Cyren Ltd.
Q4 2018 Earnings Call Transcript

Published: 13 Feb 2019

[Operator:]

Greetings, and welcome to Cyren Fourth Quarter and Full Year 2018 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 and Corporate Secretary. Thank you Mr. Spindel, you may begin.

[Eric Spindel:]

Thank you. And welcome to Cyren's fourth quarter and full 2018 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 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 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 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 the call over to Lior.

[Lior Samuelson:]

Thank you, Eric, and good morning and thank you to everyone for joining us today to discuss Cyren's fourth quarter and full year 2018 results. Cyren finished the year on a positive note as we reported $9.5 million in revenue and ended the year with $35.9 million in core revenue. For the fourth quarter, revenues were up 26% year-over-year when compared to Q4, 2017. For the full year, revenue finished up 17% over 2017 result and represented the largest annual revenue ever reported by Cyren. 2018 was a year with a number of significant milestones and achievements. Earlier in the year Cyren announced largest ever contract win and extend the contract with Microsoft worth over $20 million over three years. This win was the result of Cyren's industry leading innovation against phishing attacks. In 2019, we expanded our relationship with Microsoft and announced a new partnership to integrate Cyren's Web security technology directly into the Windows Defender Advanced Threat Protection platform. This may have a significant impact on our business in the future. We're also further leveraging the phishing detection ability to develop and launch a next generation enterprise class anti-phishing solution, which we call Cyren Inbox Security. The service is expected to be available during the second quarter of 2019 and we think it will offer a huge leap forward for enterprises who are struggling to deal with the ongoing problem of phishing attacks. And like the existing e-mail security solutions on the market, Cyren Inbox Security will be able to proactively remediate and remove phishing e-mails after they have been delivered to a user's mailbox regardless of who the company is using as an e-mail gateway for the primary level of protection. We believe that this capability will be unique in the industry and will hub generate significant demand for Cyren's e-mail security solutions during the second-half of 2019. Also in 2018, we signed and launched our largest enterprise customer to date on to Cyren Cloud Security platform. A large international company who selected Cyren through a competitive RFP process to provide e-mail security in cloud sandboxing to protect its global workforce. The service was initially launched in Q3, provide 80,000 seat but has since been expanded to over 100,000 employee e-mail accounts. We think that this customer win serves as a good example of the quality and scalability of the Cyren Cloud Security platform, and we look forward to replicate this success with other large enterprise account. For further indication during the fourth quarter we won another competitive RFP process in a 6 figure deal to an enterprise client in Texas worth over 12,000 seats using Cyren e-mail security. This follows a Q4 contract renewal for 30,000 use of deployment at a large educationalist phishing in Colorado. In both of these accounts, Cyren e-mail security was selected for our ability to instantly detect and protect the wide variety of e-mail threats including advanced malware and [indiscernible]. The annual contract renewal is a good indication that the service is working well and that our cloud security solutions improving their scalability. Overall Cyren added dozens of new enterprise customers into our CCS platform during the fourth quarter and for the year Cyren added well over 200 new enterprise customers using either web security, DNS security, e-mail security or cloud sandboxing. The installed base of customers on the CCS platform is now over 1,000 customer and SMB customers ranging in size from a few 100 seats over 100,000 seats. In our Threat Intelligence business during the fourth quarter were renewed two of largest and longest tenured customers. Both customers are marked a $1 million annual accounts and together over contributed over $25 million of revenue to Cyren over the lifetime of the contract. One of the customers renewed for three years at a 17% premium over the previous contract value and will prepay all three years of service which will have a positive impact on deferred revenues and operating cash flow during the first quarter of 2019. Although we did experience some churn in this business during 2018, we remain confident that the majority of our customers will continue to renew their contracts throughout 2019 and beyond. As I mentioned above we announced a new partnership with Microsoft to integrate Cyren web security technology directly into the Windows Defender Advanced Threat Protection platform. Also you may be aware that Microsoft bundles its Windows Defender Endpoint Security Solution within Windows 10 is a free alternative to other antimalware solutions. However, the Windows Defender ATP platform is the premium paid service that has targeted large enterprise customers and Microsoft is developing an ecosystem of security vendors to deliver enhanced security solution. Cyren is honored to have been selected as Microsoft premier partner to add web security technology into the Windows Defender ATP platform and we’re working jointly with Microsoft to integrate Cyren's web security technology directly into the Defender ATP. The new integrated offering will initially be made available as a private preview with a select set of enterprise customer during the first half of 2019 with a goal of reaching generally available data availability for all Windows Defender ATP customers later in the year. We are very excited about this partnership and once released this solution will complement Cyren existing web security offering which includes either a full proxy or DNS only solution deliberate to Cyren cost security. I also wanted to comment on a recent press release which we issued in January. Cyren announced that we are voluntarily delisting from the Tel Aviv Stock Exchange. However, I want to make it clear that Cyren will continue to maintain its headquarters in Herzliya, Israel and operate as an Israeli-registered company. The move is an effort to simplify regulatory filings and concentrate our trading volume onto the NASDAQ exchange. We remain committed to our Israeli shareholder base, but we believe the additional liquidity on NASDAQ will benefit the majority of stock Cyren shareholders. The Tel Aviv Stock Exchange delisting is expected to become effective in April. And with that, I will turn the call over to my Mike. Mike?

[Mike Myshrall:]

Thank you, Lior and good morning to everyone on the call today. I am pleased to present our fourth quarter and full year 2018 financial results. For more details, please refer to the earnings press release which we issued earlier this morning and is 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 then 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 full reconciliation of our GAAP to non-GAAP results. GAAP revenue for the fourth quarter of 2018 was $9.5 million, a year-over-year increase of 26% over the $7.5 million reported during the fourth quarter of 2017. For the year revenues finished at $35.9 million, an increase of 17% over the $38.8 million we reported in fiscal year 2017. On a sequential basis, quarterly revenue declined slightly from $9.6 million reported during the third quarter of 2018 and would have been flat on a constant currency basis. Although we experienced revenue growth in our enterprise business, the marginal decline was due in part to the weakness of the euro and the pound when comparing Q4 to Q3 along with some higher than normal churn in our threat intelligence business during the third quarter of 2018. New and upsell bookings in our enterprise business in the fourth quarter were up 47% year-over-year and for the full year 2018 bookings at our enterprise business were up 182% over 2017. Our annual recurring revenue from the enterprises business is now in excess of $6.5 million and represents roughly 18% of total revenues up from under 15% at the beginning of 2018. During the quarter we added 54 new enterprise logos and for the full year we added approximately 230 new enterprise customers ranging in size from a few 100 seats to our largest enterprise account which now stands at over 100,000 seats. Fourth quarter GAAP net loss was $5.6 million or a loss of $0.10 per basic and diluted share. A $2 million decrease compared to the $7.2 million GAAP net loss reported during the fourth quarter of 2017. For the year, GAAP net loss totaled $19.4 million or $0.36 per share compared to $15.6 million and $0.38 per share in 2017. GAAP operating expenses for the quarter totaled $11 million compared to $9.4 million during Q4 2017 and $10.4 million last quarter. The increase in GAAP operating expenses is primarily related to an increase in R&D expense which finished at $4.8 million in the quarter up from $2.9 million a year ago. This increase is mainly derived from lower R&D capitalization of technology compared to the same quarter a year ago and an increase in our R&D employees during the period. Sales and marketing expense finished $4.1 million in the quarter down from $4.2 million a year ago and G&A expense finished at $2.2 million which also represented a decrease from $2.3 million during Q4, 2017. We finished the year with 279 employees compared to 239 employees at the end of 2017. On a non-GAAP basis, Cyren’s fourth quarter 2018 net loss was $4.4 million a loss of $0.07 per basic and diluted share compared to a non-GAAP net loss of $4.3 million during Q4 2017 or $0.09 per share and $3.3 million and $0.06 per share last quarter. For the full year Cyren’s non-GAAP net loss was $16.1 million or a loss of $0.29 per basic and diluted share compared to a non-GAAP net loss of $12.4 million during 2017 or a loss of $0.29 per basic and diluted share. Cyren’s non-GAAP net loss excludes the 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. During the quarter, we had negative operating cash flow of $5.6 million compared to negative operating cash flow of $2.9 million in the fourth quarter of 2017. Also during the quarter, we invested approximately $0.5 million in capital expenditures and capitalize technology development and received proceeds of $10 million in funding in the form of convertible notes which brought our net cash flow for the period to positive $4 million. The convertible notes have a three year term and mature in November 2021 and carry an interest rate of 5.75% payable semi-annually in cash or cash and shares. The conversion price of the notes were set at $3.90 per share. We began the quarter with approximately $13.5 million in cash and ended the quarter with $17.6 million in cash. This compares to a cash balance of $24 million at the end of Q4, 2017. As Lior mentioned during the fourth quarter we renewed two of our largest threat intelligence customer. We expect to receive a multi-year multimillion dollar prepayment during the current quarter which will have a positive impact on deferred revenues and operating cash flow in the first quarter. That concludes our prepared remarks. I will now ask Doug to open up the lines for Q&A.

[Operator:]

Our first question comes from the line of [indiscernible]. Please proceed with your questions.

[Unidentified Analyst:]

So can you update us on the distributor arrangement in North America with Arrow, if you're seeing any new customers coming into that pipeline yet? What we should expect in terms of potential incremental sales from that channel next year?

[Lior Samuelson:]

So, you know we have a good relationship with them. We expect nice things this year as you know we don't have the data to be able to forecast what kind of our tractional revenue we'll get. I think it will be very positive but as you know we've been working with them and it takes a little bit of time for them as the channel sort of the people that own all the relation with their own distributors. So we're working with onboarding amongst with them and the ones with the distributor. So I think it's going well and as the year progress, I think will increasingly a better result.

[Mike Myshrall:]

And also I'd like to that in terms of the timing we did announce the relationship with Arrow around the middle of the third quarter and spent most of the end of the third quarter and early fourth quarter ramping up and onboarding some of their first resellers onto the program but we did positively recognize revenue from several customers that they brought to the table during the fourth quarter. So we already have our first customers in the door and we expect 2019 will be able to add to that.

[Unidentified Analyst:]

If I can one other question. Just directionally it's a great year, I mean up 17%. Generally directionally between 2019 we add all moving pieces together between the Microsoft expansion and the distributors and large new enterprise customers, also little bit of churn for threat intelligence directionally, and I know you don't give guidance, directionally where should we be thinking for revenues.

[Lior Samuelson:]

Yes, they work well. I think directionally we yield - the direction will continue what you're saying and exactly what the slope of the curve is depends on a variety of factors. I mean I feel relatively positive in a sense that obviously Microsoft and the enhanced Microsoft relationship which we're about to get to. I also think that the product that as you know I mentioned earlier, phishing, is a huge problem in industry and currently there are no good solutions that can solve the phishing problem. We believe that when we come out which is relatively shortly that our solution will be superior to anything in the market currently. We will not only what we do today very, very well protect the phishing attacks as they're incoming and blocking unknown phishing attacks automatically but in case if we miss something or somebody else misses something that we'll be able to have the - we have the ability now that we've developed willing to - in your mailbox and remove the phishing. We think that will be quite - I don't want to say revolutionary but definitely evolutionary and we'll definitely change the landscape of how people protect against phishing attacks. So putting all that together I think it' - any opportunity in development and some of the other areas that we are - you know things look to me, things look pretty positive.

[Operator:]

Our next question comes from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.

[Chad Bennett:]

Nice job on the quarter and the year, guys. So, Mike, just kind of making sure I understand the numbers you went through especially on the enterprise side of the business. So for the year the enterprise side was $6.5 million or is that exit rate?

[Mike Myshrall:]

Yes, that's the exit rate. So it wasn't the revenue recognition for the period but it's the annual contract value of the enterprise customers as we exit 2018.

[Chad Bennett:]

And last year my math is right, 15% of revenue would have been a little under $5.5 million, is that right?

[Mike Myshrall:]

No, I think it was below that. So if you look at the SEC, the annual contract value a year ago in 2017, it was below $5 million. It was probably in the range of about $4 million, $4.5 million. So that grew $4.5 million to about $6.6 million during the year.

[Chad Bennett:]

And, Mike, just in terms of deferred revs, and I know they'll pop probably pretty nicely in this quarter with the Microsoft up front. But deferred revs were down sequentially from the September quarter, and I think a few million bucks or little less than that. Kind of what was the logic for that?

[Mike Myshrall:]

So our deferred revenue is a little chunky compared to same size companies and it's primarily driven by some of our larger threat intelligence customers. So for instance, we received a large prepayment by Microsoft in the second quarter of 2018 and then another annual pre-payment in the third quarter of 2018. And then what you saw is that the revenue is then being recognized throughout the third quarter and in Q1 before there's another increase in deferred revenues coming from Microsoft. So typically they'll prepay a year at a time. In the case of the contract renewal that we mentioned on the call in the fourth quarter, those customers are actually going to prepay three years at a time. So that's going to have an even bigger bump on that deferred revenues, but then we will recognize that revenue over time. So quarter-over-quarter you'll see the deferred revenues continue to decline as we recognize that revenue.

[Chad Bennett:]

So it's just run off from the prepays.

[Mike Myshrall:]

Yes.

[Chad Bennett:]

And maybe one last one for Lior. Just on the enterprise business side of things as you look at the pipeline heading into this year just based on your announcements that we've heard about it seems like on the e-mail side you guys are seeing material traction with that product. Give me a sense of between e-mail and web gateway and sandboxing, the pipeline heading into this year is it still dominated by kind of e-mail functionality or is there something else emerging?

[Lior Samuelson:]

Well. I think that - I apologize, that's kind of a long answer, okay. I think that what you're seeing is you're seeing e-mail continues to be a very serious threat vector, and a lot of people struggling to protect against e-mail, a lot of people some be riding on 365 trial protection edition of security or 365, and I think that's kind of - and you see that from other companies as well. So I think that's impacting us as well. We are - and obviously we are beginning to develop solutions that we believe we'll be in a position to sort of leapfrog where the market is today, and because we think that the simple or let's say the standard mail gateway solution or solving phishing is not sufficient, and will be increasingly solved. So we made an investment and I think putting all our engines together and our cloud infrastructure enable us to do this in a relatively short period of time and I think we will emerge with - I mean it's already working inside the Company now. So that's where we see that, so we think that is - that will be significant for us. Also I think that obviously as you can see from some of the things that we're doing on Microsoft and then what Microsoft is doing on its own and other people that there obviously Microsoft is reacting the challenges on marketplace. And fortunately for us - we have been and now we’ll continue even on a bigger scale be an important part or significant part of their solution going forward where we not only helping Microsoft, but also using Microsoft as a channel to sell directly to enterprises and what's contemplated into Windows ATP agreement that we have with them. So I see that - so that's kind of you look sort of the enterprise side those are sort of kind of where we see the very significant things happening as a result of what's happening in the market. Yes, that's where we see the demand coming, that's where we see the big issues. And in fact the solution that way have worked with Microsoft on is to provide a web security through their endpoint and that sort of in a different way to provide web security - which is quite a bit different than what we have on our web - are normal basically what we call sort of the proxy based on the DNS based what occurred. So it’s just another - it's another venue we think it’s a venue with potentially. I emphasize potentially and venue with huge implications not just for us but also for the market because it's a new way of providing a web security in a through an endpoint in a very sort of for lack better word light touch way.

[Chad Bennett:]

And maybe one quick follow up Lior, when do you think that channel relationship with Microsoft really starts to kick in or you start to see something from that obviously it's early and I think you don't have any idea. But when are they trained and fully selling?

[Lior Samuelson:]

There is a way so - I'm not a - we're obviously not going to speak for Microsoft or whatever I could just tell you what kind of what we see that Microsoft go through a, what they call preview period, a test period that basically were a whole bunch of large customer Microsoft customers get on the system and use it. And then once you get through with that then hopefully you are - we’ll be open to most of all the Microsoft defender, windows defender customers which are their number is just absolutely enormous. So if it works it's going to work really, really well.

[Operator:]

Our next question comes from the line of Mike Wallace with White Pine Capital. Please proceed with your question.

[Mike Wallace:]

Yes, couple of questions just thinking about business seems to be really picking up some momentum here and as you look out towards the end of 2019 can you give us some sense of the percentage of SaaS/recurring revenues versus non-SaaS/recurring revenues. How we think about that?

[Mike Myshrall:]

Yes, so first of all of our revenues are recurring revenues in SaaS revenues. The differentiation where we spud it between our threat intelligence business which are typically not a traditional SaaS prepayment service versus our enterprise business is typically paid for year of service in the time. So as I mentioned on the call that the current breakdown is, there is roughly 18% of our recurring revenue base comes from our enterprise business today and that is coming from under 15% at the beginning of 2018. And we anticipate that that's going to continue to grow and be a bigger chunk of the overall revenue by the end of 2019. Whether that’s above 20%, 25% we don't know yet, but it will be a more significant portion of the revenue.

[Mike Wallace:]

I'm just a little confused on it but should we think of enterprise as being traditional SaaS at 20%-ish range and the rest of the business more traditional revenues? As you know the multiples that people put on those revenues are quite different if there are recurring SaaS versus non. I'm just trying to get a sense of what - how we should think about that?

[Mike Myshrall:]

Yes, we consider 100% of our revenues as SaaS recurring revenues. It's all subscription based services that we sell. The only difference is how the customer pays for us. Typically in a threat intelligence business they pay for an upfront amount which they call a minimum commitment and then either quarterly or annually they'll pay up a true-up amount for extra usage that they use of their minimum. It's a slightly different model than on the enterprise model where they sign up for a fixed duration contract, fixed duration subscription where they prepay for a year of service at a time. But it's all recurring revenues. Most of our threat intelligence customers have been with us for many, many years. Average customer duration tenure is now approaching 8 years in terms of being a customer with us. And so those are recurring revenues and you should consider them SaaS based revenues. The only difference maybe that in the eyes of the market that it may not be completely comparable to another e-mail security or Web security SaaS based subscription because it's more of an OEM model in our threat intelligence business.

[Mike Wallace:]

Probably some differences in - as we think about the P&L, Mike, and capitalize R&D expense that runs through the cost of goods versus expense item, how do you see that playing out over the next 12 to 18 months?

[Mike Myshrall:]

So in the fourth quarter we did capitalize a smaller amount in R&D technology relative to the fourth quarter of 2017 and as a result of that we - you did see that the R&D expense in the quarter was higher than a year ago. We would anticipate that the current run rate that we had in Q4 will probably continue throughout 2019. We're targeting roughly 10% to 15% of our overall R&D efforts are related to technologies that would be capitalized and then over time that would be amortized in the cost of goods sold once the project is launched or once the R&D technology is being sold directly to customers. So short answer is it's a decreasing amount compared to prior years but it will still always be a component of our overall R&D expenses.

[Mike Wallace:]

Okay that's just the way you guys want to account for or you have to account for it that way?

[Mike Myshrall:]

Yes, it's an accounting requirement to capitalize some of this technology and we've looked at some of the other peers in the sector and we're in line with - we're becoming in line with some of the peers as well.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to Management for closing comments.

[Eric Spindel:]

Lior, thank you very much. Thank you for your participation on the call today and your interest in our Company. We are obviously excited about the opportunities that our new product offerings will bring in 2019 and we look forward to reporting our successes to you in the near future. Thank you very much.

[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.