Alarum Tech. | Q2-24 Earning & Call

When your own business hurts you.

I didn’t write any investment case on Alarum so I will very briefly introduce the business here. First things first, we’re talking about a $100M capitalization which means a very, very volatile stock & “risky” investment - on which I made my own decisions and let you make yours.

Alarum is the company that owns NetNut, which accounts for more than 95% of the revenues - hence NetNut is almost everything, and offers different kinds of services, mostly what is called “data scraping” which is:

“The process of extracting large amounts of data from websites, applications, or other online sources. This is typically done using automated tools or scripts, which can access and retrieve the data in a structured format, such as a spreadsheet or database.

Data scraping is often used for purposes like:

Market research: Gathering information on competitors, prices, or trends.

Content aggregation: Collecting data from multiple sources to create a unified view.

Sentiment analysis: Analyzing customer reviews or social media posts.

Lead generation: Extracting contact information or other relevant data for sales purposes.“

I think this gives the best introduction possible. NetNut is basically a scripting tool allowing companies to gather any kind of data they want through the internet - a very valuable resource nowadays, the easiest way possible. And many got interested in the company due to its rapid growth, despite one of its biggest issues being that most of its revenues come from a few big clients... That’s what we’ll see today.

Overview.

Globally, the quarter itself is far from bad, but we’ll have a lot to say.

EPS. $0.31 | $0.41 | +32.26% beat
Revenue. $8.94M | $8.88M | -0.63% miss

"As we intend to establish the broadest data collection and insights offering in the market, we continued to increase our market share in the IP Proxy Network segment, won initial sales in the data collection and labelling market with our new Web-Unblocker and continued to make progress towards providing our customers with artificial intelligence and analysis capabilities."

A correct first look and as we’ll see, the unprofitability of this quarter is only a matter of accounting. All the problems will be from the guidance.

Revenues.

I will, weirdly, start by talking about the numbers for once because the business & guidance part will be dealt with jointly, as that’s where the alpha lies.

A strong quarter once more for Alarum, with revenues up 28% YoY, while 97.7% of them are generated by NetNut. The six months' revenues are in even better shape, up +98% YoY. Margins are increasing as the company is reducing expenses thanks to its refocus on its new business, and the balance sheet stays really strong with $21M of net debt for a business generating $6.3M of OpCF.

As said above, this quarter is unprofitable simply due to an accounting expense from warrants issued in 2019/2020 and based on share prices. It impacts the company, but the business itself is still profitable. Most of those warrants are to expire in 2025, which should leave the company free of those external charges then.

Business & Guidance.

The business.

The company is going pretty well and is apparently attracting clients, although we do not have any clear data on it - simply comments made during the earnings call. But we’re apparently talking about big brands, although we do not know how many.

“I'm excited to share that during Q2, we have added to our customer base some of the world's largest and most recognized brands [...] we won a Fortune 100 customer, a leading merchandise retailer.”

And the first consumption of those new clients seems pretty positive.

“In Q2 2024, we generated total revenues of nearly $400,000 from dozens of new customers in their 1st month of activity. This was approximately 60% higher than the revenues generated from new customers that onboarded in the prior quarter Q1 2024 and was also approximately 35% higher than the average of the last four prior quarters.“

More clients generating more revenues for NetNut than the new clients one year ago were generating - which means a bigger average usage of the tool. This is pretty promising data.

As for these kinds of predictions from the CEO, I’ll be pretty harsh but straightforward about them.

“According to our model, these new Q2 customers are expected to generate revenues of about $6,000,000 to $7,200,000 over the next few years alone. This is a clear indicator of the resilience of our business model.”

They are bullshit, for the reason we’ll talk about just now.

The guidance & business model.

Yet, Alarum is guiding for Q3-24 revenues around $7M, up only 4% YoY.

This is the big problem of this quarter - not even the big problem, but a cataclysmic new. Stocks are based on growth; if the company doesn’t grow, the stock doesn’t deserve any multiples, it’s that simple - and even more true for small capitalizations.

And this is all due to their business model & reliance on few customers for most of their revenues.

Business Model. NetNut is sold by bundles of bandwidth, which means that companies using the tools will buy for a certain bandwidth, and the service will stop once consumed. They’ll need to buy a new bundle to continue scraping. This is the first problem.

“So as I mentioned in my pitch just a few minutes ago, in the Q3, we experienced a kind of a slowdown for some of our customers, which basically made as we just mentioned, made the revenues to go a little bit back from Q2 to Q3.“

This literally means that some of their customers stopped buying their bundles & using their scrapers. As for why? Apparently not because those customers wish to stop working with NetNut.

“So I cannot formally I cannot say that we lost customers because losing a customer meaning he announced or let you know that he's terminating the agreement, stop the usage, going back leaving you for a competitor or something like this. It's not the case here.”

The only reason left is that they didn’t need or won’t need to scrape during the period, but once again, as we’re talking about bundles and not constant subscriptions, those clients could completely come back in September or November and buy much more than they used to - or not.

Revenues Concentration. As for the second problem, it is very well sumarized here.

“So an aggregate number of $14,000,000 in the first half of twenty twenty four generated by total amount of 43 customers of the company.”

Alarum generated $17.3M of revenues H1-24, meaning 43 customers generated 81% of revenues. And I’ll go even further as they gave more data: the top 5 customers generated 41.3% of the H1-24 revenues.

You can easily imagine that if only one of them reduces its usage of NetNut, revenue growth is going to slow down drastically.

My Take.

This is where we are with Alarum today and this is why the stock is tanking, down -30% after this earnings report: A poor guidance due to a volatile usage of their products & a question: Are customers leaving or temporarily slowing their usage of NetNut? Why would a company stop scrapping?

I do not have a definite answer to provide here, although if we listen to management, they seem to say that their products attract more & more and that newcomers use them pretty strongly. Not enough yet to compensate for slower usage from the top 5 customers, though - but this could change.

As for me, I personally bought more today after the drop. I had just a small position in Alarum, so this drop isn’t hurting much. I doubled my position and I entirely accept the risk.

The case is simple: volatility in usage goes both ways, and a slower Q3-24 doesn’t mean activity won’t come back during Q4-24. Indications seem to point to a globally growing usage & customer base for NetNut, and the company is working on developing new products to satisfy its new clients. Data scraping is as valuable as it was yesterday, and a growing user base could mean a very fast reacceleration of revenues if the 5 kings were to resume their activity - which seems possible with the Christmas period coming.

The only bear thesis on Alarum today would be that the big players are leaving NetNut for another tool, and although there are no indications of it right now, this could perfectly be the case - we’re closer to speculation than investment here to be honnest.

But this will be it. No DCA, no re-entry, just today’s reinforcement. And if activity isn’t back by the end of 2024, I will take my loss and leave Alarum.