Safe-T Group Ltd (NASDAQ:SFET) Q3 2022 Earnings Conference Call November 29, 2022 8:30 AM ET
Company Participants
Shachar Daniel – Co-Founder and Chief Executive Officer
Shai Avnit – Chief Financial Officer
Conference Call Participants
Brian Kinstlinger – Alliance Global Partners
Jason Kolbert – Dawson James
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. [Operator Instructions] 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 [$14 million] [ph] 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 [its risk] [ph] 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 [processed] [ph] the latest spike in usage.
Our ability to handle over 100% increase in traffic loads within a short period of time and [indiscernible] 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 [thousands] [ph] 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.
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 [corresponding period] [ph] 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 [segregated] [ph] 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.
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 [solid robust] [ph] 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 [Safe-T] [ph] 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] 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 [2.2] [ph] 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 [quote] [ph] 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 [indiscernible] 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 [business events] [ph].
Brian Kinstlinger
And just to [order it] [ph] differently, so, do you think consumer can grow 25% plus and enterprise maybe grows a little bit slower since you’re not investing as much in it? How do you think about their revenue growth rates going forward?
Shachar Daniel
You know what, Brian, I cannot point on the number and divide it to percentage. I didn’t say that I think – I didn’t say because I don’t think so. The enterprise business is growing organically without any further investments. Meaning, we are using the profits in order to scale the team, to scale the infrastructure, to add more marketing activities. I think that we – in the next quarter, we will see around 50/50 between both of them needs to grow.
It depends, you know sometimes it’s the season, sometimes it’s the situation around the privacy, sometimes it’s [shining] [ph], sometimes the consumer is shining, but I cannot point on a specific business unit that is going to grow more than the other.
Brian Kinstlinger
Okay. Last question. You got the 5 million downloads you announced, what’s the conversion rate to subscribers?
Shachar Daniel
Okay. So, basically Brian, I think as I told you in the last call regarding the internal formulas and conversion rates that we have, we are keeping it quite confidential, not due to the capital markets, but due to the competition. I think that if you look around, you will see that any company in the [B2C] [ph] exposing their conversion rates, etcetera, but I can tell you one thing that our conversion rates, the churn rates, the lifetime value, and the CPA, which is the cost per acquisition according to statistics are in the top.
As I mentioned now, we are in the first 10 places in the app store and productivity because of this statistic and this performance of our deal. By the way, this is our sweet spot, right. The ability of our team to have a great marketing and sales performance and the independent statistics.
Brian Kinstlinger
Great. And then I guess I have one follow-up to that without giving me Safe-T’s information, what are industry standard conversion rates? You say you’re at the top, what would be a standard number?
Shachar Daniel
Standard number to what?
Brian Kinstlinger
You said that if you look at the – you said the industry standards for the conversion rates, if you look at them, you’re well – I think, what I think you were intimating is that you’re well above that. What are you comparing that to? What are the averages in the industry for conversion rates?
Shachar Daniel
Okay. So, it’s a good question, but I don’t – to be honest, I don’t have in front of me. And the conversion rate is something that each company choose to present sometimes what it’s good for. What I mean, you know download and the conversion is between the download to paying a customer. Now, over the time, over the last two years, no, you have also churn rate. So, you need to aggregate the number for all the paying customers versus the downloads. And then it’s the win number, but if it’s very interesting for you, I’m willing to jump on a different call with you and to discuss about the market specifics and the market standard.
Brian Kinstlinger
Okay. Sounds good. Thank you.
Shai Avnit
We’re [indiscernible], by the way, if it’s interesting for you.
Shachar Daniel
Okay. Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Jason Kolbert with Dawson James. Please proceed with your question. Mr. Kolbert, please proceed. Your line is open for questions.
Jason Kolbert
Thank you. Just can you go through what the final share count is after the reverse split? I didn’t catch that.
Shachar Daniel
One second. Opening it. [Multiple Speakers] Just a minute. Okay. The share count ADS perspective right now is about 3.26 million ADSs outstanding.
Jason Kolbert
Okay. Thank you. And you talked a little bit about reducing expenses in the quarter, but according to the filings, I see that selling and marketing was actually up cost of goods as a percent really didn’t change. R&D didn’t change. So, I just see it was focused on G&A. So, that correct?
Shachar Daniel
Yes.
Jason Kolbert
Okay. So, going forward, how are you looking at those other expenses?
Shachar Daniel
Talking on the all expenses of the company or just on the G&A?
Jason Kolbert
All of the expenses broken up by R&D, sales and marketing, G&A and also cost of goods, what direction do we expect that to run?
Shachar Daniel
Okay. So basically, our current expenses, we think we can optimize the revenues and we build an infrastructure, as I mentioned also in the call, we invested a lot in the last quarters to build the infrastructure from product and technology perspective, [indiscernible] resources perspective, and we think that our costs should remain more or less the same, while we think that we can scale up with revenues based on more or less the same cost. So, this is the account trend that we have for the next quarters.
Jason Kolbert
And I know you’re hesitant to give a revenue guidance, but we have been anticipating that this kind of a year of building a base with, kind of, as you move out on the traditional hockey stick plan. So, is it going to take more time to realize those significant revenues? I mean, I had you out to 50 million in 2025? And so, I’m trying to understand what you’re thinking strategically in terms of when you’re going to be able to leverage those revenues across the infrastructure?
Shachar Daniel
What do you mean to leverage, Jason? I don’t understand.
Jason Kolbert
Well, [Technical Difficulty] cost of goods across, you know you said you had essentially a fixed cost of goods and then as revenues grow, you’re going to build. So, I’m trying to understand how your revenues are going to build over the next couple of years?
Shachar Daniel
Okay. So, if you look at the [indiscernible] targets, our targets since last year, which basically were better than this target is to have a 50% [growth] year-over-year. If you will calculate, you will see that if we meet this plan, we will be in 2025 in around $50 million in revenues. So, I think that our current revenues are significantly growing. The company in 2018 was a $1.4 million in revenues. Now, in 2022 it is almost, you see the numbers and you can calculate regarding the whole year. And if it goes like this, I said – like this, I think that it’s totally significant growth, significant revenue, leveraging everything just trying to understand what specifically you want to understand.
Jason Kolbert
No, that’s fine. I just wanted to hear you say that you’re still on track for that growth rate. And talk a little bit about cash on the balance sheet and kind of what the – you said that it’s been a difficult capital financing market. Tell me a little bit about, you know how you’re planning to manage the current cash? And how long do you think it will last?
Shachar Daniel
Okay. So, we have – we’re at – the company now is in a very good position because we have kind of [new plants] [ph]. One of them can take us further ahead with the current cash. And we have, as Shai mentioned, we have [indiscernible] in the PR, you can see that we are on top of the current cash for September 30. We have additional $4 million committed from the bank and from the strategic investors. We’re paying installments in the next few quarters. So, basically, we have the current cash to support the growth and to support the current customers and technology of the company.
As I mentioned to Brian, our consumer acquisition plan is very attractive for many investors to come and be partners. The rev-share model that we did with the last strategic investor. So, from consumer acquisition perspective, due to the fact that our model is working very well and is very attractive from IR perspective, we think that we can fund it even forever on this rev-share model and keep the company to be, look at the difference between the cash in the last – in the end of the second quarter to the end of the third quarter and [indiscernible] that we can keep like this for many quarters. And again, in the phase of the market positions and in many other terms, but we have some plans and we will adjust the plan according to the market conditions and the growth rate that we will define for the company.
Jason Kolbert
So, I hear you saying is that you can take the current cash balance and with adjudicating expenses, you can manage on this cash balance until their market conditions allow you to bring more cash into the company.
Shachar Daniel
Absolutely.
Jason Kolbert
Okay. Thank you very much. Appreciate the update.
Shachar Daniel
You’re welcome. Thank you.
Operator
Thank you. There are no additional questions at this time. Would you like to make any closing comments?
Shachar Daniel
Yes. Thanks everybody for joining us today. We look forward to continuing to update you on our progress. Thanks.
Operator
This will conclude today’s conference. Thank you for your participation. You may now disconnect your lines at this time.
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