Cyren Ltd.
Q3 2021 Earnings Call Transcript

Published: 15 Nov 2021

[Operator:]

Welcome, everybody, to Cyren's Third 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 filing, including our annual report on Form 10-K that was filed March 30, 2021. Any forward-looking statements should be considered in light of these risk factors. Please also note, as the safe harbor and the outlook we present is as of today, 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 we 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 the call today, we have Brett Jackson, our Chief Executive Officer; and Ken Tarpey, our Chief Financial Officer. With that, I will now hand the call over to Brett.

[Brett Jackson:]

Thanks, Joe. I'd like to welcome everyone to today's call. Cyren continues to focus on establishing revenue growth by executing our strategy to build an exciting, new recurring revenue stream in the enterprise anti-phishing market. We are pleased to report that Cyren inbox security market momentum continued to accelerate in Q3 with a 36% increase in customer transactions over Q2 and Q3 quarter-ending annual recurring revenue growth of 92% year-over-year. We remain very bullish on the market opportunity and our product market fit. Phishing, business e-mail compromise and ransomware threats continue to be significant problems for most enterprises, are top of mind for CIOs and CISOs and customer feedback consistently reinforces our view that Cyren has a highly differentiated solution to help mitigate these threats. While Cyren's Q3 overall revenues declined year-over-year, this was due to churn and downsell in our legacy business that occurred in prior quarters, as previously reported. We continue to believe that Cyren Inbox Security will be the key driver of future revenue growth for Cyren. Our team remains focused on building momentum in the market each quarter, with the goal of developing a high-growth enterprise revenue stream that will materially contribute to Cyren's results. As we have previously discussed, this is a journey that will span multiple quarters, and we are encouraged with the revenue trajectory to date. As I mentioned earlier in my comments, Cyren's approach to addressing phishing is highly differential. We are offering customers a completely different and unique solution here. Our approach leverages Cyren's core strength in automated, real-time phishing and business e-mail compromise detection but, more importantly, we also provide automated incident response. Cyren Inbox Security continuously monitors users' inboxes, automatically detects phishing and business e-mail compromise attacks and automatically responds to remove threats without the need for human intervention. So our solution doesn't just simply identify phishing and BEC attacks, we automatically remove the threats, saving IT and security staff valuable time and effort as they no longer have to manually investigate and remove suspicious e-mails on a daily basis. This translates into a real return on investment. The final component of our unique approach is to involve users. As mentioned, we provide automated detection of phishing and BEC as well as automated incident response, but we also leverage users and human intelligence to help identify and analyze suspicious e-mails. Our unique approach continues to resonate with customers, and we believe our view is supported by our win rate. In the third quarter, we won 83% of the customer product evaluations we participated in, and our win rate year-to-date is 76%. As we mentioned in last quarter's earnings call, we are confident in our product market fit and the value we provide customers. Given this, our top priority is to expand our go-to-market. And growing our channel is an essential component to achieving this. Consistent with our Q2 results, more than 50% of our Cyren Inbox Security business came through the channel in the third quarter. We continue to expand our channel partner network and, in the quarter, added a number of new partners, including leading solution providers like PD Phoenix in North America and Softcat in the United Kingdom. We believe that another component to expanding our go-to-market will be developing partnerships with other solution providers who are involved in addressing the phishing problem. We announced earlier today our first of such partnerships with KnowBe4, the leading security awareness training provider with more than 40,000 customers worldwide. Cybersecurity is all about multiple layers of defense and security awareness training for users is an important component of an enterprise's cybersecurity strategy. With that said, phishing, business e-mail compromise and ransomware are difficult problems to solve, and Cyren Inbox Security offers customers additional and complementary capabilities to security awareness training solutions. As we engaged customers in the market, we learned that many of them had deployed no KnowBe4's platform but also saw value in our automated anti-phishing solution and were requesting integration between Cyren Inbox Security and the KnowBe4 platform. Additionally, Cyren and KnowBe4 before have many mutual channel partners who also saw the value in a combined integrated solution. So customers and partners believe that an integrated solution would provide much greater value and, given this market input, Cyren collaborated with KnowBe4 before to provide integration between our respective products. This integration is available today, and we are working with KnowBe4 to develop a shared road map for the future. It is particularly exciting when customers are the impetus for a partnership and vendors collaborate to provide more value to their mutual customers. We believe there are other partnership and product integration opportunities that may make sense for Cyren Inbox Security and our customers, including the potential to integrate and collaborate with security, orchestration, automation and response platforms, commonly referred to as SOAR platforms, as well as endpoint security solutions. We will continue to explore partnership opportunities that can provide value to our customers and/or accelerate our market traction. As 2022 approaches, we are also evaluating our strategic direction with Cyren Inbox Security. Today, we are focused on addressing phishing and business e-mail compromise threats among enterprises using Microsoft 365 as their corporate e-mail platform. This is a very large market opportunity, with Microsoft 365 being used by more than 1 million companies worldwide and more than 200 million users. Our goal is to achieve a leading position in the anti-phishing market among enterprises using Microsoft 365. With that said, we believe the phishing problem will continue to expand beyond e-mail to other messaging systems within collaboration platforms like Teams, Slack and Zoom; as well as to mobile phone messaging systems, including SMS and WhatsApp. Our vision for Cyren is to be a leading security provider not just for email but other messaging systems as well. And over the coming months, we will be developing our future platform expansion strategy. Let me move to our legacy Threat Intelligence business. In this segment of our business, we provide embedded threat detection and threat intelligence solutions the world's largest e-mail providers, leading cybersecurity vendors as well as managed service providers. Our teams are focused on maximizing customer satisfaction and retention among our OEM customers, many of whom we have long-standing relationships with. We are pleased to report gross retention of 97% in the third quarter with minimal churn and downsell. Additionally, we added several new customers in the quarter. Of course, Q3 is behind us, and our go-to-market teams are now focused on closing out Q4 and calendar year 2021 and continuing to build momentum in the enterprise anti-phishing market. I will now turn the call over to Ken who will go through the third quarter financials.

[Kenneth Tarpey:]

Thank you, Brett, and good afternoon, everyone. I will now present our third quarter 2021 financial results. For more details on 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 U.S. GAAP accounting standards, including nonoperating expenses, and that I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes those nonoperating 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 third quarter 2021 was $7.5 million compared to $9.1 million recorded during third quarter 2020. The decrease in revenue year-over-year is primarily a result of a contract reduction by our largest customer. We had previously disclosed this change, which took effect in Q2 2021. The impact of this customer contract reduction was $700,000 and $1.7 million for the 3 and 9 months ended September 30, 2021, respectively. Other items, which reduced our Q3 2021 revenue were customer renewals at lower values and churn within our legacy business. End of life of several legacy enterprise products during 2020 also contributed to the decline in revenue during 2021. GAAP gross margins for the third quarter 2021 were 50% compared to 58% for Q3 2020. On a non-GAAP basis, gross margins were 60% compared to 66% during the third quarter of '20. GAAP and non-GAAP cost of goods sold during the quarter were roughly in line with the same period as a year ago. So the reduction in gross margin is a function of lower revenue. Third quarter 2021 GAAP net loss was $5.8 million compared to $4.9 million during Q3 2020. On a per share basis, GAAP net loss was $0.07 per basic and diluted share for Q3 2021 compared to $0.08 per basic and diluted share for Q3 2020. On a non-GAAP basis, Cyren's third quarter 2021 net loss was $4.3 million compared to $2.9 million during the third quarter of 2020. This translates to a loss of $0.06 per basic and fully diluted share for Q3 2021 and a loss of $0.05 per basic and diluted share for Q3 2020. As a reminder, Cyren's non-GAAP results exclude a number of noncash 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 selected GAAP to non-GAAP measures. GAAP operating expenses for Q3 2021 totaled $9 million down from $10 million during Q3 2020, a decrease of 7%. On a non-GAAP basis, total operating expenses for the quarter totaled $8.5 million, down from $8.7 million in Q3 and of 2020. During the recent quarter, GAAP R&D expense was $4.1 million compared to $4.8 million in the third quarter of 2020. The main reason for the decrease of GAAP R&D expense during the third quarter is that in Q3 2020, we decided to write off some older technology development that was on the books from R&D projects dating back to 2017 that never materialized into release products. GAAP R&D expense during the third quarter of 2020 includes a onetime nonrecurring adjustment of approximately $700,000 for those terminated projects. During the third quarter of 2021, a we capitalized a lower amount of R&D expense than prior quarters since certain products launched in 2020 are fully launched. As a result, GAAP R&D expense during the period was higher than in prior quarters. The capitalization of these R&D costs reduces expenses, hence, as capitalization decreases, expenses will increase. Another consideration is the lower headcount in Q3 2021 as compared to Q3 2020 R&D headcount, resulting in lower salaries and related costs. On a non-GAAP basis, which excludes the effects of R&D capitalization, R&D expense for the period decreased from $4.2 million in 2020 to $4.0 million in 2021. The GAAP sales and marketing expense for the Q3 2021 was $2.8 million compared to $2.9 million during Q3 2020. Non-GAAP sales and marketing expense was $2.6 million compared to $2.8 million during the third quarter of 2020. G&A expense for Q3 2021 was $2.3 million compared to $2.3 million during the third quarter of 2020. On a non-GAAP basis, G&A expense was $1.8 million compared to $1.7 million a year ago. Employee count at the end of Q3 was 203 full-time and part-time employees, down from 226 full-time and part-time employees at the end of Q3 2020. The overall decrease in operating expenses is consistent with the reduction in headcount year-over-year. During the quarter, we had negative operating cash flow of $4.9 million compared to a negative operating cash flow of $3.6 million during the third 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 multiyear, multimillion dollar prepayment from one of our largest customers in the first quarter of 2019 and a decline in deferred revenue due to down sales on various customer renewals. There was an increase in trade accounts receivable at September 30, 2021, due to a large customer payment of $2.1 million, which was originally due for late Q3 2021 but was not received until early October 2021. Overall, net cash flow for the Q3 2021 was positive $4.1 million and the cash balance was $17.9 million at September 30, 2021. On September 15, 2021, we entered into securities purchase agreements with certain institutional investors, which we agreed to sell an issue in a private placement offering 14,152,779 of our ordinary shares at a purchase price of $0.72 per share and warrants to purchase up to 14,152,779 ordinary shares at an exercise price of $0.60 per share. The ordinary warrants will be exercisable immediately and terminate on March 17, 2025. We also agreed to issue through the placement agent warrants to purchase up to 849,167 ordinary shares, representing 6% of the aggregate number of ordinary shares sold in the offering. The placement agent warrants will have an exercise price equal to $0.90 or 125% of the offering price per share and will be exercisable immediately and will terminate on March 17, 2025. The closing of the offering occurred on September 17, 2021. We received gross proceeds of $10.2 million in connection with the offering. We intend to use the net proceeds received by us from the offering for working capital purposes and repayment of indebtedness. During the second quarter of 2020, we released 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. We continue to believe it will take 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 written notice from NASDAQ of noncompliance as the share price was below $1 for 30 consecutive days. The share price continues to be below $1. On October 6, 2021, we announced that the company received written notification from the Listing Qualification Department of NASDAQ Capital Market, granting the company's request for an additional 180-day extension to regain compliance with NASDAQ's minimum bid price requirement. The company now has until April 4, 2022, to make a requirement. NASDAQ's extension notice has no immediate effect on the continued listing status of the company's ordinary shares on NASDAQ Capital Market. Therefore, the ordinary shares remain listed on NASDAQ Capital Market. If at any time until April 4, 2022, the bid price of the company's ordinary shares closes at or above $1 per share for a minimum of 10 consecutive trading days, the company will regain compliance with the rule and the matter will be closed. The company will continue to monitor the bid price of its ordinary shares and consider various options available to it if its ordinary shares do not trade at the level that is likely to regain compliance. These options include effecting a reverse stock split. There can be no assurance that the company will regain compliance with the rule or maintain compliance with any of the other NASDAQ continued listing requirements. I will now ask the operator to open the lines for question-and-answer.

[Operator:]

[Brett Jackson:]

We'd like to thank everyone for joining us on the call today and your interest in Cyren. We look forward to the fourth quarter of 2021 and keeping you updated on our progress. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.