Cyren Ltd.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Greetings, and welcome to Cyren's First quarter Earnings Conference 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, Chad Rusek, thank you. You may begin.

[Chad Rusek:]

Thank you, and welcome to Cyren's first 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 Form 10-K filed on March 31, 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.

[Brett Jackson:]

Thanks, Chad. I'd like to add my welcome to everyone for today's call. Cyren's primary focus continues to be our biggest growth opportunity, helping enterprise customers using Microsoft 365 combat phishing-ish attacks. While our Q1 revenues were down year-over-year, they were in line with internal expectations and the year-over-year revenue variance is largely attributed to churn associated with legacy products. We continue to execute our plan to develop a leading position in the anti-phising market with Cyren Inbox Security. Good progress was made in Q1, continuing the process of building this new high-growth revenue stream. As we continue engaging with prospects, we remain extremely bullish on the market need for Cyren Inbox Security based on our view of the severity and breadth of the phishing problem among enterprises. Phishing clearly remains a top concern among chief security information officers, and we believe this will continue to be the case going forward. Our value proposition resonates with prospects, and our unique approach to the problem as well as our competitive differentiation are compelling to buyers. We offer continuous detection of evasive phishing attacks at the Inbox and offer a CrowdSource framework for end users, IT administrators and security operations personnel to report phishing as well, leveraging both artificial and human intelligence to prevent phishing attacks. Most importantly, we provide automated remediation and incident management capabilities to increase the speed of response to threats and neutralize them quickly across an enterprise. Additionally, our approach provides an automated solution to a traditionally manual process saving IT and security organizations valuable time and effort in addition to providing faster response time to threats. Q1 was our third quarter in market with Cyren Inbox Security. In Q1, we saw quarter-on-quarter ARR growth as we continue to acquire new customers as well as expansion of some existing customers protecting additional users as well as providing our add-on 24/7 incident response service.

[Ken Tarpey:]

Thank you, Brett, and good afternoon, everyone. I'm pleased to present our first quarter 2021 financial results. For more detailed results, please refer to the earnings press release and the first quarter 2021 Form 10-Q that was issued today and is posted on the Investor Relations section of our website. 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 first quarter of 2021 was $8.8 million, a decrease of $800,000 compared to the $9.6 million reported during the first quarter of 2020. On a constant currency basis, the Q1 revenue decreased approximately $300,000 year-over-year and revenue was actually up $400,000 over the fourth quarter of 2020. GAAP gross margins for the first quarter were 57% compared to 63% during the Q1 2020. On a non-GAAP basis, gross margins for the first quarter were 65% compared to 68% during Q1 2020. First quarter GAAP net loss was $4.2 million, up 50% compared to the $2.8 million net loss reported during the first quarter of 2020, mostly due to lower revenues and higher R&D expenses compared to the prior year. On a per share basis, GAAP net loss was $0.06 per basic and diluted share compared to $0.05 per share during the first quarter of 2020. GAAP operating expenses for the quarter totaled $9 million, an increase from $8.6 million during Q1 2020. This increase in operating expenses is mainly due to an increase in GAAP R&D expense, which increased from 34% of revenue during Q1 2020 to 49% of revenue in Q1 2021. The increase in GAAP R&D expense during the quarter can be attributable to lower R&D capitalization. On a non-GAAP basis, R&D expense also decreased to $4.3 million in Q1 2021 compared to $4.5 million in Q1 2020.

[Operator:]

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

[Chad Bennett:]

Brett, I see in the release, it looks like you guys signed a pretty material customer for CIS in the quarter. I think it was Sika Group. Can you just give us color on kind of how that deal came about? And then what existing technology, security technology around email they were using that they felt what’s lacking and what the opportunity was to actually win that business?

[Brett Jackson:]

Thanks, Chad. Yes, that transaction was closed earlier, but we announced that transaction to the market in the first quarter. Sika is a Swiss-based organization. They've got offices around the world. They were experiencing phishing problems. They did not have a solution in place other than secure e-mail gateway. And we engaged with their security operations personnel, who were interested in gaining visibility into the problem across their global operations. They evaluated our product, and they were happy with the results that we delivered. We gave them visibility across all their operations. And when we leveraged our automated phishing detection capabilities, we could eliminate the phishing e-mails from inboxes across their company, which was a huge timesaver for them. They were also impressed with our ability to engage users in what we call CrowdSource detection. So as users engage with their e-mail account, some of them have received training. Some of them are just knowledgeable about what phishing attempts look like, and we gave them the ability to report those phishing attempts as well in addition to our automated detection. So it was a very nice fit with our product and Sika's needs. It's a global operation and phishing tends to be a bigger problem in larger organizations. In this case, we rolled out to 25,000 users across 100 -- I think it was 100 different sites. So we're helping them get a hold of the problem and successfully remediate these attacks.

[Chad Bennett:]

Okay. And then just a follow-up on the commentary on CIS pipeline growth in the quarter looked pretty good. I think you indicated up 100% sequentially. Just any color into kind of the deal size and kind of verticals that you're seeing early traction in for CIS?

[Ken Tarpey:]

So it's a phishing -- first off, Microsoft 365 is used by enterprises across multiple verticals. So -- and the phishing problem is also across vertical issue. So the second point I would make is that as we get into the market further with our own sales efforts and as we recruit more channel partners, we are getting into larger opportunities. And that's the biggest change to our pipeline, a greater number of large opportunities. And I'm talking about opportunities that range in size from 10,000 users to probably a maximum of close to 100,000 users.

[Chad Bennett:]

Then last one for me. Any kind of color, I know it's still early, but reaction from the e-mail security market to the proof point transaction? And if you believe that's potentially an opportunity for you or any color you could provide, then I'll hop off.

[Brett Jackson:]

I didn't hear the first part of the question.

[Chad Bennett:]

The proof point takeout? Any commentary on there opportunity for you guys or otherwise?

[Brett Jackson:]

Yes. I think it wasn't surprising. I think the proof point is in a variety of businesses, but the security e-mail gateway business has been commoditized. And I don't think represents a great growth opportunity. So it's not surprising. The transaction was not surprising. I do think it's an opportunity for us, but we believe that all along that Cyren Inbox Security is a next-generation e-mail security product and the current landscape of securing mail gateway products and vendors just don't solve the problem. So we will continue to pursue the opportunity and prove to customers that we provide value over and above their legacy security mail gateway products.

[Operator:]

Our next question comes from Michael Gaomei, a Private Investor. Please proceed with your question.

[Unidentified Analyst:]

I was inquiring about -- I noticed you're doing a lot of enterprise customers. Are you also doing - willing to work with governments? That's my first one.

[Ken Tarpey:]

We have not. We do not have as part of our strategy, an initiative to pursue governments. It's not out of the question. The most obvious opportunity for us is the enterprise at the moment. And I think as we gain traction, we will continue to consider other opportunities and government may be one. But it's not currently in our plan for 2021.

[Unidentified Analyst:]

Is there any merger talks?

[Brett Jackson:]

No. We don't comment on speculation around mergers as a practice.

[Unidentified Analyst:]

And having this Sika, I noticed that was it -- you didn't say who it was that you lost your contract from your last Q, like a part of your contract? Was it through Sika that you lost part of the contract or am I missing something there?

[Brett Jackson:]

No. Sika was a new customer. So I'm not aware of what you're referring to.

[Unidentified Analyst:]

There was -- on your last quarter or your earnings, you were seeing that you -- as of April 1, you're going to be on one customer you lost part of the contract, I guess, because maybe from your -- if you can elaborate on that one? Why did we lose part of that contract? That's why your sales were down, I was assuming?

[Brett Jackson:]

No. Not aware of that. Not aware of what you're referring to.

[Unidentified Analyst:]

Okay. I deleted it. So it's like -- okay. And that was it. Just those two, like there's merger and just if you give me strictly on enterprising and from your last questioner I heard that you were building up bigger and bigger for enterprise. And so do you work with other groups, too, like casino groups and that kind of stuff too or strictly 365 web mail?

[Brett Jackson:]

So we are -- with our Cyren Inbox Security product, we are currently focused on Microsoft 365, which is the most popular e-mail platform within enterprises, and we are looking at the market very broadly. So while there may be some concentration in particular verticals, it's a very horizontal problem. Phishing is, it's a very horizontal problem. So I think your question was about the gaming industry?

[Unidentified Analyst:]

Yes. Like besides just doing the 365, would you be working with those type of groups as well?

[Brett Jackson:]

We'd be looking for phishing opportunities among Microsoft 365 customers across multiple industries.

[Operator:]

There are no further questions at this time. At this point, I'd like to turn the call over to Brett Jackson for closing comments.

[Brett Jackson:]

Thank you all for joining us on the call today. We look forward to keeping you updated on Cyren's progress over the coming quarters. Thanks.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.