Cyren Ltd.
Q2 2019 Earnings Call Transcript

Published: 14 Aug 2019

[Eric Spindel:]

Thank you and welcome to CYREN's Second Quarter 2019 Financial Results Conference Call. This call is being broadcast live and can be accessed on the Investor Relations section of the CYREN's 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 outline in the Risk Factor section of our SEC filings, including our annual report on Form 10-K filed on March 29, 2019. 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 obligations to revise any forward-looking statements in the future. Also during the course of this conference all, we may discuss non-GAAP measures when talking about the company’s performance. Reconciliations to most directly comparable GAAP financial measures are provided in the tables in the earnings press release issued earlier 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 a non instead of GAAP measures. Also on today’s call we have Mr. Brett Jackson, Chief Executive Officer and Mr. Mike Myshrall, Chief financial officer.With that, I will now like to turn the call over to Brett.

[Brett Jackson:]

Thanks, Eric. Good morning, everyone and thank you for joining us on the call today to discuss CYREN's second quarter 2019 financial results. I joined CYREN as CEO during the second quarter and my first 100 days were largely spent getting to know our team, learning as much as possible about our business and establishing - establishing clear priorities and objectives. I'm very impressed with the quality and expertise of our team and their commitment to CYREN. And while I have much more learning to do, I think I have a good sense of our opportunities, as well as some of our challenges.In terms of second quarter performance, CYREN finished the quarter with $9.7 million in revenue, which was up 6% year-over-year compared to Q2 2018. While this represents relatively modest growth, it is our largest quarter to date and it should be noted that the year-over-year comparison is challenging given that we closed a significant contract with Microsoft in Q2 2018.During the second quarter, we added a number of new enterprise customers and our enterprise annual recurring revenue is now approximately $6.8 million, up 26% from a year ago. We renewed over 200 enterprise customers in the quarter and CYREN’s largest enterprise customer now has approximately 130,000 active seats.Also during the quarter, we closed a significant up sale contract with one of our largest Threat Intelligence customers. This long standing customer has been a CYREN customer for 14 years and this latest contract expansion is an indication of the long term value that CYREN provides to its threat intelligence customers.We previously discussed additional products and services that we have in our product development pipeline and our most exciting new product is a next-generation enterprise class, anti- phishing solutions called CYREN Inbox Security. The need for new approach is to combat phishing attacks is well-documented in the security industry and Gartner recently released a comprehensive market guide for email security in which they identified a new market segment called the Cloud Email Security supplements, which focuses on specific threats like phishing, by leveraging cloud technologies for detection and remediation.CYREN was among the vendors identified in the Gartner report and we feel that our CYREN Inbox Security solutions will fit squarely into this market segment and address the needs of enterprise customers who are not receiving adequate phishing detection and remediation from their primary email security provider.We've been working with early adopter customers to test and refine our offering and currently expect that the CYREN Inbox Security product will be generally available for sale in the second quarter of 2020.Earlier this year, we also announced a partnership with Microsoft to integrate CYREN web security technology directly into the Windows Defender Advanced Threat Protection platform. This product is currently available to select Windows Defender ATP enterprise customers in a private preview, being conducted by Microsoft and we expect feedback over the next one to two quarters. If successful, this product will become generally available for all of Microsoft's ATP customers.Rounding out the highlights, we have strengthened our leadership team with the addition of Dr. Richard Ford, as our new Chief Technology Officer and Bruce Johnson, as our new VP North American sales. Dr. Ford joined CYREN from Forcepoint, where he served as Chief Scientist and he's got over 20 years as a researcher of anti-malware and advanced threat detector for a variety of companies including IBM Research.Bruce Johnson, our new North American sales leader brings more than 20 years of enterprise sales leadership and cybersecurity market experience. He has built and led enterprise security sales teams in multiple successful cybersecurity company.As I look forward to the second half of 2019 and into 2020, our top priority is clear and that is to focus on increasing revenue growth. To that end, we have several initiatives underway that we expect will enable more growth, with execution over the occurring - over the next few quarters and contribution anticipated in 2020.We're sharpening our strategy, adding more talent to the leadership team, evaluating our product portfolio in order to concentrate our efforts on our best opportunities and enhancing our key product offerings to provide more value to customers.We are committed to developing world class products and services like CYREN Inbox Security and becoming a more relevant player in the security industry. We look forward to sharing our progress over the coming quarters.With that, I'll turn the call over to Mike to go through the second quarter financials in more detail.

[Michael Myshrall:]

Thank you, Brett and good morning everyone. I am pleased to present our second quarter 2019 financial results. For more detailed results, please refer to the earnings press release which was issued earlier today and it's posted on the Investor Relations section of our website. Please note that we state 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 both non-operating items. Please refer to the table in today's earnings release for a full reconciliation of our GAAP to non-GAAP results.GAAP revenue for the second quarter of 2019 was $9.7 million compared to $9.2 million reported during the second quarter of 2018, an increase of 6% percent year over year. On a sequential basis, quarterly revenues were up approximately $56,000, they were essentially flat when rounded and compared to the $9.7 million reported last quarter.Year to date, we have recognized $19.4 million in revenue, which is up 15% compared to $16.8 million as of midyear 2018. GAAP gross margins for the second quarter were 61% compared to 60% in the same period a year ago.During the second quarter, we recorded less amortization of capitalized R&D expenses down to $0.8 million [Technical Difficulty] during Q2 2018, which accounts for the slight increase in GAAWP gross margins. On a non-GAAP basis gross margins were 69% compared to 71% during the second quarter of 2018.Second quarter GAAP net loss were $4.6 million or a loss of $0.08 per basic and diluted share compared to $4.2 million GAAP net loss and $0.08 per share reported during the second quarter of 2018.GAAP operating expenses for the quarter were $10.3 million compared to $9.7 million during Q2 2018 and down from $10.5 million last quarter. The year over year increase in GAAP operating expenses is mostly due to an increase in R&D which was $4.3 million this quarter, representing 44% of revenue compared to $3.6 million a year ago when it was 40% of revenue. The increase in R&D expense can be attributed to lower R&D capitalization of technology compared to Q2 2018 and a marginally - marginal increase of R&D headcount compared to the same quarter a year ago.Sales and marketing expense for the quarter finished to $3.6 million or 37% of revenue, down from $4.1 million a year ago when it represented 44% of revenue. The decrease is due to lower sales and marketing headcount in the period compared to Q2 2018.G&A expense for the period finished at $2.4 million or 25% a year, compared to $1.9 million and 21% of revenue during the second quarter of 2018. The increase in G&A is related to higher legal expenses during the first half of 2019, as well as additional executive compensation related to the CEO transition that occurred during the second quarter.Overall company headcount totaled 265 employees at the end of the second quarter 2019 compared to 251 employees at the end of the second quarter 2018. On a non-GAAP basis, CYREN second quarter 2019 net loss was $4.1 million or loss of $0.08 per basic and diluted share compared to a non-GAAP net loss of $3.5 million during Q2 2018 or $0.07 per basic and diluted share.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 which are included in the GAAP results. Please refer to the table in our press release for more details on the reconciliation of GAAP to non-GAAP results.During the quarter, we had positive operating cash flow with $0.8 million compared to operating cash flow of $1.1 million during the second quarter of 2018. The positive operating cash flow in the quarter is a result of higher cash collections from customers, including an annual prepayment from our largest Threat Intelligence customer where we collected approximately $5.7 million in the quarter. This payment is also reflected in the increase in short term deferred revenue on the company's balance sheet.Short term deferred revenue totaled $9.8 million at the end of Q2 compared to $5.8 [ph] at end of 2018. Overall, net cash flow for the second quarter was negative $31,000 compared to negative $1.2 million in the second quarter of 2018. We began the quarter with $12.6 million in cash and also finished the quarter with $12.1 million in cash. As a result $10 million – excuse me, as a reminder, we maintain $10 million of long term debt on the balance sheet which is in the form of convertible notes that we issued in December 2018 and which mature in December 2021.During the second quarter, we made our first semi-annual interest payments on the note which amounted to roughly $0.3 million in the quarter of which is $0.2 million of cash and the rest was issued in shares.I will now ask the operator to open up the line for Q&A.

[Operator:]

Thank you. [Operator Instructions] The first question is coming from the line of Chad Bennett, Craig-Hallum. Please proceed with your question.

[Chad Bennett:]

Great. Thanks for taking my questions. Brett, now that you've been there for a few months now, it's good to hear the top priority is obviously growth considering the space you're participating in. I guess, what do you think and not that your evaluation done by. But what do you think you guys can do better and or maybe kind of what’s the opportunity that that maybe you haven't been capturing or the company hasn't been capturing today that you think is ahead of you?

[Brett Jackson:]

Well, I think there's two questions in your question Chad and I'll try to touch on both. The revenue growth - by the way revenue growth is clearly our top priority and I do think we have opportunity to accelerate growth. When I think about revenue growth there are multiple elements involved, strategy, including product strategy, competitiveness of our products, our individual products, our portfolio, how we're positioning and messaging, how we're going to market et cetera. So we're looking at all of those elements as we think about improving revenue growth.When it comes to the opportunities that I see at this point, I would say first and foremost, I feel very enthusiastic about the opportunity. I think we have in the emerging anti-phishing market.We have a very exciting new offering. We've been working with early adopters on refining that as I've mentioned. And I think this could be a very interesting space for CYREN. It plays to some of our historical strengths. That's number one.Number two, I think we still have opportunities in the Threat Intelligence space. And I think we'll put a bit more focused on exploring and exploiting those opportunities. And then finally, we're also working on identifying new market opportunities [Technical Difficulty] and looking for creative way to leverage our technology assets, which you probably know we have we have a fairly extensive portfolio of technology, so how can we leverage these assets against other new opportunities in the space.

[Chad Bennett:]

Great. I appreciate the color there. And then maybe next question around the Windows Defender ATP partnership and maybe I'm a little bit off on the timing, but has the kind of release or full GA [ph] of the integrated product by Microsoft to that base. I guess, I was under the impression you know we start to see that second half of this year or Microsoft kind of unleash it in the second half of this year. Has that been delayed or can you just give us a progress update their relative to what I was thinking?

[Brett Jackson:]

Sure. I think as I mentioned in my earlier comment, Microsoft has initiated a private preview with some of their largest enterprise customers. And we expect that to take place over the next couple of quarters and we should be getting feedback throughout that process.Any timing on general availability of the product would come after that private preview. So our view is we'll know more in the next couple of quarters and we will keep shareholders and investors updated as we learn more. But that's in Microsoft's control.

[Chad Bennett:]

Yes. Understood. But ever everything you kind of see here, your feedback it's kind of go into plan Brett?

[Brett Jackson:]

Yes I've - the most recent update we've gotten is that everything is generally on plan and we'll continue to monitor and share our insights when we have them.

[Chad Bennett:]

Okay. I appreciate. And maybe one last one for me then I'll hop off, maybe a clarification real quick to those, you guys were speaking a little faster or Mike was on some of the metrics, the ARR metric you gave Mike was that $6.8 million?

[Michael Myshrall:]

Yes. On our enterprise business the ARR is approximately $6.8 million.

[Chad Bennett:]

And that’s effectively the CSS business correct?

[Michael Myshrall:]

Correct.

[Chad Bennett:]

Okay. And that was up 26% year-over-year?

[Michael Myshrall:]

That's correct. Yes.

[Chad Bennett:]

Okay. And then just following on that and maybe it's a question for both you guys. I mean - what - I mean that that business has been progressing. The volatility I guess I'd say of growth has been pretty wide. I mean what - considering the scale, considering the space and opportunity, what should that business grow at annually in your mind, maybe looking out to 2020?

[Michael Myshrall:]

So you're right, there has been some volatility related to the growth and part of it has been when we signed some larger customers last year, they had a more significant impact on the ARR growth in the period. So we started this business with a relatively small subset of the enterprise space. A lot of them more SMB and SME customers and when we added a very large enterprise customer it had much more positive impact on the ARR growth in the second half of last year. Brett may comment on the longer term growth plans.But we would want this business to be growing at least as fast as the market, which is roughly 30% to 40% year-over-year. And if we were to become a leader in the space, we want to achieve even higher revenue growth.

[Chad Bennett:]

Great.

[Brett Jackson:]

So Chad, as part of that, I think one of the initiatives that we have taken is to review our product strategy, our individual offerings, including CCS and make sure we've got the right strategy and the right roadmap of key enhancements that we think are necessary to improve growth. And that's an ongoing process right now.

[Chad Bennett:]

Got it. All right. Thanks for taking my questions.

[Operator:]

[Operator Instructions] The next question is from the line of Dan Drawbaugh with B Riley. Please go ahead with your question.

[Dan Drawbaugh:]

Good morning, guys. Thanks for taking my questions. So I'll just start on the threat Intel customer expansion in the quarter. Can you provide us a little more color on maybe what additional services they're taking, sort of the timing of that given that they just renewed their contract towards the end of 2018 and if possible whether that's kind of - what the annual run rate revenue under that contract is now?

[Brett Jackson:]

So yes, you're correct that, that customer recently renewed at the end of 2018. During the second quarter we expanded the scope not to include new products, but to include new scope of use for the customer as they could use it more widely within their network and with a larger set of end users. And so basically [Technical Difficulty] technology providing to them, protecting literally hundreds of millions of users, and we've expanded that growth to allow them to protect even more users using our technology.The contract itself is one of our top five contract. It's a seven figure deal in one and a half to two million dollar range. And over the most recent expansion increases by about 15% incremental [Technical Difficulty] It is a very [large customer] that both spent spending now for four years, they basically have renewed for another two and a half to three years. So we think it's been a good partnership.

[Dan Drawbaugh:]

Okay, great. Helpful color. And then can you step back a bit and, Brett or Mike, whichever one of you this is most appropriate for, just talk about the pipeline you're looking at in the enterprise business and I know you're kind of working on a review of sort of how you want to grow that.But I mean how deep is that pipeline compared to maybe where you were a couple quarters ago and you've got this one very large customer or any sort of large opportunities that you're looking at or is it mostly incremental?

[Brett Jackson:]

At this point mostly incremental, Dan, but I would say that going back to the elements of revenue growth, one of them is go to market execution and a big part of that is always making sure that we are building quality pipeline at an acceptable rate.And so we have put some new practices in place to allow us to better track quality pipeline growth in the enterprise, as well as Threat Intelligence. And as I mentioned in my comments in North America we have a new sales leader, which I think will be a big help. We're providing more focus on pipeline building in North America.I think we've already got a pretty strong pipeline in EMEA. So - but you know more pipeline is always better and we've got a focus on making sure we're doing that and that is part of the equation to driving more revenue growth.

[Dan Drawbaugh:]

Okay. Understood. From a cost standpoint you know, you mentioned slightly lower sales and marketing headcount year-on-year, if you are now also looking at trying to re-evaluate your product strategies or you go-to-market, I mean does that come back up or do you feel comfortable with the heads that you have?

[Brett Jackson:]

I think I'm comfortable where we are. I'm a firm believer that we have to make sure we've got our plans in place on the product side, including our new product, the Inbox Security Product. And we start to see some results from some of these newer initiatives that we've launched. And when we feel like we've got positive traction its time to think about [Technical Difficulty]

[Dan Drawbaugh:]

All right, fair enough. I'll step back into queue. Thanks, guys for taking the time.

[Brett Jackson:]

Thank you, Dan.

[Operator:]

Thank you. At this time, I'll turn the floor back to Brett Jackson for closing remarks.

[Brett Jackson:]

Thank you all for joining the call today. As we reviewed CYREN second quarter financial results and my initial impression during my first quarter as CEO. I'm very enthusiastic about our opportunity and I'm committed to bringing more value to our current customers and shareholders. Thanks a lot.

[Operator:]

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.