Safe-T Group Ltd (NASDAQ:SFET) Q3 2022 Earnings Call Transcript

Safe-T Group Ltd (NASDAQ:SFET) Q3 2022 Earnings Call Transcript November 29, 2022

Safe-T Group Ltd misses on earnings expectations. Reported EPS is $-0.7 EPS, expectations were $-0.6.

Operator: Greetings. Welcome to the Safe-T Group Limited Third Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I will turn the conference over to Shachar Daniel, Co-Founder and CEO. Mr. Daniel, you may now begin.

Shachar Daniel: Thank you and welcome everyone to Safe-T Group’s 2022 third quarter earnings results conference call. As is customary, we’ve Shai Avnit, our Chief Financial Officer. I would like to provide a brief review of our business operations, summarize our accomplishments, and then turn the call over to Shai who will briefly discuss the financial results of the third quarter and nine months period before we open the call to questions. We are excited to present seven consecutive quarters of revenue growth. Safe-T today is a different company that it was a year or two years ago and right where we planned it to be. I would like to explain how we successfully accelerated our growth quarter-by-quarter. On a corporate level, all the actions and activities taken in the recent quarters led to revenues of $13.6 million for first nine months of 2022 already exceeding full-year 2021 revenues and presenting an increase of 109%, compared to the nine month period of 2021.

Our greatest achievement this quarter was the ability to balance between continued growth and operating profit loss. While maintaining our growth, we managed to significantly reduce our overall expenses and decrease our bottom line loss. Our efforts to reduce operating expenses resulted in a 25% reduction in net loss and a 29% decrease in adjusted EBITDA loss. I would like to address one more important subject and that is our recent funding initiatives. In May 2022, we secured a $2 million non-dilutive credit line from a leading Israeli bank. In August 2022, we announced a strategic financing of up to $4 million. The $4 million in financing is including a commitment for the with the additional $2 million to be made available subject to achievement of certain milestones.

A successful customer acquisition program, allowed the waiver by the investor of the milestone condition for the second part of the funding and we secured the second funding of $2 million, which in total will be made up relative to the company through a series of cash installments until July 2023. We are extremely proud to execute these fundings that support the company growth without impacting our shareholders at the current market valuation, resulting in the addition of over $4 million on top of September 30, 2022 capital resources. On a business level, I would like to provide a short summary of our enterprise privacy business, NetNut. NetNut operates in the fast growing market of IP Proxy in which with each year the demand for solution in this field increases.

Although several companies operate in this sector, the ability to provide and support enormous number of customers and is not trivial. NetNut wholesale network has been established and developed five years ago, and during recent years, we have invested a wide range of resources, including building an experienced motivated marketing team to grow and strengthen its network. I am proud to say that today our network and infrastructure are one of the most experienced and reliable in the market, serving hundreds of customers. In recent months, we redesigned our scalable infrastructure in order to meet growing demand and continue to scale as we expand with our partners and customers. We recently announced that our network doubled its usage volume within one month with more than 36 billion requests the latest spike in usage.

Our ability to handle over 100% increase in traffic loads within a short period of time and business without affecting performance is gaining customer confidence in our solution. In the past month, we recognized traction for new vertical and exciting markets such as cybersecurity companies, increased demand from our car and the new e-commerce customer and with this increased inquiries for advertising for detection, mitigation, and prevention solutions. Advertising fraud is an existing and growing industry issue, one that costs a waste of billions of dollars annually for both enterprises and consumers. According to business of apps, the total cost of advertising fraud in 2022 reached to $81 billion predicted to increase to $100 billion by 2023.

We expect demand for this segment to keep growing and to represent bigger share in deposits from our privacy enterprise units. During the first quarter, from the beginning of the year 2022, our consumer privacy and cybersecurity business evolved significantly as well. We’re excited to launch our solution in additional platforms, making them accessible to Android users, as well as for iOS and Apple devices users. By launching across the top mobile platforms, we expanded our offering to additional of potential users. Last month, we announced one of the biggest milestones to date of our consumer privacy business that reached 5 million in downloads in a very short time. Moreover, our Apple iOS privacy application is ranking among the Top 10 privacy applications in the category of productivity in the U.S. App Store.

Similar to our enterprise privacy business, our expert professional team and our marketing and technology capabilities contribute greatly to our growth. In addition, the expansion of our user base for the consumer also depends on our ability to successfully acquire customers. Customers is our business, main assets and investments in user acquisition translating into future high margin recurring revenues. Our model estimates revenue for each acquired customer for the duration of their lifetime value, which is LTV period. Under this plan, a significant portion of our certain marketing expenses reflected in our P&L is simply our investment in acquiring users, which we believe that according to our model will translate into more predictable future revenue streams.

For example, during the third quarter, we invested $1.2 million in customer acquisition, which has already returned in a very, very short time 20% of the investment. We believe that this investment will generate millions in future and in revenues. Before going further, I would like to turn the call over to Shai to discuss the financials for the quarter in more detail. Shai, go ahead.

Photo by Dan Nelson on Unsplash

Shai Avnit: Thank you, Shachar. I will begin with a summary of our third quarter 2022 financial results, which are compared to our third quarter 2021 results unless otherwise stated. All figures in this summary were rounded up for simplicity. Revenue for the third quarter of 2022 totaled $4.8 million, a 42% increase compared to revenues of $3.4 million for the third quarter of 2021. The growth is attributed to an organic increase in enterprise privacy business and consumer business revenues. Gross profit for the third quarter of 2022 was $2.6 million, compared to a gross profit for the in 2021 of $1.8 billion only. The increase in gross profit was primarily driven by the increased revenues. Operating expenses in the third quarter of 2022 totaled $5.1 million, compared to $6.2 million in the equivalent quarter of 2021.

As of September 30, 2022, the company’s cash and cash equivalents balance to $3.8 million, compared to $4 million on June 30, 2022. These company’s cash balance for September 30, 2022 does not account up for up to additional $4.3 million in future funds under its recently secured credit facility and investment financing. As of September 30, 2022, shareholders’ equity totaled $15.7 million or approximately $4.8 per outstanding American Depository Share, compared to shareholders’ equity of $17.3 million or approximately $5.7 per ADS as of June 30, 2022. Net loss for the third quarter of 2022 totaled $2.4 million or $0.07 basic loss per ordinary share, compared to a net loss of $3.7 million or $0.12 basic loss per ordinary share as of September 30, 2021.

Adjusted EBITDA loss decreased sharply to $1.7 million, compared to an adjusted EBITDA loss of $3.1 million for the equivalent quarter in 2021. Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 32.6 million ordinary shares, which equal to approximately 3.26 million ADSs. On a fully diluted basis, we currently have around 49.4 million shares or 4.94 million ADSs outstanding. With that, I’ll turn the call back over to Shachar.

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Shachar Daniel: Thank you, Shai. In summary, during the third quarter this year, we continued to realize our mission, including the delivery of significant revenue growth, reducing our loss, and expanding our solutions reach. On a personal note, we are not indifferent to the share price and the capital markets as many other companies, Safe-T too suffered from the challenging market conditions. Over the past year, our financial results show that we are building a high growth company with high growth margins. Our board and team are committed to building a company as a top priority and over time we believe that the value of our business will become greater because of the decisions being made now and will translate into shareholder value.

Alongside our commitment to improving our business operations, we are also committed to expanding awareness of through more frequent contact and participation at investment conferences. Looking ahead, we have a well-defined roadmap for execution, technology innovation, and expansion plans for the near term. The cybersecurity and privacy market are going into a global multi-billion dollar opportunity in response to the incredible surge in privacy and cyber-attack issues for both organizations and individuals. We are optimistic regarding the future of the company and are building our business plans to support our continuing efforts to improve financial results. With that, I would like to open the call for any questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. Thank you. And our first question is from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your questions.

Brian Kinstlinger: Hi, great. Thanks for taking my questions. First, can you break down the third quarter revenue consumer versus enterprises? And now that your acquisitions have anniversaried, what are reasonable growth targets for each of these businesses?

Shachar Daniel: Okay. So, the breakdown is around $2.6 million for the consumers privacy and cybersecurity business and around for the privacy enterprise business. What’s the other question, Brian?

Brian Kinstlinger: I’m curious, you know the growth rates are currently impacted still by the acquisition of CyberKick year-over-year in the third quarter, right? You had a full quarter, but you didn’t have a full quarter last year. So, I’m curious

Shachar Daniel: No, no, no. The answer is no. If you compare the €“ I will keep

Brian Kinstlinger: Sorry, July, the beginning of July.

Shachar Daniel: Yes.

Brian Kinstlinger: Yes. Okay. No, you’re right. Sorry. I apologize. You’re right. Yes, so, in the press release, you talk about challenging market conditions. So, given the economics uncertainty, I’m curious, has there been an impact on your enterprise business, whether it’s slower spend by enterprises, any change in sales cycles? What has been the impact to your business?

Shachar Daniel: Okay. So, I wanted to explain what I meant in my in the PR. From a business commercial perspective, I would be totally honest, no impact. Meaning, it goes very well. You see the growth, you see the numbers. When I say challenging market conditions I meant to the capital markets.

Brian Kinstlinger: I see. So, there’s been no impact to consumer enterprise churn, anything like that thus far?

Shachar Daniel: No, not something that I can point as significant, you know here and there, but it’s always the routine. Always we will have market conditions, but I cannot point of something significant that impact our business. I think that we met our €“ all our targets even more. I’m talking from market conditions, it’s capital markets.

Brian Kinstlinger: Yes. Okay. So again, back to consumer enterprise as you think about going forward, which business might grow faster going forward? Is the consumer side given the capital that you have for that? And what are reasonable growth targets for those two businesses?

Shachar Daniel: Okay. So, basically as you see in the last quarter, as you can see around 50/50, sometimes it’s 60/40, but this is more or less the split and this is the target of the company. We do not have any specific preference for one of them. And just to elaborate, so the €“ as we mentioned in the PR, the enterprise business is basically in a breakeven. It can be profitable very soon. And at this point of time, we don’t have plans to invest more resources, but we have plans to grow organically and to stay profitable or around the breakeven, it’s going very well. The demand is unbelievable and we think that we can do it without any further investments. In the consumer business, as I mentioned, few times in the past and also in the €“ now in this call, and we can divide our expenses for two parts.

One is the operation expenses, which is very, very efficient, but the most significant investment is the consumer acquisition. As you saw in the last two quarters, two very, very, let’s say blended organizations like a commercial bank or like a strategic investors shows a huge belief in our model, and they invested in the consumer acquisition. Meaning, for us it’s not a loss. It’s an investment. We have many ways to fund it externally without diluting our investors. And it’s not only us, it’s part of this business if you go to other B2C companies. The giants and the small €“ if the model is working, if the team is performing. So, we have many organizations that love this model because it gives you a great IRR over the time, and fast returns and it’s very stable.

So, basically, these are the plans for the coming future for both.