analytics.

The new products are not just generating cross/up-selling opportunities, they are also bringing in new customers.

The analytics (either through M&A or internal development) is something for next year, the upcoming AI scraper is pretty interesting, it was described during the Q1CC as follows:

will be able to adjust itself to almost every website to the structure of the lending page or the pages, the relevant pages in the website and also to adjust itself to new versions or revisions that each [indiscernible] is uploading once in a year, 2 in a year et cetera. And by this for the main advantage, yes, will be one, it will be very fast. Customer does not need to wait for professional services. We don't want professional services. We are trying to do everything as automatic as possible without any human being involved. And second, we will have a huge variety of scrapers, which of course, will leverage us to much more opportunities versus our customers.

The AI scraper will be in beta in a few months and launched at the end of the year, early next year. It automates processes that today need manual assistance, so apart from a competitive differentiator, it's also good for margins. The company hired what seems to be a big shot for its AI initiatives.

So we have three sources of growth from AI, only the first is already producing:

• Demand from AI companies, which is now emerging

• The AI-driven scraper

• An AI-data analytics product, planned for next year

Operating leverage

Gross margin increased to 78% and OpEx was up a tad sequentially to $4M, which is only a $16M run rate as the company keeps investing in new products, S&M, and its infrastructure, but OpEx isn't growing nearly as fast as revenues so together with the gross margin expansion it's no wonder profits are exploding.

Adjusted EBITDA came in at $3.2M, net earnings (corrected for the $800K fair value adjustments of the warrants, a non-cash item) came in at $2.8M or $0.45 per share, way above estimates.

Given the current trends, we see FY24 EPS well above $2, which makes the shares still very modestly priced for a company with this growth rate, operating leverage, NRR, and balance sheet.

Speaking of the latter, operating cash was $3.2M and the company has $15.1M in cash on its balance sheet, up from $10.9M at the end of 2023. The company has no debt and 6.4M of ADS outstanding.

Valuation and conclusion

We disagree with some who argue that, due to the competitive nature of the industry, the shares don't deserve the type of valuation one would expect of a profitable, cash-generating company growing at a triple-digit rate simply because there are no signs the company is bothered by any competition:

• It's growing way faster than the market, it's obviously taking market share and it's been doing this since 2019 when it was just a $2M business.

• The record NRR and the way they achieve that (customers sampling, often also at competitors and then coming back for more) and the raving reviews on G2 suggest, that its core product is very well regarded, and they win market share for a reason.

• Company investments are producing significant performance improvements.

• The price competition is limited mostly to the low end of the market, NN is operating in the enterprise market, and its prices are competitive.

• It is developing new products to increase its value proposition and competitive differentiation.

The company is also on a mild tax rate of 12% and can keep that indefinite as long as it invests a certain percentage of revenues into R&D.

We think that given the tremendous performance on almost any metric, a p/e ratio of 30 is pretty modest. With our EPS estimate of well over $2, there is still plenty of upside left despite the stunning run we already enjoyed in the shares.

If they can make the AI scraper a success and buy or develop an AI analytics product, 2025 could be another good year with new growth catalysts.

We think the company can do $43M-$45M in revenue this year which, at 78% gross margin and $18M OpEx would deliver an operating profit of $17.1M and an after-tax income of $15.1M, delivering $2.14-$2.35 in FY24 EPS so we have a share price target of $70 (on a p/e of 30). The company is also likely to have well over $20M in cash on the balance sheet at the end of the year.