Cyren Ltd.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good day. And welcome to the Cyren Limited Third Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Eric Spindel, Cyren's General Counsel and Corporate Secretary. Please go ahead, sir.

[Eric Spindel:]

Thank you. And welcome to our conference call to discuss Cyren's third quarter 2018 financial results. This call is being broadcast live and 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 will 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 to in the Risk Factors section of our SEC filings, including our annual report on Form 20F, filed on April 27, 2018. 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 Web site. These financial measures are included for the benefit of investors and should be considered in addition to, and not instead of, GAAP measures. With me on the call today are Mr. Lior Samuelson, Cyren's Chairman and Chief Executive Officer and Mr. Mike Myshrall, Chief Financial Officer. With that, I would now like to hand over the call to Lior.

[Lior Samuelson:]

Thank you, Eric, and good morning and thank you everyone for joining us on the call today. We made very good progress over the past three months, and Q3 was an excellent quarter for Cyren. We reported $9.6 million in revenue, which was another record for Cyren. Revenues were up 26% year-over-year. During the quarter, we signed our largest enterprise customer to-date on to the Cyren Cloud Security platform, a multinational conglomerate, which show sign to provide the aim of security and cloud sandboxing to its 80,000 employees .The multiyear multimillion dollar contract was awarded to Cyren after comprehensive RFP process where Cyren was chosen of other well-known email security solutions. We feel good this contract win will serve as a springboard to other significant enterprise accounts in future quarter. Overall Cyren added over 60 new enterprise customers into its CSS email and Web security platform going to third quarter. The first few orders and average contract prior to new customers grew over 190% compared to the third quarter 2017. Year-to-date through the third quarter, enterprise bookings were up 223% over the same period a year-ago, and year-to-date revenue recognition from enterprise customers is up 38% year-over-year. During to the third quarter, Cyren launch a new global channel program called GoCloud. The program provides resellers, managed service providers and distributors, with the opportunity to sale Cyren's 100% cloud security products and generate recurring monthly SasS revenue stream. In August, we announced a channel partnership with Arrow Electronics, which is a province's first major distributor in North America. Cyren is working closely with Arrow to train and certify their network of security product resellers in order to enable them to sell Cyren's full suite of enterprise cloud security services. We have already began to receive our first customer orders from the relationship and think that this partnership with Arrow will serve as a great channel for Cyren to extend our go-to-market in North America. We continue to hear from prospects and customers alike that phishing has become the industry number pain point and is becoming increasingly difficult to detect and prevent. As we disclosed earlier this year, Cyren's technology has been integrated by Microsoft into their Exchange online protection and Office 365 advanced threat protection packages to help combat phishing attacks in Office 365. Due to our global view network where we see billions of securities transactions every day, Cyren is in unique position to the second block phishing attacks in real time. We are working to further refine our anti-phishing technology to be able to proactively remediate and remove fishing emails after they have been delivered to user's mailbox. We guard load of who the company is using as an email gateway for their primary level of protection. We believe that this capability will be unique in the industry and will position Cyren as a market leader in phishing detection and mailbox remediation. We will officially launch the service in early 2019 but expect that it will become a major growth driver for Cyren next year. In our Threat Intelligence business, we continued to renew long-term relationships with many of our largest customers. Since the beginning of the third quarter, Cyren renewed an expanded four of its top 10 Threat Intelligence contracts for extensions ranging up to three years. These four companies have been customers of Cyren for over 12 years and together represent annual contract value of over $6.6 million. Overall, the average contract tenure of our 10 largest customers is over 12 years, which points to the reliability and stickiness of Cyren's industry-leading Threat Intelligence solutions. Last quarter, we talked the launch of Cyren's standalone cloud sandbox service within our Threat Intelligence portfolio. The service leverages our global view database with billions of daily transactions allows for real time threat look up, as well as full forensics on a base of zero day threat. The early adopter feedback was very positive and during the quarter, we signed our first deal on the service and we are seeing additional pipeline that could materialize in the fourth quarter and into 2019. And with that, I'll turn the call over to Mike. Mike?

[Mike Myshrall:]

Thank you, Lior and good morning to everyone on the call today. I'm pleased to present our third quarter 2018 financial results. For more details, please refer to the Q3 earnings press release, which was issued earlier this morning and is posted on the Investor Relations section of our Web site. 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 those 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 third quarter of 2018 was $9.6 million compared to $7.6 million during the third quarter of 2017 and $9.2 million last quarter. Once again, this represents the highest quarterly revenue that Cyren has ever reported and translates to 26% year-over-year growth. During the quarter, we added a multimillion dollar enterprise e-mail security contract in Europe with over 80,000 employees where the annual contract value is in high six figures. We recently added another e-mail security customer in the U.S. with 12,000 employees and another six figure annual contract value. These deals are helping to bring our new average deal size up 185% over the third quarter 2017. And overall, our install base of annual recurring revenue in the enterprise business is up 52% year-over-year. Third quarter GAAP net loss was $4.4 million or a loss of $0.08 per basic and diluted share compared to a GAAP net loss of $3.4 million or $0.09 per share in the third quarter 2017 and $4.2 million or $0.08 per share last quarter. GAAP operating expenses for the quarter totaled $10.4 million compared to $8.1 million during Q3 2017 and $9.7 million last quarter. The increase in GAAP operating expenses is primarily related to an increase in R&D expense, which is derived from lower R&D capitalization of technology compared to last quarter and last year. On a non-GAAP basis, Cyren's third quarter 2018 net loss was $3.3 million or a loss of $0.06 per basic and diluted share compared to a non-GAAP net loss of $3.2 million during Q3, 2017 or $0.09 per share and $3.5 million and $0.06 per share last quarter. Cyren's non-GAAP net loss excludes a number of non-cash items, including the effective capitalization of technology, which is included in the GAAP results. Please refer to the table in our press release for more details on the reconciliation of our GAAP to non-GAAP results. In the third quarter, non-GAAP gross margin increased to 72% from 71% last quarter, and we're in line with the non-GAAP gross margins a year ago. Non-GAAP operating expenses totaled $10.2 million in the quarter, an increase of $0.2 million over the last quarter and up from $8.7 million during Q3, 2017. The increase in operating expenses was largely due to an increased headcount. We finished the third quarter with 261 total employees compare the 239 employees a year ago. During the quarter, we had negative operating cash flow of $2.6 million compared to negative operating cash flow of $0.5 million in the third quarter of 2017. Also during the quarter, we invested approximately $1.2 million in CapEx and an additional $0.4 million in technology developments, which were capitalized. These cash flows were offset by approximately $1 million in proceeds from its employee options exercises. And the net cash usage for the quarter was $3.1 million, which compares to $1.7 million a year ago. The Company's cash balance at the end of the third quarter was $13.5 million compared to $9.9 million at the end of Q3 2017. In addition, we maintained another $0.6 million in restricted cash for a total of $14.1 million in total cash, cash equivalents and restricted cash as of September 30th. In September, Cyren filed a shelf registration statement on form F3 since our last shelf expired in 2017. The registration statement is intended to given Cyren additional flexibility to act to capital markets on a timely and cost-effective basis, and enable the Company to raise upto $50 million in equity or debt over the next three years. Throughout the third quarter, we had a weighted average of $53.7 million shares outstanding, which is reflected in the per share calculations in the Q3 press release. At the end of the third quarter, we had a total of 54 million shares outstanding, which compares to 39.2 million shares outstanding in the third quarter of 2017. That concludes our prepared remarks. I will now ask the operator to open-up the line for Q&A.

[Operator:]

[Operator Instructions] We will now take our first question from Chad Bennett from Craig-Hallum Capital Group. Please go ahead. Your line is open.

[Chad Bennett:]

Any potential guidance for 2019 that you could provide regarding cloud security bookings, potentially?

[Lior Samuelson:]

So we haven't provided guidance yet and we're not yet at a point to provide guidance for 2019. But what we can say though is we expect that the traction that we made in the first three quarters of the year is going to continue into the fourth quarter and we're looking forward to the release of the phishing service in 2019 that should help drive the enterprise bookings more significantly during Q2, Q3 and Q4 next year. So without giving a specific number, we are very bullish on release of the new service and we think things are going well on the enterprise side of the business.

[Chad Bennett:]

Is there booking mix breakdown between email security and web securities that you could provide to get in terms of the overall the deal breakdown?

[Lior Samuelson:]

Well, I think this quarter was skewed a little bit more towards the email securities than historically just because of that larger email security deal that we had in Europe. Historically, what we've seen is a mix of both email and web security. And a number of customers who'll take both email and web together as part of the overall suite of services. But I would say this past quarter on a total dollar value was primarily driven by the larger deal on the email security side. And then we're also seeing a nice mix of users who are opting for the advanced email security packages, which include the cloud sandboxing. And there's been significant interest as well, especially throughout Europe on our DNS security offerings. But overall, I would say that email make up the largest component of our enterprise bookings for the quarter.

[Operator:]

We will now take our next question from Mike Wallace from White Pine Capital. Please go ahead, your line is open.

[Mike Wallace:]

I have a couple questions. Looking at gross margins and I apologize if do this on my own but I'm mobile today. If you excluded the amortized and capitalized R&D costs and others that go through that cost of goods sold by now. If you excluded those, what would be the gross margins this quarter?

[Mike Myshrall:]

So on a quarter on a non-GAAP basis, we're at 72% gross margin.

[Mike Wallace:]

And what was it last year?

[Mike Myshrall:]

So a year ago on Q3 of '17, it was also 72%. But in previous quarter Q1, it was 67% and then went up to 71% in Q2. So it has trended upward throughout 2018.

[Mike Wallace:]

And as you think about this quarter and into '19, would it be safe to say that trend to continue?

[Mike Myshrall:]

Yes, I think it's a function of two things obviously it's a function on the revenue that we recognize. And so as revenue continue to increase, we think that the fixed cost in both operations and support won't increase at the same rate. And so therefore our gross margin should improve. However, we are investing in the operational side of the business, both in the data centers as well as our cloud components. And so on a quarter-over-quarter basis, you are seeing a slightly higher cost of goods sold associated with our operational stats and building out to data centers.

[Mike Wallace:]

I think you mentioned recurring enterprise revenues were up 52% year-over-year, right?

[Mike Myshrall:]

Yes, year-to-date. So if you look at the first three quarters of 2018 compared to the first three quarters of 2017, yes, we're up 52%.

[Mike Wallace:]

And what is that -- can you share that number with us?

[Mike Myshrall:]

I don't have it off the top of my head, but it's north of $6 million now.

[Mike Wallace:]

And the bookings are really strong, outstanding booking. Can you give us some sense of how much of those bookings were recurring revenue bookings or SaaS like revenues versus traditional annual enterprise contracts?

[Mike Myshrall:]

So we consider all of the bookings as recurring revenue, it's all the SaaS based model. And so we break it into the two components, the enterprise business and the threat intelligence business. Both of them are SaaS recurring. The booking traction that I talked about was specifically through our enterprise business or CTS email or CTS web. And so it's growing very nicely in the quarter, primarily as a result of some of the larger deals that we mentioned during the script.

[Mike Wallace:]

And so I think about that, how much cash then was that Cyren collect when you sign those contracts. And how do I -- so when I think about the $13.5 million on the balance sheet and cash. How much of that came from the SaaS contracts?

[Mike Myshrall:]

So it's a little bit higher to derive, because basically our deferred revenue balance is a mix of both the Threat Intelligence business, as well as the enterprise business. Historically, our Threat Intelligence business has not being paid upfront whereas the enterprise business typically prepays a year in advance. But some of this -- in the quarter, cash collection is also related to the time and the invoice and when the company -- and when the customer actually pays the invoice. So even though we might have closed the deal in the third quarter, we may not reflect that cash in the third quarter yet.

[Mike Wallace:]

So as we look into Q4 and into '19. Mike, how should we think about cash building on the balance as you continue to grow the SaaS side of the business?

[Lior Samuelson:]

So as Mike mentioned, we finished the quarter with $13.5 million on the balance sheet. And we are always looking for ways to show up our balance sheet and while making sure or at least paying attention to issues related to dilutions. So we're always looking to shore up the balance sheet and making sure that we have our shareholders in line when we do that?

[Mike Wallace:]

And so maybe final one last question. What do you think as a comfortable cash balance that you need?

[Mike Myshrall:]

Certainly with ending cash balance that we had this quarter, we're comfortable that it provides the runway well into 2019. But as Lior said, if we're able to add additional cash to the balance sheet, it gives us a lot more visibility and it gives us lot more flexibility to invest in the R&D and the sales and marketing. But historically we've operated with cash balances between $5 million and $10 million no problem. And a year ago we had about, I think around $10 million on the balance sheet and we're at $13.5 million right now.

[Operator:]

[Operator Instructions] We will now take our next question [21.28] [indiscernible]. Please go ahead, your line is open.

[Unidentified Analyst:]

[Technical Difficulty] Can you hear me now? Operator…

[Mike Myshrall:]

Yes, we did receive the question. The question was if we sign the largest enterprise deal that we've had in the company's history, why did we wait until now to disclose it? And the basic explanation to that is that contractually, we haven't been allowed to do a press release on this customer contract. They launched service in the third quarter, but they haven't allowed us to disclose their name and so therefore from a contract standpoint, we didn't think that it was worthy of press release at this stage. And so we're hoping that down the road once the customer meet certain milestones that they will allow us to fully disclose their name and we'll do a case study on the win.

[Operator:]

At this time, it appears no further questions. I would like to turn the conference call back to you for any additional or closing remarks.

[Lior Samuelson:]

Ladies and gentlemen, thank you very much for your participation on the call today. We look forward to a strong fourth quarter and a very strong finish to the year. And we'll keep you updated on our future developments. And we very much appreciate you interest in Cyren. Have a nice day.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.