Cyren Ltd.
Q1 2020 Earnings Call Transcript

Published: 13 May 2020

[Operator:]

Greetings and welcome to Cyren's First Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Eric Spindel, Cyren's General Counsel. Thank you. You may begin.

[Eric Spindel:]

Thank you and welcome to Cyren’s first quarter 2020 financial results conference call. This call is being broadcast live and could be accessed on the Investor Relations section on 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 30, 2020. Any forward-looking statements should be considered in light of these risk factors.Please also note as a Safe Harbor any outlook we present is 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 the call today, we have Brett Jackson, Chief Executive Officer and Mike Myshrall, Chief Financial Officer.With that, I will now hand the call over to Brett.

[Brett Jackson:]

Thanks Eric. I'd like to thank everyone for making time to join our call today.Clearly the first quarter was a challenging time for organizations globally due to the COVID-19 pandemic, and the chaos and disruption it caused. Like most businesses, Cyren took the appropriate steps in March to protect our team by adopting a work from home posture, prohibiting travel, and ensuring that we could maintain a high level of operational readiness to support our customers without disruption.I am proud of our team for quickly adapting to a new style of work while dealing with the effects and constraints of the pandemic. Cyren has teams spread across six countries, so we are used to working virtually, but I've been very impressed with the level of productivity the team has displayed while working from home. That productivity allowed us to stay focused on executing our new strategy.Despite the external challenges, our team achieved our Q1 operational milestones including exceeding our bookings plan, and ensuring a strong contract renewals rate in the quarter. As previously reported, we took actions early in the year prior to the COVID-19 crisis to reduce expenses, and we're fortunate to raise capital in March. These two actions put Cyren in a much stronger position and give us much more flexibility to operate through the crisis.While we hope that the worst of the crisis is over and conditions will improve, the fact is, no one knows when economies and businesses will return to something close to normal. So we intend to continue closely monitoring our business, and making whatever adjustments are necessary to ensure that Cyren is able to support our customers and make progress to build shareholder value.Based on our experience to-date, we firmly believe that cybersecurity remains an important priority among customers and prospects in our target markets. In fact, the threat landscape is more active than ever. Given the remote working environments are now standard. Email-based threats, including phishing attacks that exploit the COVID-19 crisis are clearly on the rise, and various cybersecurity industry analysts have reminded us that the majority of cyber-attacks start with email.Given this, we remain bullish on our strategy and our current and plan cloud-based solutions to protect customers from a variety of threats from email and from the web. In past calls, I've outlined our new strategy and our key growth initiatives. One of these initiatives is to provide enterprises with an email security solution that addresses the escalating evasive phishing problem.After several months of working very closely with a number of early adopters, we launched Cyren Inbox Security for Microsoft 365 on April 27. Cyren Inbox Security is a cloud service that fully integrates with Microsoft 365 and user onboarding is accomplished in a few clicks. It provides an additional layer of security and more effective protection against evasive phishing and business email compromise than legacy secure email gateways.It provides continuous monitoring of inboxes with automated threat detection, driven by Cyren's GlobalView Threat Intelligence, as well as automated response and remediation, saving IT and security team's time and effort. In addition to our automated phishing detection, we have provided a mechanism to engage users by enabling them to easily report suspicious emails, which reinforces security awareness. We are proud of our product team for delivering a unique product to the market on time, and we appreciate our early adopter customers who help guide our efforts.We believe that Cyren Inbox Security addresses a pervasive problem representing a large market opportunity, and we look forward to this new revenue stream. Many of our early adopter customers immediately started seeing value from Cyren Inbox Security. One recent example is a mid-sized company with approximately 1,000 users. Despite having an email security solution already in place from another vendor, they were infected by ransomware, which penetrated several Microsoft 365 mailboxes, and malware infected several computer systems.Cyren Inbox Security immediately detected other compromised accounts and remediated numerous infected mailboxes, saving their IT organization many man hours of work to clean the infections. The customer subsequently rolled out our product to all of its employees, and shortly thereafter signed a three-year contract just days after product general availability.There are currently over 200 million Microsoft 365 mailboxes in service, and we believe there are many that are experiencing similar challenges with phishing. We invite all Microsoft 365 users to try Cyren Inbox Security for themselves, and have added a free trial offer on the Cyren homepage.While the big news has been the release of our new anti-phishing product, our team continues to execute on our other growth initiatives, which relate to leveraging our core threat intelligence services. We aim to grow our already strong position in the OEM market where our threat detection services and threat intelligence data, both powered by our GlobalView security cloud, are used by leading email providers in cybersecurity vendors.We are working hard to enhance our product offerings, and aggressively building pipeline to drive new customer acquisition. In addition to expanding our OEM market position, our product team is executing our roadmap with deliverables to enable us to expand our threat intelligence services into the much larger enterprise market. We look forward to sharing further progress during our next call.I will now turn the call over to Mike who will go through the first quarter financials.

[Mike Myshrall:]

Thank you, Brett and good morning everyone.I'm pleased to present our first quarter 2020 financial results. For more detailed results, please refer to the earnings press release that was issued earlier today, and it's 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 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 reconciliation of our GAAP to non-GAAP results.GAAP revenue for the first quarter of 2020 was $9.6 million, a decrease of $6,000 compared to $9.7 million reported during the first quarter of 2019. On a constant currency basis, Q1 revenue increased approximately $78,000 year-over-year and revenue was also up $120,000 over the last quarter.GAAP gross margins for the first quarter were 63% compared to 59% during the Q1 2019. On a non-GAAP basis, gross margins remain constant at 68% compared to the first quarter of 2019. First quarter GAAP net loss was $2.8 million, a decrease of 40% compared to the $4.6 million net loss reported during the first quarter of 2019. On a per share basis, GAAP net loss was $0.05 per basic and diluted share, compared to $0.08 per share during the first quarter of 2019.GAAP operating expenses for the quarter totaled $8.6 million, down from $10.5 million during Q1 2019. The decrease in operating expenses is mainly due to a reduction in GAAP R&D expense, which decreased from 43% of revenue during Q1, 2019 to 35% of revenue in Q1, 2020.The decrease in GAAP R&D expense during the quarter can be attributed to higher R&D capitalization of technology related to our new product development efforts around Cyren Inbox Security and enterprise threat intelligence offerings. On a non-GAAP basis, R&D expense also decreased from $4.9 million to $4.5 million during Q1 2019 and Q1, 2020.Sales and marketing expense for the quarter was $3 million, compared to $3.9 million during the first quarter of 2019, representing a decline from 40% of revenue to 31% of revenue.G&A expense for the quarter was $2.2 million or 23% of revenue compared to $2.4 million, or 25% of revenue during the first quarter of 2019.As Brett mentioned earlier in the year, we had taken steps to reduce expenses in the business. And as a result, total reported headcount in the company at the end of Q1 was 234 employees compared to 272 at the end of Q1, 2019.These initiatives also had a positive impact on our non-GAAP results. On a non-GAAP basis Cyren’s first quarter 2020 net loss was $2.8 million or a loss of $0.05 per basic and diluted share down from a non-GAAP net loss of $4.4 million and $0.08 per share during the first quarter of 2019. Cyren's non-GAAP net loss excludes a number of non-cash items, including the effect of stock-based compensation, amortization of intangible assets and capitalization of technology. Please refer to the table in our press release for more details on a reconciliation of GAAP to non-GAAP results.During the quarter we experienced operating cash usage of $4.4 million compared to operating cash usage of $1.3 million during the first quarter of 2019. The reason for the higher cash usage for the quarter was that we received a multimillion dollar three-year prepayment during the first quarter of 2019, which distorts the comparison to a year ago.Overall, our cash balance increased from $11.6 million at the end of the fourth quarter to $15.1 million at the end of the first quarter. This includes proceeds from a convertible debenture offering that closed in the third week of March, which was discussed on our last earnings call. As a result of the debenture offering and the previous 2018 convertible notes, we now have approximately $19.4 million in debt on the balance sheet.During the quarter, we renewed two large and longstanding threat intelligence customers to multiyear, multimillion dollar renewals. The customers used a combination of Cyren’s email security engine, malware detection engine and phishing detection services. Both have been customers for more than 12 years. So these contract renewals ensure that they will remain customer for over 15 years, a testament to the sticky nature of Cyren’s products.Brett mentioned some of the challenges related to the ongoing COVID-19 crisis and related economic uncertainty. We will continue to manage our financial resources diligently. I believe that we continue to operate the business through the ongoing crisis. We believe that the security services we offer are mission critical, and at this early stage, we don't believe it will have a material impact on contract renewals or new business specifically related to COVID-19.Our current sales efforts are primarily focused on large enterprise and technology vendors, many of whom are less susceptible to financial impacts from the economic slowdown.I will now ask the operator to open up the lines for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.

[Chad Bennett:]

Great, thanks for taking my questions. Nice job executing in a tough environment guys. So I guess just maybe Brett could you give a little bit of an update on the Microsoft relationship and progress there and kind of what you've seen in terms of penetration into that partner channel?

[Brett Jackson:]

Chad, that's a pretty broad question. So let me just ask a clarifying question, penetration into the broad channel can you be more specific on that?

[Chad Bennett:]

Yes, so what have you seen in terms of uptake with your products in the Microsoft Office 365 base and for your ATP product?

[Brett Jackson:]

Got it. So - let's start with the first piece. So, Cyren Inbox Security is our new anti-phishing product that targets phishing in the Microsoft 365 environment as we talked about. We literally just launched a product. So we don't have any data for you yet on channel uptick. We expect to see signs of uptick over the next 90 days. It is important to note that just after launch, we did sign a distribution agreement with Arrow, a large distributor and that agreement covers distribution of our product in EMEA.We expect to work with Arrow in other geographies as well. Arrow has great reach into the partner ecosystem, especially the Microsoft partner ecosystem. So we think this is an example of some of the initiatives that we will undertake over the next 90 days to launch CIS Cyren Inbox Security into the channel, which will enable us to scale revenues more quickly over time.On the other point on ATP, nothing has changed with respect to Microsoft Defender ATP. As we have previously reported, we've had conversations with Microsoft for a number of months about integrating our web filtering into ATP. Microsoft has yet to make a decision on when or how they will go to market. And that's really all I know at this point. I certainly suspect that the COVID-19 crisis has delayed things even further.So we'll continue to monitor the situation and continue to have conversations with Microsoft as they make their go-to-market decisions.

[Chad Bennett:]

Got it. I appreciate the color there. Then maybe a follow-up from me just on the new inbox security product. Brett, can you just talk about the go-to-market changes you've made and in kind of the addressable market - or at least maybe not addressable market, but near term market opportunity from a direct standpoint for that product?

[Brett Jackson:]

So, I will - it's - I think it's worth mentioning the addressable market share because we spent a lot of time going through a TAM analysis early in the project, and that we think this is a $1 billion plus market opportunity total addressable market. As I mentioned in my previous comments, there are more than 200 million Microsoft 365 mailboxes in production. They dominate the enterprise mail space.So that's the opportunity we're talking about. We have a dedicated enterprise go-to-market team, as opposed to our OEM go-to-market team. We have been building pipeline pre-selling, if you will, Cyren Inbox Security for several months prior to the launch on April 27.So we have a fairly healthy initial pipeline already in place that our teams are focused on converting. And early days, but we're optimistic, you may recall from past calls we have had experience with a number of early adopter customers over the last several months. So we've got a good idea of the kind of value the product can provide customers. And so, we expect to be successful converting this initial pipeline that we've built.Now going further with the product in the market, we have ramped up our demand generation efforts. And we are now moving from pre-selling to selling the product. And as I mentioned with the Arrow example, we will start building indirect channel to complement our direct selling efforts.

[Operator:]

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

[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. Have a good day.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.