Cyren Ltd.
Q4 2020 Earnings Call Transcript

Published: 22 Feb 2021

[Operator:]

Greetings and welcome to Cyren's Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'd now the turn the conference over to your host Eric Spindel. Thank you. You may begin.

[Eric Spindel:]

Thank you, and welcome to Cyren's fourth quarter and full year 2020 financial results conference call. This call is being broadcast live, it can be accessed on the Investor Relations section of the Cyren Web site. 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.

[Brett Jackson:]

Thanks, Eric. I'd like to thank everyone for joining the call today to discuss our Q4 and 2020 results. 2020 was a year of transition for Cyren as we executed a new strategy to enable growth. We brought new products to market targeting the enterprise, wound down legacy SMB offerings, revitalized our core threat detection services business and streamlined our organization. We exited the year having achieved our primary operational goals and gained valuable momentum in the second half that will serve us well in 2021. The key highlight of our fourth quarter was the continued progress with Cyren Inbox Security, our next generation cloud-based email security solution. As we have mentioned in past calls, we see this new product as Cyren's top growth engine based on the size of the market opportunity and the capabilities of our product. Microsoft 365 is the dominant email platform used by enterprises globally and evasive phishing continues to be a problem for IT and security organizations, bypassing existing security measures like secure email gateways. In our opinion, this is a market opportunity with an estimated $1 billion total addressable market. Given this we plan to continue focusing the majority of our sales and marketing investment on penetrating this market, ramping revenues and building market share. Q4 was our second full quarter in the market with CIS. New customer transactions in the quarter increased 30% from Q3 while revenues grew 140%. A few weeks ago, we announced that Sika Group purchased Cyren Inbox Security to help mitigate phishing, rolling out our product to more than 20,000 users across its global operations.

[Mike Myshrall:]

Thank you, Brett, and good afternoon. I am pleased to present Cyren's fourth quarter and full year 2020 financial results. For more detailed results, please refer to the earnings press release that was issued shortly after market closed today and is posted on the Investor Relations section of our Web site. The results released today are in line with our preliminary results which were filed on form 8-K on February 11. 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 a reconciliation of our GAAP to non-GAAP results. GAAP revenue for the fourth quarter of 2020 was $8.4 million, compared to $9.5 million reported during the fourth quarter of 2019. Full year 2020 revenues were $36.4 million, compared to $38.4 million for the full year 2019. As we discussed on prior calls, 2020 was a transition year for Cyren as we retired a number of legacy SMB products in order to focus on new enterprise products introduced this year, and as such, revenues were expected to decline until the impact from new products offset the loss of revenue from discontinued products. As Brett mentioned previously, we saw good traction in the fourth quarter as revenue recognition from CIS increased 140% quarter-over-quarter. Revenue for the fourth quarter also included a one-time non-recurring reduction of $0.7 million for a multi-year customer contract that was restructured. This was related to a single customer who entered into a five year agreement in 2016, who could not fulfill their contractual obligations. The contract was amended and the company remains a loyal Cyren customer. So we do not expect that this contract will be an issue in future quarters. GAAP gross margins for the fourth quarter were 57% compared to 57% during Q4 2019. And for the full year GAAP gross margins remained unchanged at 59%. On a non-GAAP basis, fourth quarter gross margins were 65% compared to 68% during the fourth quarter of 2019 and for the full year 2020, GAAP gross margins were 66% compared to 69% a year ago. Fourth quarter GAAP net loss was $5 million, or a loss of $0.08 per basic and diluted share, compared to $5.3 million GAAP net loss and $0.09 per share during the fourth quarter of 2019. For the full year, GAAP net loss was $17.3 million, a decrease from net loss of $18 million during 2019. This translated to $0.29 per basic and diluted share in 2020 versus $0.33 per share in 2019.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question is from Nick Mattiacci of Craig-Hallum.

[Nick Mattiacci:]

This is Nick Mattiacci and I'm in for Chad Bennett. Thanks for taking my questions, guys. I want to start with kind of a fanatic question. We've heard throughout the security space about how the pandemic has resulted in a pretty dramatic increase in cyber attacks, particularly email phishing. Now, you guys spoke about this a little bit. But are you seeing customers recognize this critical issue and to what extent does this driving demand for you guys?

[Brett Jackson:]

Thanks for the question, I think prior to the pandemic, we knew, based on research and a lot of analysis of the Microsoft 365 market that phishing was a major threat. And certainly, in most cases, it's not an annoyance. And the pandemic, with virtual working environments has certainly made that worse. So there was existing demand prior to the pandemic. And that demand has only increased because of the pandemic driven virtual work environments. So we still feel strongly about the opportunity whether there's pandemic or not, we've got good data that customers are looking for help with evasive phishing across their enterprises.

[Nick Mattiacci:]

Got it. I think last quarter, you guys set a target for 100,000 active users on CIS by the end of the year. Could you give us an update on where you ended the year in terms of seats and maybe an idea of how these things have drove throughout?

[Brett Jackson:]

Well, we are not at this point ready to share a projection on growth. But we feel good about the achieving our objective and that we laid out in our previous call. And as we mentioned, we saw 30% increase in transactions from Q3 to Q4. We've got a strong pipeline in Q1 with some good size transactions as well. So we're on the right path in terms of seat growth and meeting our internal expectations.

[Nick Mattiacci:]

And then maybe on that same note, could you expand about the opportunity that exists now begin in the Azure and Palo Alto marketplaces and kind of your thoughts on that?

[Brett Jackson:]

Well, I think the marketplace opportunities that we have both with Azure and the Palo Alto marketplace, give our products visibility into the enterprise. As you remember, may remember from past calls, we are refocused on growing the enterprise business away from the SMB. That was Cyren's sort of traditional target market. And it's all about getting visibility inside large enterprises. And we'll do that through our -- sales force through channel partners. But also relationships and these two marketplaces are great examples of ways for us to get our product exposed to enterprise customers and make it easier for enterprise customers to evaluate our offering and purchase our offering, frankly.

[Nick Mattiacci:]

Okay. Can you help me with kind of a framework for thinking about Q1 revenues? I don't see CIS is growing at a rapid rate quarter-over-quarter, but and that become -- if you actually kind of push overall sequential revenue growth, then, of course, any other key item that I should think about Q1 revenue?

[Mike Myshrall:]

So as we mentioned, the Q4 revenues were impacted by a one-time non-recurring adjustment to revenue. So we do anticipate that Q1 revenue will rebound over the Q4 revenue number. CIS is still a growing component of overall revenue. And so we don't anticipate that it's going to have a significant overall impact on Q1 quarterly revenues, but it will be a rebound over Q4.

[Brett Jackson:]

Just to echo what Mike mentioned, it's where our Inbox Security has been in the market now two quarters, Q3, Q4 last year. We're into its third quarter. So we're still very much in the ramping phase of this new product. So we will not be -- its revenue contribution will not be material in Q1. But we are encouraged by the growth opportunity there. And we believe there will come a time where its revenue contribution will be material, as we've mentioned, we see it as our biggest growth opportunity. And again, plays into the enterprise space. So we're still excited about that opportunity and it's a new product. So it's a journey over the course of multiple quarters.

[Nick Mattiacci:]

And then, maybe one last one for Ken, if he is on the call, I just want to get his take on kind of what motivated him to join Cyren, what aspects of the business is he most excited about? And what it will be kind of it's the first year at this company.

[Ken Tarpey:]

Okay. Sure. Hi, this is Ken. Nice to meet you, look forward to catching up further. From my standpoint, I've known about the company for a little bit and had the opportunity in my last company to deal with a financial loss to the phishing and understand the monetary value of what the company's offering with CIS. And that what's to me was very intriguing, obviously, a great set of investors in the company and a long-term track record for the company with a great customer base. So for me with all of the various types of companies I have dealt with before, it just had the right ingredients to get engaged with another public company, dealt with a number of time and try to help Brett and the collective team to capture that opportunity.

[Operator:]

At this time, it appears we do not have any further questions.

[Brett Jackson:]

Okay. We'd like to thank everyone for joining us on the call today. I look forward to keeping you updated on Cyren's progress over the coming quarters. Thanks.

[Operator:]

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.