Safe-T Group Ltd. (SFET) CEO Shachar Daniel On Q1 2022 Results - Earnings Call Transcript

May 31, 2022 8:24 PM ETSafe-T Group Ltd (SFET)
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Safe-T Group Ltd. (NASDAQ:SFET) Q1 2022 Earnings Conference Call May 31, 2022 8:30 AM ET

Company Participants

Steve Gersten - Director of Investor Relations

Shachar Daniel - Co-Founder & Chief Executive Officer

Shai Avnit - Chief Financial Officer

Conference Call Participants

Brian Kinstlinger - Alliance Global Partners

Jason Kolbert - Dawson James

Operator

Greetings and welcome to the Safe-T Group Ltd. First 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] As a reminder, this conference is being recorded.

I would now like to turn the call over to Steve Gersten, Director of Investor Relations. Thank you. You may begin.

Steve Gersten

Thank you, operator. Good morning, ladies and gentlemen. Welcome to Safe-T Group’s first quarter of 2022 earnings results conference call. I’m Steve Gersten, Director of Investor Relations for Safe-T Group.

Before we get started, I will read a disclaimer about forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the Federal Securities Laws regarding Safe-T Group. Forward-looking statements include statements about plans, objectives, goals, strategies, future events or performance and underlying assumptions, and other statements that are different than historical fact. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized, and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties include those discussed under the heading Risk Factors in Safe-T's Annual Report filed with the Securities and Exchange Commission, the SEC, on May 31, 2022, and in any subsequent filings with the SEC. As such forward-looking statements written -- whether written or oral, made on behalf of the company are expressly qualified by these cautionary statements, and such forward-looking statements are subject to risks and uncertainties, and we caution you not to place undue reliance on these.

At this time, I'd like to turn the call over to Shachar Daniel, the company's CEO. Go-ahead, Shachar.

Shachar Daniel

Thank you very much, Steve, and welcome everyone to today’s 2022 first quarter corporate update conference call of Safe-T Group. With me is Shai Avnit, our Chief Financial Officer.

In the first quarter of 2022, we achieved important milestones in our paths to become a leading cybersecurity and privacy company that serves consumers and enterprises. I will now review operations, starting the enterprise side of the business, then focusing on our consumer business, we'll provide updates and some insights to help investors better understand our work [ph].

Our enterprise privacy business continue to grow in the first quarter of 2022 driven by continued momentum and interest in our products. For example, the company headed over 75 new clients from the Asia Pacific markets, including ecommerce and NFT organizations for our newly upgraded enterprise privacy products, which was introduced in the fourth quarter of 2021. [Indiscernible] an important update regarding the dismissal of patent litigation. With the mutual settlement agreement in place we expect disagreement will contribute to a significant reduction in the company's overall general estimates and [ph] illustrations cost expect fully in the third quarter of 2022. The significance of this agreement is that combined with the expected growth in revenues in our enterprise privacy business. We believe that this unit will be operating on the verge of breakeven going forward.

Now, turning to our cybersecurity for enterprise operations. In January, we entered the strategic collaboration with TerraZone on phase development of our Zone Zero [ph], zero trust network access software. We believe that this step will allow us to maintain the value of our IP, and partnering sales we are enjoying a reduction in expenses which are just now starting to positively impact our operating results. Over the past few months, as you may ever -- ever heard us say, we shifted our business from primary focus on solution for enterprise towards consumers as well, because the consumer business operated different business models and sales methods. I want to take some time now to discuss this important part of our business.

Currently, we offer consumers with two product lines, the privacy and the cybersecurity products, the most recent of which we launched last year. We are currently executing against the plan to not only increase the capabilities and features of our existing product but to release a number of complementary solutions across most mobile and desktop platform throughout this year. Unlike marketing for enterprises, consumer marketing requires a more end-to-end [ph] approach, engagement and investment. However, costs related to consumers marketing investments led to the creation of immediate revenue streams, and for predictable monthly recurring revenues.

We feel through our marketing effort in the consumer segment is our customer acquisition program. The program is based upon a five year business model that employs a user lifetime value, LTV metric. LTV is the calculation of the average dollar amount of revenues anticipated to be received from subscribers or the day retention period. According to this model, the company can estimate future recurring revenue based upon the number of users at any given point of time multiplied by the relevant LTV. We started our investment in customer acquisition in the second half of last year, and we’re successfully generating a growing future revenue stream from subscribers, one which is and will be an important asset and the driver of value for Safe-T and its shareholders.

After several months of investing into sales and marketing to acquire a current customer base of our first consumer product, we are confident in the sales and marketing efficiency of our customer acquisition program and its ability to attract profitable subscribers. Although these efforts contribute significantly to the company's expenses, we see it as an investment for the long-term that will generate for the -- it will generate for the company a valuable recurring revenue stream.

With a solid business model in the first quarter of 2022, we generated record revenues of $12.02 million, up 199% over the first quarter of 2021 results. Our gross profit for the three months period ended March 31, 2022 amounted to $2.2 million, an increase of 378% compared to the corresponding period in 2021. We are proud of our continued revenue growth and our ability to rapidly identify opportunities and large advanced products.

I want to address questions and frequently asked by investors regarding our expenses structure [ph]. Our net loss for the first quarter of 2022, our non-IFRS net loss which excludes non-cash expenses amounted to $3.2 million. We are not indifferent to our overall costs in the past month, and in the past month we initiated several directed actions to tackle our expenses structure, results of which will in the near future become visible in our results.

First and foremost, we settled our patent litigation that has a significant impact on our expenses. As mentioned before, the saving of this legal cost will be reflected partially in the second quarter of 2022, and fully in the third quarter going forward. To demonstrate this less loss for this quarter would have been cut at 50% if you take out from our current list net loss, the IP litigation expenses and the last payments for the transition of our cybersecurity for enterprises.

In addition, we gained a vote of confidence from [indiscernible] which granted the company a non-dilutive 12 months line of credit for up to $2 million. The credit line represents a validation of our input financial profile and the potential of our consumer business, allowing us to invest in our continuous growth without having to consider dilutive funding. With additional expected reduction from our enterprise cybersecurity operations, alongside with our continuous growth in revenues, I believe that we have the ability to fulfill our potential.

But before going further, I would like to turn the call over to Shai to discuss the financial for the quarter. Shai?

Shai Avnit

Thanks you, Shachar. I will summarize our first quarter 2022 financial results, which are compared to our first quarter 2021 results, unless otherwise stated. All figures in the summary were rounded for simplicity.

Revenue for the first quarter of 2022 totaled $4 million compared to revenues of $1.3 million for the equivalent period in 2021 [ph]. The increase in revenues is due to an increase in enterprise privacy business revenues, and the consolidation of CyberTech’s revenues following the completion of its acquisition on July 4, 2021.

Gross profit for the first quarter of 2022 was $2.1 million compared to a gross profit for the corresponding period in 2021 of $0.4 million. The increase in gross profit was primarily driven by the much larger rise in revenues compared to the rise in the cost of sales. Operating expenses totaled $6.7 million compared to $2.9 million in the equivalent quarter of 2021. The increase is mainly due to: one, the consolidation of CyberTech’s operations and costs, and especially the customer acquisition costs Shachar just mentioned -- discussed. And two, higher enterprise privacy costs due to an expansion of the segment's activity. This increase was partially offset by early savings from our cost reduction plan in our enterprise cybersecurity business, which Shachar also discussed.

Net loss was $4.7 million which really means a loss of close to $0.16 per share as compared to a net loss of $2.5 million or a loss of $0.11 per share in the first quarter of 2021. Net loss on a non-IFRS basis, which reconcile the effect of some non-cash expenses or income, and certain other expenses was $3.3 million or $0.11 per share, as compared to a non-IFRS net loss of $1.9 million, or $0.09 per share in the first quarter of 2021. As of March 31, 2022, the company's cash and cash equivalents balance and short-term investment balance totaled approximately $7.2 million or approximately $0.24 per share compared to $9.7 million on December 31, 2021. The decrease resulted mainly from the company's operating non-IFRS loss.

And lastly, I wanted to touch base on our share count as it stands today. On an outstanding basis, we have around 30.4 million ordinary shares representing an equivalent number of ADS [ph]. On a fully diluted basis, we currently have around 40.7 million shares or ADS’ outstanding.

With that, I'll turn the call back over to Shachar.

Shachar Daniel

Thank you, Shai. To summarize, during the first quarter this year, we made a significant progress implementing our vision. We delivered on our goal of consecutive quarter of significant growth and laid the foundation which will support our continued success.

Looking ahead, we will continue to develop our position as the leading provider of privacy and cybersecurity solutions. The cybersecurity and privacy protection sector are experiencing hyper growth into global multi-billion dollar market due to incredible volume of cyber-attacks on organizations and individuals. In response, we are leveraging our expertise to expenses and promote our customer acquisition plan, while efficiently managing our expenses. We look forward to the continuous growth and innovation of our products and service and to a strong reminder of the year.

With that, I would like to open up the call for any questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your questions.

Brian Kinstlinger

Hi guys, thanks for taking my questions, and nice results. Can you first talk about where you're seeing the most demand increase either on the consumer side or the enterprise side? And which products, specifically, are you seeing the most demand for right now?

Shachar Daniel

Hi Brian, thanks for asking. So basically, as I mentioned, we see a spike in the consumer side, especially in the privacy product. And in the enterprise side, in the privacy product also, it's more or less equal, a huge -- so a small advantage at this stage for the privacy for the consumer.

Brian Kinstlinger

And just to be clear, on the consumer side, all of your sales are through channel partners, not directly, is that right? So you're not having to increase your marketing spend?

Shachar Daniel

No. In the consumer side, we are selling our products only independent, direct sales.

Brian Kinstlinger

Got it? And so then, talk to -- talk to -- as I heard you talk about [indiscernible] predictable revenue streams, when you -- when you spend on the marketing side, how are you thinking about marketing expenses? And, you know, customer acquisition over the next 6 to 12 months; is there going to be a spike in those given there is surge in demand? Is it going to kind of level off; how do you think about that?

Shachar Daniel

So just to make sure that I understand your question, you are talking now on the expenses side?

Brian Kinstlinger

The consumer side of sales and marketing, right? There is a direct correlation between how much you spend and…

Shachar Daniel

Of course…

Brian Kinstlinger

Customer acquisition revenue. So, how are you thinking about that?

Shachar Daniel

Okay. So basically, as I mentioned, we are at this -- at this point of time, we are acquiring assets, meaning we spend money in marketing and sales, of course, in a very efficient and very smart marketing and sales. And one of our targets is to have -- you know, to decrease our consumer acquisition costs, which is the CAC. And from the other side, to improve our product, and to get a better and better retention, and to keep in touch with our consumers.

Brian Kinstlinger

What is that retention rate?

Shachar Daniel

Sorry, again, what is…

Brian Kinstlinger

What is that retention rate?

Shachar Daniel

So, I don't want to mislead you and the audience because, you know, we are quite young. We have one year of experience in this product, not because we have guys that are well experienced, so -- but basically, it looks like that in five years model, we can get at least 3x on the CAC, on the consumer acquisition costs. So imagine yourself that in the big numbers in one or two years from now, we will have enough recurring revenues to see growth from quarter-to-quarter with minimum expenses. And then -- then at this point of time, you can start and discuss about being profitable and show tremendous growth. At this point of time, we are buying our assets for the future. And we have a CAC, I don't know -- I don't want now to expose specific numbers, you know, not from investors perspective but from competition perspective, okay.

Brian Kinstlinger

Right. Yes.

Shachar Daniel

So, I guess you understand me. But at this point of time, the formulas are working very well, it's very interesting ROI. And it makes us more eager and to invest, and to generate the assets that will serve us and our investors in the future.

Brian Kinstlinger

And one more follow-up on that. What -- how much recurring revenue do you have at this point? What percentage of your revenue is recurring?

Shachar Daniel

Almost 100%.

Brian Kinstlinger

Thank you. And I wanted to just touch on TerraZone. I'm curious the progress you've made since the announcement; is this partnership today that's generating revenue? If it is or is not, how should we think about the ramp of its contribution over the remainder of this year and next?

Shachar Daniel

Okay. So at this point it creates lower amount of revenues, okay, if you compare it to our other business lines. But from the other side, the expenses are accordingly. TerraZone are now experiencing a very interesting opportunities in the market with our new -- you know, the guys of TerraZone, they react different to our products, and now we are offering to the market again, secure email, digital -- secure vaults, and secure remote access in the same package in the cloud; a very interesting offering, starting for small and medium business, and hopefully in the future, you know, we'll jump to enterprises. It looks like there are some very interesting opportunities now in Europe, in Israel it started to go quite well. So, I think there is a kind of expectation that it will also start to generate traction revenues and increasing clients in the future.

Brian Kinstlinger

So sounds like -- sounds like a 2023 catalyst to start accelerating. Is that right?

Shachar Daniel

Significantly as compared to our current numbers, this is one where, you know, we discussed I think first time few years ago, when the oil company did $1.5 million yearly. The company now is on a run rate of $4 million quarterly; so comparing to these numbers, yes. If you want to see the significant part of it, I’m saying it proudly, and so, yes, it looks like 2023 can be or maybe an important catalyst in our portfolio.

Brian Kinstlinger

Right. Last question. On the expense side, you talked about the two items that you could adjust [indiscernible]. Could you quantify the litigation expense in one cue, as well as the cyber expenses that will transition? And if I’m -- maybe I’m not mistaken, but maybe I am; but in the second quarter, the litigation will disappear. But in the third quarter, when the cyber expenses will disappear; is that right?

Shachar Daniel

Yes, no. You know, it's -- when we start the process, it takes one or two quarters to fully implement, okay. Again, this from a legal perspective, I don't want to expose the exact numbers, but I mentioned and I will say it again, that if you would remove from our balance sheet, right -- this quarter, okay, the current quarter, you need to remove these two items which will be removed very fast; you know, in this and the next quarter, you will see 50% improvement in the net loss in the IFRS net loss -- non-IFRS net loss. 50%, okay. So, meaning from operation perspective, the company is improving dramatically the revenues, and also the expenses. We just had this burden on our neck but hopefully, it looks like that it’s behind us. I am talking much on the federal budget, we're only on the litigation, okay.

Brian Kinstlinger

Okay. Thanks so much.

Shachar Daniel

Thank you very much.

Operator

Thank you. [Operator Instructions] Our next question is coming from the line of Robert Smith with The Center for Performance Investing [ph]. Please proceed with your questions.

Unidentified Analyst

Good morning from here, and thanks for taking my question. So, can you tell me what your principal challenges are in the enterprise area and your strategies to address them? Thank you.

Shachar Daniel

So, basically, I will talk about our enterprise. Thanks for asking. First of all, I’ll talk about our enterprise privacy. So, I think that today our enterprise privacy business is one of the leading five companies in this space. And the challenges is only the competition; we don't see any other challenges at this place, at this point of time. And of course, as always, if you have -- you know, a double [ph] human resources, and available [ph] resources, so of course, the numbers will be accordingly. But comparing to our plans, and to our projections, and to the current budget of the company, the only challenge is the competition. And we are trying -- you need to be one step ahead, they are trying to be one step ahead. I don't see any other major challenges, besides of any regular challenges of each and every vertical.

Unidentified Analyst

So, how do you get a leg up on the competition?

Shachar Daniel

Sometimes it can be the quality of the product, the quality of the network, the stability, the performance, it's very important for our customers. Sometimes it can be the features. And if you ask me, it’s also the personnel kind of skills of our sales and marketing guys that know how to approach customers, how to make customers to stay with us to retain them. And sometimes you need to be kind of agile from price perspective and sometimes not; so you know, it's the business game, how to attract customers, how to stay in touch, how to leave them motivated, how to make them stay with you, and to increase the retention and develop that value [ph].

Unidentified Analyst

Is there resistance in dealing with an Israeli company as opposed to one that would be domestic in the States?

Shachar Daniel

No. To be honest, I don't want to use this excuse, totally, no. We are doing everything -- by the way, 99% of our sales was with zero physical touch, okay, it's online. We are joining events and marketing events, but from sales perspective, it's online. Maybe behind the scenes, someone who prefer to buy from a domestic company, yes. But to see it as a trend or something significant that is disturbing us, I don't think there is an issue.

Unidentified Analyst

Is there -- are there any developments in cybersecurity that sort of are transformational? I mean, I could impinge upon your operations or how do you see what's -- what's the direction of things are going here?

Shachar Daniel

Well, you know, you can read articles of hundreds of pages and hear webinars of hours to power some of the trends in the cybersecurity, you know, to be more -- and we cannot discuss about everything, we are not experts in everything. We just see one thing in our cybersecurity, by the way, we just discussed about the privacy side; now if you want to touch the cybersecurity side for enterprises, first of all, there is a spike in the amount of attacks, you don't need me, in order to see it in every place, in every statistics, in every article. Last year 51% -- 50% of various citizens reported on a cyber-attack event -- I am talking on the citizens, not on the enterprises.

So from enterprise perspective, we’re seeing that the small/medium business is suffering from lack of resources, from lack of knowledge, and sometimes from lack of investment in cybersecurity; that's why we developed a very, very simple product in the cloud, easy to operate, easy to run and operate, which can review in one package, some of your critical security needs for your organizations, like your emails, like the way you exchange data with the world, outbound and inbound, and like the way you let your employees or other stakeholders to connect remotely. We think that this solution is easy to implement, it's cheap, and because we -- you know, we want to get massive customers. But for each and every organization, it's doable; mainly given a small organization of 10 lawyers can take it very fast. And that is -- it needs the Chief Information Security Officer in the organization in order to implement it. So we think this trend is in favor of us, and that -- this is the place that we have proven no pushing at this stage for marketing and sales perspective.

Unidentified Analyst

Thanks so much. And good luck, going forward.

Shachar Daniel

You're welcome. Thank you very much for asking.

Operator

Thank you. Our next questions are coming from the line of Jason Kolbert with Dawson James. Please proceed with your questions.

Jason Kolbert

Hi guys, congratulations on some great numbers. I guess I want to follow-up on some of the questions you have already been asked, which is fantastic job in terms of driving what I would consider to be organic growth. But what I want to understand is that, if you had an additional $10 million or $20 million of capital that you could deploy in terms of marketing, would that translate into greater market share or new customer acquisition? You know, I'm trying to understand are capital resources holding you back from really hitting that sharp, sharp growth element that I think everybody would like to say?

Shachar Daniel

Hi Jason. So, the answer is absolutely yes. You know, we build the infrastructure, we have the product; as you see, the product is growing. The only missing thing to see, although the numbers are great, but we could see -- we can double the numbers and triple the numbers. If we have additional capital to invest, of course, the answer is absolutely, yes.

Jason Kolbert

Good. Okay. Yes, I know it's kind of an obvious question, but I think it needs to be stated because it seems to me that what you've done is you've done a fantastic job of demonstrating proof-of-concept here. And now it's just the machine needs fuel in order to run.

Shachar Daniel

Absolutely.

Jason Kolbert

And one other question, you know, we were all very concerned with international events with Russia, and the idea that there would be a dramatic rise in cyber warfare and have you seen that actually come to fruition?

Shachar Daniel

So, you know, I'm saying something that sounds bad, it was too short, okay. Because the world if you remember, the world was under panic for two weeks, it's not like the COVID, okay. The COVID changed everything; the demand, the way people working, of course, it worked in favor of us, almost from every aspect. The war between Russia and Ukraine was in the headlines since three weeks, and yes, of course, from these specific regions we saw a demand, and that makes us to drive one of our very, very interesting products; we announced about it. But it doesn't matter, Jason, the world is under panic of cyber anyway, before the war and after the war. They'd go and it becomes worse and worse and worse, whatever you see the amount of cyber-attacks on consumers, on organizations, it become more and more difficult to defend and to protect from these cyber-attacks. So the world -- yes, the world was part of it but I cannot say that is something significant.

Jason Kolbert

Okay, fair enough. That makes sense. Maybe it just acted to raise awareness of a problem that's already been there and growing. Thank you so much, and congratulations on the strong quarter.

Shachar Daniel

You're welcome. Thank you very much, Jason.

Operator

Thank you. Our next question is coming from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your questions.

Brian Kinstlinger

Great. Just one question, follow-up on the revenue line. Given that your revenue is all recurring, you obviously have some churn. Is it fair still to say that the first quarter should be the lowest revenue quarter, and you can build sequentially with more or additional incremental sales? Both on the consumer enterprise side, this be slowly building each quarter?

Shachar Daniel

Brian, that's -- basically that’s the definition of recurring revenues. So, it's fair to say, but to be kind of -- it's fair to say, and it’s fair to say, of course, you know, we have two months in the second quarter, okay. So I have high level of confidence to say -- to answer you and to reply yes. But to be cautious a little bit, we are still -- in this specific product, we don't have five years of six years customers that we know, you know, to project in a very accurate way. But basically, the answer is yes, sometimes it can be season or -- you know, the summer is a little bit different than the winter. But from annual perspective, I would have more confidence to say yes.

Brian Kinstlinger

Essentially, it’s too soon to tell what -- essentially what you're saying is, you're going to be acquiring new customers and growing revenue, it's hard to tell today, with the short experience you have in these products, the churn increases in any given month or quarter, and then it comes back to normal. So, that's the hard way to predict.

Shachar Daniel

Yes. I can say it today. But you know, basically, let's -- when we will discuss in the hands of God [ph] next year, okay; I would have more level of -- higher level of confidence to say this, yes. But going -- looking on the fourth quarter, you know, you'll see the results of the first quarter -- the first quarter. And now, as I say, no, with this -- in this -- the last two months, so I can tell you, yes. But let's wait a little bit.

Brian Kinstlinger

Yes. Understood. Thank you so much.

Shachar Daniel

Thank you very much.

Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Shachar Daniel for any closing comments.

Shachar Daniel

Thank you very much, all of us, all of you for joining us today. We look forward to continue to update you on our progress.

Operator

Thank you This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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