Cyren Ltd.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Greetings and welcome to the Cyren's Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Eric Spindel, General Counsel. Thank you, sir. You may begin.

[Eric Spindel:]

Thank you, and welcome to Cyren's Third Quarter 2020 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 as filed on March 30, 2020. Any forward-looking statements should be considered in light of these risk factors.

[Brett Jackson:]

Thanks, Eric. I'd like to thank everyone for making time to join our call today. During the third quarter, Cyren reported revenues of $9.1 million. While Q3 revenues were down slightly year-over-year, it is important to point out that our results do not yet reflect material contribution from our growth initiatives, although significant progress on that front was made in the quarter. The key highlight of the quarter related to driving future revenue growth is the progress that was made with our next-generation e-mail security products, Cyren Inbox Security. Q3 was our first full quarter in market with this new product. Based on our customer engagements to date and Q3 customer wins, we believe that CIS is Cyren's most compelling new opportunity, and we believe that it can generate a significant new enterprise revenue stream over time. Given that our top corporate priority is to grow revenues, it is clear that CIS is our most impactful initiative and the key growth driver for Cyren. We will focus on it and fund it accordingly. As a reminder, Cyren Inbox Security, or CIS, as we know it internally, is a cloud-based e-mail security offering with a 100% subscription-based recurring revenue model. CIS provides continuous inbox monitoring and automated response and remediation for phishing, business e-mail compromise and malware threats that have penetrated existing defenses such as traditional secure e-mail gateways. CIS provides an important additional layer of defense, is easily integrated with Microsoft 365 and on-boarding large numbers of users is accomplished quickly and painlessly. And as we have mentioned in past calls, leading security market research firms, like Forrester and Gartner, have reported on phishing as one of the biggest e-mail security threats organizations face today. During the third quarter, both of these organizations recognized Cyren and Cyren Inbox Security as a solution to this widespread problem.

[Mike Myshrall:]

Thank you, Brett, and good afternoon. I will now present our third quarter 2020 financial results. For more detailed results, please refer to the earnings release that was issued this afternoon 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 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 our press release for a reconciliation of our GAAP to non-GAAP results. GAAP revenue for the third quarter of 2020 was $9.1 million compared to $9.5 million during the third quarter of 2019. The revenue decrease is primarily related to the end-of-life of some of our legacy offerings on the Cyren Cloud Security platform, including Cyren Web Security, and the installed base is winding down through 2020 and into mid-2021. The lower revenue recognition during the period is partially attributed to the decline of revenues associated with those products. GAAP gross margins for the third quarter were 58% compared to 60% during the Q3 of 2019. On a non-GAAP basis, gross margins were 66% compared to 69% a year ago. GAAP cost of sales during the quarter was slightly higher than it was in the same period a year ago due to the increase in amortization of capitalized technology and increased depreciation expenses.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Nick Mattiacci with Craig-Hallum. Please proceed with your question.

[Nick Mattiacci:]

This is Nick Mattiacci on for Chad Bennett. First, I just wanted to start out with a little bit more of your view on the environment you saw in Q3. And if you can kind of compare that to what you saw in Q2? And then maybe if you could give us some color on what you've seen so far in this quarter Q4?

[Brett Jackson:]

Nick, can you be more specific about what you're referring to?

[Nick Mattiacci:]

Yes. Whether it's deal cycle lengthening or your pipeline? Or anything like that, just kind of how that progress like the overall environment over the past couple of quarters, if those kind of metrics or indications have been improving or not?

[Brett Jackson:]

Sure. Yes, let's put this in the context of COVID because I think in Q2, we were -- as the pandemic started to take hold of various economies, we did not see impact to our business. We felt that pipeline growth was continuing as normal, and did not see any major impact on renewals. As we got through Q3, I think our sales teams noticed that it was more challenging to engage with new prospects that might have been a combination of spending reductions from COVID-19 or people working from home and being less available for some reason. But we did see our prospecting efforts become a bit more challenging in the third quarter. And I think that was the biggest thing we saw. We also saw customer buying processes, in some cases, extend more than we saw in the second quarter. So those are the two key comments I would make about the differences from Q3 to Q2.

[Nick Mattiacci:]

Got it. And then just to dig a little deeper on the -- some of the enterprise initiatives you guys have gone on. Could you talk about the pipeline you're seeing for both Cyren Inbox Security and Threat InDepth? And then also, if you've learned anything new, I guess, in this quarter, whether it be feedback from customers? Or on the competitive front how these products have been in the market for another quarter?

[Brett Jackson:]

Yes. The Cyren Inbox Security is the -- for us, is the big story of Q3. As I covered in my comments, we've now had several months of the product in market, and we were able to get hands-on experience. We've had very positive feedback. I've been in software for a long time, and this particular product launch was far better than most I've done, largely because the product market fit seems to be so strong. And as I said in my comments, that's likely due to our team working very closely with a number of early adopter customers well in advance of general availability. So we know there's a large problem in the market. It's common knowledge that phishing is causing Microsoft 365 customers a problem. The larger the organization, the bigger the problem is. We have engaged with enough customers to know that, that problem really does exist. We can confirm that. And we can confirm that product market fit is better than we expected it to be. In other words, we're not -- our product teams are not scrambling to add additional functionality to the product to allow us to compete. So when we get into an opportunity, more often than not, we're winning. So that is -- that's the big news of the quarter. Threat InDepth is a repackaging of our -- the threat intelligence that we offer our OEM customers, but this is pointed at the enterprise. That is a newer offering that really just got to market. So we're still in a phase of dealing with early adopters and ensuring that we've got product market fit. So there's opportunity there, but the big story for us is Cyren Inbox Security and the success we've had and reaffirming our belief that it's a big mark opportunity, and we need to work as hard as we can to capture as much of that opportunity as soon as we can. And we're -- again, we're encouraged with win rates, really high win rates. And now it's a question of getting into as many opportunities as possible and building our channel as quickly as we can.

[Nick Mattiacci:]

Awesome. That was good color. And then just kind of one housekeeping thing. The mix of OEM and enterprise still about 80-20 in Q3 and then kind of how should we think about that mix changing in the future, whether it be next quarter or next year?

[Mike Myshrall:]

Yes. So it's still roughly 80-20. With the new bookings growth on the enterprise side, we do anticipate that enterprise will become a larger piece of the pie over the coming quarters. And so you should see that increase in Q4 and Q1 and Q2 next year.

[Brett Jackson:]

Yes. Our focus, Nick, is we've got a stable OEM business that's been around for a while, some strong customers, but the real growth opportunity for us is in the enterprise and today, it's Cyren Inbox Security. And so that's the focus. And we'd like to see that mix shift more aggressively. Time will tell how well we do, but that's what we're focused on.

[Operator:]

There are no further questions at this time. I'd like to turn the call back over to Mr. Jackson for any closing remarks.

[Brett Jackson:]

I'd like to thank everyone for joining us today and your interest in Cyren. We look forward to a strong finish to 2020 and keeping you updated on our next call in 2021. Thank you.

[Operator:]

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