A Quick Take on Alarum Technologies

FY24 EPS could approach $2 with significant cash flow to boot

We are hard-pressed to come up with reasons why Alarum Technologies (ALAR) won't produce $1+ in EPS this year and have a pretty good shot at reaching $30, here is why:

In Short

• Growth is much higher than the headline 40%, NetNut, its main product, is winning market share and produced 150% growth in FY23

• The company is focusing on high-growth, high-margin NetNut and running off its consumer business, most of which has gone in Q4/23. Management can now completely focus resources and attention on growing NetNut, which it’s doing by developing new products.

• NetNut just introduced two new data scraping products in short order already, layered on its NetNut IPPN infrastructure business with a third one coming, it’s moving up the value chain, adding new revenue streams, and improving customer retention all at once.

• NetNut has patented, proprietary technology providing it with an advantage in a highly competitive industry.

• The IPPN and EDC markets where NetNut is operating are high-growth markets producing secular tailwinds.

• A recent impulse for growth is Gen AI which produces huge data needs.

• Exiting the consumer business has propelled gross margins much higher and with declining OpEx in dollar terms, together with triple-digit revenue growth and gross margin expansion producing tremendous operating leverage.

• The company turned profitable, generates cash, and has a healthy balance sheet with $10.8M at the end of 2023 and no debt.

• The company already produced $1.1M in net income in Q3/23.

• Analysts expect $0.97 in EPS in 2024, we think that’s too low and see $10M+ in net income or close to $2 in EPS.

• Jan/24 IR presentation

The IPPN Market

• The company’s main product, NetNut operates on the IPPN (IP proxy network) market, a relatively new market

• IPPNs are used to hide identities and circumvent data gathering limitations on the internet, they are a crucial part of the EDC (Enterprise Data Collection) market.

• Data gathering limitations are for instance: 1) Websites blocking access to IP addresses from competitors. 2) Many websites change their displayed information based on user IP address, location, and demographic attributes. 3) Limits many websites place on the amount of information they send to any one IP address.

• Use cases include: price comparison, ad verification, data collection, fraud protection, application performance, brand protection, talent sourcing, cyber security, and account management. (from Frost & Sullivan). Lately, training LLMs (large language models) has emerged as another huge use case.

• Even before the emergence of the voracious data needs for training LLMs, the IPPN market was projected to grow strongly at a CARG of 16.8% from 2019-2025 according to a Frost & Sullivan report from 2019.

• The market is very competitive with few barriers to entry and little room for competitive distinction, although that doesn’t seem to preclude tremendous margins and profitability. Since Alarum is the only publicly traded (semi) pure play, we don’t know whether its 77% gross margin (Q3/23) is representable (and NetNut’s gross margin is likely higher still as Alarum still had considerable consumer business in Q3).

• Data scraping (which uses IPPN markets to circumvent limitations) is also not entirely without controversy. Market leader Bright Data was sued by Twitter for this and they have similar legal battles with Meta. However, Bright Data won its case against Meta recently, a positive for the IPPN/EDC market.

Recent company developments

• The company sold its enterprise cybersecurity business to its exclusive reseller TerraZone for a 7% stake in the latter (Jul/23).

• Management is to scale down investments in its consumer business CyberKick as CAC (customer acquisition cost) became too burdensome. CyberKick was aquired in 2021 (Jul/23).

• Alarum closed a $4.25M private placement with management participation (Sept/23).

• NetNut was granted a US patent for its reflection proxy technology (Nov/23).

• The company enters the EDC (enterprise data collection) market with SERP (Nov/23).

• NetNut introduces a second EDC scraper product, a website unblocked.

• NetNut announces a new revolutionary AI-based data collector product under development.

NetNut

• Alarum’s main product is NetNut, which was acquired in 2019 and is an IPPN (IP Proxy Network) infrastructure provider.

• After deciding not to invest in their consumer business it’s almost the only product ($6.8M out of $7M+ according to preliminary Q4/23 figures).

• NetNut has been steadily gaining market share and its revenues increased from $3M in 2019 to $21M in 2023.

• It has proprietary technology that was recently granted a US patent that makes its network especially efficient. From the 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.”

• NetNut won multiple large customers from multiple segments (see here, here, here, and here) so it could just be the company has an effective sales team, this is a competitive market.

• It’s a semi-SaaS product with customers taking subscriptions upwards of 3 months and customer retention has greatly improved over the years. Management will provide figures on that early next year.

Leveraging its IPPN network

• Management's aim is to leverage its position in the IPPN infrastructure by adding additional layers of products, like AI-based data gathering and data analytics.

• It has just introduced the first of these, the SERP Scraper API delivers real-time structured data from global search engines, tailored to enterprises’ needs. The benefits are described here. Shortly after its introduction, it’s already taking off, with demand from existing and new customers.

• It already introduced a second product, a website unblocker in January, and announced the development of a third in February, an AI-based EDC product which seems pretty revolutionary.

• The idea is to introduce other layers of products like data sets and data analytics. Given the $10.8M of cash balance at yearend/23 and the cash flow the business generates an acquisition could also be in the cards here. It would cement its market position, offer opportunities for cross- and upselling, and open up new larger growth markets.

Growth

• The company is already growing at 40%+ revenue growth but that’s an understatement, NetNut is growing at 150% (in Q4/23 as well as FY23, per preliminary Q4 results) as they decided in July/23 not to invest in their smaller consumer business (internet privacy and security solutions) due to the increased CAC (customer acquisition cost). Additional reasons for strong growth to continue are:

• Strong IPPN and EDC market growth and NetNut gaining share.

• Its new scraper products will add to growth and enable better retention of existing customers, management promised to provide data metrics on increasing customer retention in 2024.

• Then the company is developing a revolutionary AI-based EDC product and In the future it’s likely to add data analytics products, moving up the value chain and offering a complete package for the ECD market.

Operating leverage

• Operating costs are falling in dollar terms as 1) Management decided to scale down investment in their consumer business and 2) Investments made last year in their infrastructure are now largely done. This has done wonders for margins, see chart above.

• Its consumer business was on much lower growth and lower margin and a main reason to exit the business were escalating CAC (Customer Acquisition Cost). They either retrained those salespeople to sell NetNut or they were let go. The first would boost growth, the second would boost operating margins.

• OpEx was just $3.7M in Q3/23, that’s a $15M run rate, no wonder the company swung to profitability ($1.1M in Q3) and cash flow positive (operating cash flow of $1.5M in Q3 and $2.8M in Q4).

• Preliminary Q4/23 figures show $7M+ in revenue (+35% y/y) and a whopping $2.8M in operating cash flow, that’s nearly $2 per share in operating cash flow on a yearly basis (and this is likely to increase in 2024, given the revenue growth).

Valuation

• The company incurred a one-time $650K in financing costs related to a private placement (in which a quarter of the $4.25M was taken up by management).

• Q4 growth and the falling away of the financing costs are likely to take net income towards $2M in Q4, and that’s even before 2024 has started.

• So $8M in EPS in 2024 should not be a demanding target, we think FY24 net income will be $10M+

• On 6M outstanding shares that’s an EPS of $1.3+, and given NetNut growth, the two new EDC products, and tremendous operating leverage it could very well be higher.

• Especially when factoring in the balance sheet. Given the company is likely to have $20M+ in cash by yearend/24, this puts the EV at $52 (at $12 a share), with $10M in net income for 2024 that would make the shares trading at 5x profits. That’s too low.

• The company has no debt and $10.8M in cash (per preliminary Q4 results) with operating cash in Q4 at $2.8M, that’s $0.45 per share.

• A profitable, cash-generating company growing at a triple-digit rate, with 77% gross margins and falling OpEx in dollar terms should normally command high valuation multiples. However, the competitive and somewhat controversial nature of the IPPN market is likely to produce some counterweight here.

• Nevertheless, at single-digit earnings multiples the shares are way too cheap still.