Cyren Ltd.
Q2 2021 Earnings Call Transcript

Published: 16 Aug 2021

[Operator:]

Greetings, and welcome to Cyren's Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Chad Rusek, VP of Accounting and Finance. Please proceed. Chad Rusek Thank you and welcome to Cyren's second quarter 2021 financial results conference call. This call is being broadcast live and can be accessed on the Investor Relations section of the Cyren website. Before we begin, please let me remind you that, during the course of this conference call, Cyren's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors section of our SEC filings, including our annual report on the Form 10-K filed on March 30, 2021. Any forward-looking statements should be considered in light of these risk factors. Please also note, as a safe harbor, any outlook we present as of today, and management does not undertake any obligation to revise any forward-looking statements in the future. Also, during the course of this conference call, we may discuss non-GAAP measures when talking about the company's performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the earnings press release issued today and available on the Investor Relations section of our website. These financial measures are included for the benefit of investors and should be considered in addition to, and not instead of, GAAP measures. Joining me on today's call, we have Brett Jackson, Chief Executive Officer, and Ken Tarpey, Chief Financial Officer. With that, I will now hand the call over to Brett.

[Brett Jackson:]

Thanks, Chad. I'd like to welcome everyone to today's call. As we have mentioned in past calls, Cyren's biggest growth opportunity is helping enterprise customers effectively deal with the constant stream of phishing attacks and business email compromise attempts that they are experiencing on a daily basis. Our team continues to make great progress executing our strategy to develop this new and potentially high growth revenue stream with a clear goal to establish a leading position in the anti-phishing market, which we believe can be instrumental in increasing shareholder value. While Cyren's Q2 overall revenues declined year-over-year, this decline was primarily within our legacy threat intelligence services OEM business. OEM churn was extremely low in the quarter, but we did have some anticipated customer contract reductions, with some of these occurring in 2020, which impact the year-over-year comparison. We will discuss the details later in my comments as well as in our CFOs comments. Not apparent in our overall revenues is the real highlight of our second quarter – the performance of our enterprise anti-phishing product, Cyren Inbox Security. CIS, as it is known internally, has literally been a startup within Cyren. And after steadily building momentum over the past few quarters, we experienced a real acceleration of bookings in the second quarter, which we are very excited about. We believe this acceleration provides us further validation that we are helping customers solve an urgent problem with a differentiated product that delivers value immediately. We also believe that the bookings acceleration we experienced in Q2 is likely to continue in Q3 with the potential for further strong quarter-over-quarter growth based on the size and maturity of our pipeline, and the number of customer transactions already closed in the third quarter. Q3 2021 marks the one year anniversary of Cyren Inbox Security being in market, and we are within striking distance of $1 million of ARR, which is a significant milestone for us. While this revenue stream is not yet material to our overall results, we are very encouraged with its trajectory and potential. Let me cover the details of Cyren Inbox Security's performance in the second quarter 2021. We saw new and expansion ARR grow more than 240% from Q1, with most of this from new customer acquisition. This quarter-over-quarter growth was driven by a 55% increase in customer order volume from the prior quarter with transactions from customers across six countries. While the majority of the Q2 ARR growth is from new customers, we are seeing an increasing stream of expansions from existing customers as they add more licensed users. In Q2, we also saw our first customer contract renewals and we are pleased to see 100% growth retention, which is another validation point that Cyren Inbox Security is an invaluable solution, helping our enterprise customers solve their phishing problems. A key element of our go-to-market strategy is leveraging channels to help us scale. We committed to developing the channel early in our go-to-market execution, and we are pleased to report that 55% of our Q2 bookings were through channel partners. We are beginning to see new opportunities sourced and completely managed end-to-end by our partners, with some sales cycles as short as 30 to 60 days. It is still early days building our indirect channel, but we are encouraged by the progress that has been made and our channels team will continue to add new partners as aggressively as possible. It is also important to point out that our win rate on product evaluations remains strong at more than 70%. Specifically, when a prospect decides to evaluate our anti-phishing solution, more than 70% of the time they choose to purchase our solution instead of competitive alternatives. This win rate is well above our expectations, and we have several takeaways from this. First, we believe the phishing problem is widespread across enterprises, and customers are keen to solve it despite prior investments in secure email gateways and security awareness training. Second, our product has strong product market fit. Our product team understands the phishing problem and has created a product with the right functionality and ease of use to quickly and effectively solve it. Finally, we believe that Cyren Inbox Security is a highly differentiated anti-phishing solution that when evaluated stands out versus alternatives. Let me share a recent customer example as an illustration. One of CIS' strengths is how easy it is to implement with just a few clicks and deliver immediate value. A recent prospect deployed our product in approximately 10 minutes. And CIS immediately identified an active phishing campaign that was also automatically remediated. It turns out that this prospect had been unsuccessfully fighting this phishing campaign for several months and their team was spending many hours every week trying to remediate it. Within one week from the successful product evaluation, the customer purchased Cyren Inbox Security. Of course, not all sales cycles can be this short, but the key point is that when we identify a prospect with a phishing problem, we can quickly and effectively solve their problem. And we believe we do this better than any other solution. We continue to believe that the anti-phishing market for Microsoft 365 in the enterprise is large and underpenetrated. The recent increase in ransomware attacks highlighted in the media have only added fuel to the phishing fire. In our opinion and the opinions of industry experts, phishing is viewed as a common method of distributing ransomware. Stop phishing and you eliminate a key source of ransomware. In fact, we have a growing number of customers who recognize Cyren Inbox Security as one of the essential components of their defense in depth strategy to protect themselves from ransomware attacks. Given validation of our strong product market fit, our compelling competitive differentiation, and exceptional win rate, it is clear that we need to scale our go-to-market as quickly as we can to take better advantage of the market opportunity. Simply put, we need to get our anti-phishing solution in front of more prospects. If we can effectively do this, we absolutely believe we can build a much larger, high growth revenue stream that can increase Cyren's market value and reward our shareholders. Thankfully, this past July at our annual meeting, our shareholders approved an increase to our authorized share capital, which gives us the potential to raise additional capital at the appropriate time to fund go-to-market expansion, as well as continued product innovation. Let me now move to our threat intelligence services business. We are pleased to report that we acquired multiple new customers in the second quarter. Of note, we close the contract with one of the most successful brands in the world, who selected Cyren's threat intelligence data service to help mitigate fraud and account takeover. After a detailed and thorough evaluation of several competitive offerings, Cyren was chosen over other vendors due to our ability to detect security threats in real time on a global basis, leveraging our global view security cloud. In fact, Cyren demonstrated an ability to detect malicious phishing sites earlier than other alternatives – in some cases, as much as 24 to 48 hours ahead of competitive offerings. We also experienced strong OEM customer renewals in the quarter with extremely low churn. More than 20 OEM contracts contract renewals were closed in Q2, with five of these having annual contract values ranging from $500,000 to $2 million. With that said, we did renew a contract within the quarter with our largest customer at a substantially lower value. We were notified in early Q4 2020 that this customer did not intend to renew one of its contracts at full value, which we disclosed in our Q3 2020 10-Q. The contract was originally signed in 2018 and had two components. The customer decided to remove renew just one of the components moving forward, effective April 2021. Our relationship with the customer remains strong. We are currently providing five different Cyren threat intelligence services across several contracts to multiple parts of the customer's business. The latest service to be added was a seven-figure, four-year contract executed in November 2020. And we believe there is future opportunity for additional Cyren services. Given this contract reduction, gross retention in our OEM business was approximately 87% for the quarter. I will now turn the call over to Ken who will go through our second quarter financials.

[Ken Tarpey:]

Thank you, Brett. And good afternoon, everyone. I will now present our second quarter 2021 financial results. For more details of these results, please refer to the earnings press release that was issued earlier today and is posted on the Investor Relations section of our website and our quarterly filings on Form 10-Q. Please note that we present our financials under US GAAP accounting standards, including non-operating expenses and that I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes those non-operating items. Please refer to the table in today's earnings release for a reconciliation of our GAAP to non-GAAP results. GAAP revenue for the second quarter 2021 was $7.6 million compared to $9.2 million reported during second quarter 2020. The decrease in revenue year-over-year was primarily the result of a contract reduction by our largest customer. We had previously disclosed this change and it took effect in Q2 2021. The impact of this contract reduction was a $900,000 reduction and a $1 million reduction for the three and six months ended June 30, 2021 respectively. Some other factors that were impactful, though smaller, which impacted our Q2 2021 revenue were impact to foreign currency exchange rates over the period, customer renewals at lower values and churn, and end-of-life of several legacy enterprise products during 2020 which also contributed to the decline in revenue during 2021. GAAP gross margins for the second quarter of 2021 were 50% compared to 59% for Q2 2020. On a non-GAAP basis, gross margins were 60% in Q2 2021 compared to 66% during the second quarter of 2020. GAAP and non-GAAP cost of goods sold during the quarters was roughly in line as same quarter a year ago. So the reduction in gross margin is really a function of lower revenue. Second quarter 2021 GAAP net loss was $5.6 million compared to $4.6 million during Q2 2020. On a per share basis, GAAP net loss was $0.07 per basic and diluted share for Q2 2021 compared to $0.08 per basic and diluted share for Q2 2020. On a non-GAAP basis, Cyren's second quarter 2021 net loss was $4.5 million compared to $3.9 million during the second quarter of 2020. This translates to a loss of $0.0 per basic and fully diluted share in both Q2 2021 and Q2 2020. As a reminder, Cyren's non-GAAP results exclude a number of non-cash items, including the effect of stock-based compensation, amortization of intangible assets and capitalization of technology costs. Please refer to the table in our press release for a reconciliation of the selected GAAP to non-GAAP measures. GAAP operating expenses for Q2 2021 totaled $9.1 million, down from $9.8 million during Q2 2020, a decrease of 7%. On a non-GAAP basis, total operating expenses for the quarter totaled $8.7 million, down from $9.5 million in the second quarter of 2020, an 8% decrease year-over-year. During the recent quarter, GAAP R&D expense was $4.1 million compared to $4.2 million in the second quarter of 2020. The main reason for the level of GAAP R&D expense during the second quarter 2021 is attributable to a lower R&D capitalization of technology, which reduces expenses related to our new product development efforts. Another consideration is lower headcount in Q2 2021 as compared to Q2 2020 related to R&D headcount. On a non-GAAP basis, which excludes the effect of R&D capitalization, R&D expense for the period decreased from $4.5 million in 2020 to $4.2 million in 2021 Q2. GAAP sales and marketing expenses for Q2 2021 was $2.7 million compared to $3.1 million during the second quarter of 2020. Non-GAAP sales and marketing expense was $2.6 million compared to $3.0 million during the second quarter of 2020. GAAP expense for Q2 2021 was $2.3 million compared to $2.5 million during the second quarter of 2020. On a non-GAAP basis, G&A expense was $2 million in Q2 2021 compared to $2.1 million a year ago. Employee headcount at the end of Q2 2021 was 201 full time and part time employees, down from 229 employees at the end of Q2 2020. The overall decrease in operating expenses year-over-year is consistent with the reduction in headcount. During the quarter, we had negative operating cash flow of $2.3 million compared to positive operating cash flow of $2.5 million during the second quarter of 2020. The decrease was largely driven by an increase in net loss, a decline in deferred revenue driven by the receipt of a multi-year multi-million dollar prepayment from one of our largest customers in the first quarter of 2019, and the decline in deferred revenue due to downsells on various other customer renewals. Overall, net cash flow for Q2 2021 was negative $2.5 million and the cash balance is $13.9 million at June 30, 2021. During the second quarter of 2020, we release Cyren Inbox Security. We continue to increase the number of contracts signed each quarter. But due to the ratable nature of our revenues, the revenue contributed during the quarter was not material for these new products. We continue to believe that it will be a number of quarters before the revenues of this new product offering will begin to have a meaningful impact on our revenue. As previously disclosed, the company received a written notice from NASDAQ of non-compliance as the share price was below $1 for 30 consecutive days. The share price continues to be below $1 and the current cure period ends on October 5, 2021. If the company cannot regain compliance by then, the company intends to request a second 180-day cure period. However, there is no guarantee that this will be granted. We are following COVID protocols at our offices. These protocols have not been an impediment to our communication, collaboration and conducting commerce with our customers and our employees. We will continue to monitor governmental guidance to ensure a safe environment for all our employees, customers and vendor partners. I will now ask the operator to open up the lines for Q&A.

[Operator:]

. Our first question comes from Chad Bennett with Craig-Hallum.

[Chad Bennett:]

It seems like the majority of the impact in the quarter was from your – obviously your large OEM customer that was well telegraphed in terms of the change in conditions there by you guys a couple quarters ago. Brett, I think you talked about a couple new threat intelligence customers in the quarter. I guess, how do you view that part of the business just from a run rate standpoint from where you ended in the June quarter? And is there any more risk in the second half, either churn related – outright churn related or just contract modifications that you see out there?

[Brett Jackson:]

Chad, we're not aware of any major risks as we look forward. Of course, things can change. We have had churn in prior years as a result of one of our customers end up liking a product or selling a part of their business. So, it can be unpredictable, but we're not aware of any major risks. We did see a number of new logos in Q2. That was a very positive change year-over-year. You may remember that we have talked in the past about reprioritizing this business and reengaging with customers and we've done that. We've been improve customer satisfaction and we're starting to see some additional opportunities from current customers as well as new logos. So it's not a high growth business, but it's a stable business with a lot of great customers. And it's a profitable business. So, that's how we see this, a steady part of our business, a key source of our threat intelligence data that we think can drive additional enterprise products in the future.

[Chad Bennett:]

Is there any change from a historical perspective on the nature of the new logos you're going after in that business, either from a type of company, a use case…?

[Brett Jackson:]

Traditionally, our customers in this particular part of our business are the world's largest email providers and the world's largest cybersecurity vendors. We also have a number of managed service providers. I would say, in the second quarter, we saw more interest from online brands who are doing commerce and are dealing with a number of problems, including phishing and fraud. So, some new profiles in the mix. I don't know how that'll play out going forward. But again, I think we've seen a bit of an increased momentum in our traditional OEM business. Again, not going to be a high grower like our anti-phishing business, but a good solid set of customers with some opportunity in the market.

[Chad Bennett:]

Shifting focus real quick to the CIS business, another pretty staggering ARR sequential growth quarter. I know we're still trying to scale that business, but looks like another very, very strong bookings quarter. Again, we're a few quarters, so to speak, into this kind of direct business and repackage product. Any kind of learnings that that you have there, Brett, in terms of type of customer, average deal size, kind of regulated, non-regulated verticals, are there any trends you're seeing, or is it pretty diverse?

[Brett Jackson:]

I would say it's fairly diverse. There are some concentrations, but I just think that's a function of us building that customer base, mostly non-regulated so far. I think this is a problem, phishing is a problem that cuts across verticals, which is good news from our perspective that suggests a large addressable market. And that was the most exciting part of our quarter, the acceleration of that business in Q2, new customer acquisition, starting to see expansions from existing customers. And of course, small number of renewals, but 100% renewal rate. So, 100% growth retention. I think as far as new learnings, maybe not as much as validation of things that we have been assuming and we have learned in past quarters. We've been at this now for, as I mentioned, just about a year. And I think we firmly believe this is a real problem in the enterprise. When we engage with a prospect who has fishing, it's a very straightforward conversation. They know they have the problem, they want to solve the problem and it's a question of that of evaluating our product and potentially products from other vendors. We evaluate quite well. I mentioned our win rate to date, which is well above industry norm. We've got really strong product market fit. We're very differentiated, easy to implement, great detection, and of course, remediation, which is a key strength of the product. So, more confirmation and validation of what we have seen early days and what we assumed and we think the acceleration will continue. We think we're likely to see another strong quarter in Q3. So, we're really excited about what we saw in Q2. Really happy with finally starting to see this acceleration based on all the hard work our product team and sales teams have been doing.

[Operator:]

. Our next question comes from Michael Santana, a private investor.

[Michael Santana:]

I noticed that your net loss obviously was higher this Q2 and also the net revenue lower. And it's because of the loss of the OEM reduction in the contract. So, I know you're pumped up really quite a bit about your Q2 ending with your new anti-phishing, the revenue stream there. But still the net loss is quite significant. And the rev is quite significantly lower. Can you – I'm not going to say guarantee, but are we expecting Q3 to beat Q3 of 2020, in 2021 Q3 is my one question. Second question, I think you've covered that, that there's not going to be a reverse split, looks like, this year, even though we're quite well down on our stock price. So, if you can answer that one, that would be much appreciated. Thank you so much. Also, will you be doing more OEM products? And will you only be staying with private companies on the streaming anti-phishing? Or will you try to maybe even go governmental, either internationally or in the US or whatnot?

[Ken Tarpey:]

I'll start with the first couple. Maybe, Brett, the third piece, you might be better with. But as it relates to looking forward, we don't give guidance. We did telegraph that this is a significant customer change, the impact of it. It's still going to be our number one customer, but not as concentrated as it was in the past. So that impact will continue through in our business over the next several quarters till we get to the anniversary date of that change. We don't go any further. As I said, we don't give formal guidance. We're not going to go any further than that. Your point on the reverse split, it's definitely an option. And there are other things that we are trying to – as we're monitoring to see when we have a benefit to the stock price. So, this second period would allow us then to really look again at the impact of the reverse split. And I think Brett kind of answered your question about CIS customer targets at this point in time. Anything else to add there? Brett?

[Brett Jackson:]

Michael, I would say that we are we are not limiting ourselves. Our enterprise anti-phishing solution, Cyren Inbox Security is targeting midsized and large enterprises, whether they're private companies or public companies, regardless of industry, and regardless of geography. In fact, in Q2, we closed transactions with customers in six different countries. And we have customers as small as 500 users and as large as 25,000 users. So, we're looking to go after midsize and large enterprises in all the key markets globally. That's why the partner channel is so important to us. 55% of our bookings in the quarter came through partners and our partners are very geographically distributed. So, hopefully, that answers your question.

[Operator:]

Thank you. At this time, there are no further questions in queue. I would like to turn the call back over to Mr. Brett Jackson for closing comments.

[Brett Jackson:]

If there are no further questions and we'd like to thank you all for joining us on the call today and thank you for your interest in Cyren. We look forward to keeping you updated on our progress through the rest of the year. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect at this time and thank you for your participation and have a great day.