A Quick Update on Alarum

After 5 years of uninterrupted growth...

While growth was always going to slow down as no company can keep on growing at 150% forever, Alarum (ALAR) disappointed with its Q3 sequential decline guidance. This undermines its status as a growth stock, even if it might very well just be a blip.

Q2 results, at first sights, quite a few positives

• Q2 results were still pretty good (NetNut revenue +72% to $8.7M even if that's a big step down from Q1 growth at +139%).

• Gross margin increased to 78.5% (from 71% in Q2/23).

• OpEx was $4.2M.

• Adj. EBITDA was $3.4M.

• Cash increased from $10.9M to $21.6M in just two quarters.

• NRR held up well at 159% (versus 164% in Q1).

• The website unblocker has been well received and will go live.

• The company won some big customers in Q2 (and Q3).

• $400K revenues was from new customers, 60% higher (on a monthly basis) compared to Q1.

• On average our NetNut customers have been generating approximately 15 to 18 times the revenues compared to their initial month activity.

• They will move into AI-driven data analytics next year and have considerable cash for M&A.

But surprising negatives took hold

• Q3 guidance is just $7M (+/- 3%) with adjusted EBITDA at just $0.8-$1M, that's a bit of a shocker.

• Management explained that some customers are cutting back usage but at the same time noticed that a recovery already started in July.

• We surmise there might also be some price erosion, even if this wasn't discussed during the CC, but this is a very competitive industry with relatively low entry barriers, even if NetNut operates mostly at the top end, the enterprise level of the market.

• After 5 years of continuous growth, this comes quite unexpectedly.

The upshot

The company still has quite a few things going for it:

• Gaining share in a growing industry (at least so far, Q3 might see a decline in market share).

• High gross margins and a very scalable business model.

• The website unblocker is well-received and has started to generate revenue.

• An upcoming AI-scraper that could differentiate NetNut from the competition (and will increase margins through automation).

• It’s winning ever bigger customers.

• It’s likely that with the accumulation of more and bigger customers, down quarters like Q3 will become less common as things will tend to even out.

• Conclusion: while the shares are not expensive, and the guided sequential Q3 decline could very well be a one-off, the aura of uninterrupted growth has been shattered, undermining its status as a growth stock (and related valuation premium).

• We won’t be in a hurry to get in until we have a clearer picture of what the longer-term growth profile actually is.