Cyren Ltd.
Q3 2017 Earnings Call Transcript

Published: 13 Nov 2017

[Operator:]

Good day, and welcome to the Cyren Ltd. Third Quarter 2017 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Eric Spindel, Cyren General Counsel. Please go ahead, sir.

[Eric Spindel:]

Thank you and welcome to our conference call to discuss Cyren’s third quarter 2017 financial results. 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 Factor section of our SEC filings, including our annual report on Form 20-F filed on April 27, 2017. Any forward-looking statements should be considered in light of these Risk Factors. Please also note that the Safe Harbor and the 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. Reconciliation for 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. Finally, references on today’s call for the planned tender offer are neither an offer to purchase nor a solicitation of an offer to sell securities. The planned tender offer is not yet commenced. At the time the planned tender offer is commenced, a tender offer statement on Schedule TO will be filed by Warburg Pincus with the SEC, and Cyren will file a solicitation/recommendation statement on Schedule 14D-9, with respect to the planned tender offer. The tender offer statements including an offer to purchase, a related letter of transmittal and other tender offer documents and the solicitation/recommendation statement will contain important information that should be read carefully before making any decision to tender securities in the planned tender offer. Those materials will be made available to Cyren’s stockholders at no expense to them. In addition, all of those materials and all other tender offer documents filed with the SEC will be made available at no charge on the SEC’s website at www.sec.gov. 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 will now like to hand the call over to Lior.

[Lior Samuelson:]

Thank you, Eric and welcome to everyone on the call today as we discuss Cyren third quarter 2017 results. Q3 was an outstanding quarter for Cyren as we continue to build and grow our cloud enterprise business. Before we get into the third quarter results I would like to refer to the announcement we made last week about the strategic investment we’ve received from Warburg Pincus, a global private equity firm focused on growth investing. As we detailed in the press release issued November 6, Cyren raised approximately $19.6 million for Warburg Pincus in a private placement. These funds are not included in our Q3 results, but this strategic investment helps to set the backdrop to discuss the third quarter. In addition, Warburg Pincus announced its intention to acquire up to 75% of Cyren’s partially diluted outstanding shares through a special tender offer. During the third quarter, we continue to gain traction in our enterprise business, adding over 16 new customers to the Cyren Cloud Security platform of email, web, and DNS security. As the size of our installed base grows so too does the size of our customers. During the third quarter, we had a number of large wins including an institution with 30,000 seats, a professional service organization well over 100,000 active email accounts and an expansion contract with a global software company was using Cyren to protect 120,000 employees from phishing, zero day attacks and advance malware. During the quarter Cyren average new order size from enterprise customers increased over 250% and new seat growth was up over 300% compared to the previous quarter. I’d like to illustrate what Cyren is winning these larger opportunities by taking a closer look at a 30,000 seat account that we closed, which we think is indicative of other potential enterprise opportunities in our pipeline. This particular institution was already utilizing a well-known cloud security vendor but continue to have serious problems with phishing emails, the Ransomware and general malware. Over a 30 day period we ran our GAAP analysis tool on almost 6 million live email messages in order to determine its potentially harmful emails we’re getting through their security parameter. The results were quite interesting, Cyren found that over 0.5 million email messages that were let through should have been caught by the spam or phishing, and almost 1,500 dangerous messages were delivered that contain malware or malicious links, including over 1,200 emails that contain no malware signatures. These were all messages that would have been easily blocked by Cyren. By implementing Cyren EmailSecurity plus protection, the institution was able to improve spam detection by over 30% and practically eliminate malicious email by utilizing Cyren’s malware outbreak protection, zero-day malware blocking and time-of-click phishing protection. I would like to point out that many of today’s well-known so-called email security vendors are not security companies. They buy security products in the market, and they integrate them into their email service. This generally results in inferior security. On the other hand, we develop our own security engines and data, which results in what we believe is the best security in the market. Our Cyren Cloud Security platform continues to mature and integrate additional features. We recently launched version 4.2 of the platform, which brings a number of enhancements to our web, email and DNS security. The most notable capability was the addition of email archiving, which simplifies regulatory compliance with email management, protection and retention in the cloud. Fully integrated with Cyren EmailSecurity servers archiving solution offers the same low cost of ownership and industry-leading time-to-protection that can be best achieved in the cloud. The Cyren email archiving service simplifies email management and requires no hardware, software that leaves administrators in complete control of email archiving policy management. Users access their archive with a web browser, a folder and outlook that requires no plug-ins or their mobile device. Search results are returned in seconds. This flexible self-service, along with role-based access, significantly reduces the support burden on email administrators. The third quarter results in our Threat Intelligence business were mixed. As we detailed on our last call, early in the year, we won two large contracts, including one of North America’s largest cloud service providers and a dramatically expanded contract to one of our largest technology customers. Only one of these customers launched service during the third quarter, which had a relatively small impact to Q3 revenue. The second customer is scheduled to launch during Q4, so we will begin to recognize revenue from that contract during the fourth quarter. But as we previously discussed earlier this year, Cyren also terminated several contracts with material customers who weren’t willing or unable to absorb price increase, and this showed a negative impact on Threat Intelligence revenue during the third quarter. However, we have several large opportunities in the pipeline and believe there is an opportunity to offset this decline with significant upside in the Threat Intelligence business in future quarters. As I mentioned at the outset of this call, last week, we announced an investment of Warburg Pincus. As part of the investment, Warburg Pincus is entitled to designate two directors to Cyren Board of Directors, which grows from seven to nine directors. The two directors who’ve been added to the board are Cary Davis and Brian Chang, who were both instrumental in closing the deal with Cyren. We welcome Cary and Brian to the board. In addition, Warburg Pincus announced its intention to launch a special tender offer in order to increase its ownership in Cyren up to a maximum of 75% of Cyren’s partially diluted outstanding shares. Cyren’s Board of Directors resolved to recommend in favor of shareholders tendering their shares in the offer subject to the terms of the purchase agreement between Cyren and Warburg Pincus. The complete terms and conditions of the tender offer will be contained in the Tender Offer Statement, which Warburg Pincus will file with both the SEC and with the Israeli Securities Authorities when the offer is commenced. Upon review of the Tender Offer Statement, Cyren will file a solicitation/recommendation statement of Schedule 14D-9. Cyren is unable to comment further on the tender offer at this time. However, it should be noted that even upon successful completion of the tender offer, Cyren expects to remain a publicly traded company for the foreseeable future. I will now hand the call over to Mike to go through Cyren’s third quarter financial results. Mike?

[Mike Myshrall:]

Thank you, Lior, and good morning to everyone on the call. I am pleased to provide you with a review of our third quarter 2017 financial results. For more detailed results, please refer to the press release we issued earlier today, which is posted on the Investor Relations section of our website. Please note that we state our financials under U.S. GAAP accounting standards, including nonoperating items, and that I will discuss certain financial metrics on a non-GAAP basis, which excludes those nonoperating items. Please refer to today’s press release for a reconciliation of our GAAP to non-GAAP results. GAAP revenue for the third quarter of 2017 was $7.6 million compared to $7.9 million during the third quarter of 2016 and $7.8 million last quarter. As Lior described earlier and we highlighted on the last call, the sequential decline is mostly attributed to Threat Intelligence contracts that were terminated earlier in the year and the timing on new revenues from contracts that are still ramping in the second half of 2017. During the third quarter, bookings growth in our enterprise business was up over 150% over the previous quarter, driven primarily by an increase in the average new order size by over 250%. The deal size, both in terms of dollar value and number of seats, was up substantially over the previous quarter, and as Lior mentioned, included several large deals over 5,000 seats. During the quarter, the enterprise business contributed over 15% of revenues, but accounted for over 25% of new and up-sell bookings. Many of these customers are in their early stages of deployment and therefore, did not have a material impact on revenues during the third quarter. GAAP gross margins for the quarter were 59% compared to 65% during the third quarter of 2016 and 61% last quarter. GAAP cost of sales remain relatively flat at $3.1 million, compared to $3 million last quarter as the ongoing cost of maintaining our data centers has remained relatively constant. On a non-GAAP basis, gross margins were 72% this quarter compared to 73% during Q3 2016 and 74% last quarter. GAAP operating expenses for the third quarter totaled $8.1 million compared to $6.1 million in the third quarter of 2016 and $7.8 million last quarter. This excludes – excuse me, this includes expenses in R&D, sales and marketing and G&A. GAAP R&D expenses during the third quarter were $2.3 million, up from $2.1 million reported during the third quarter of 2016 and down slightly compared to $2.4 million last quarter. As a reminder, GAAP R&D expenses are net of any capitalized development projects and also net of any capitalized R&D grant funding from the Israeli Innovation Authority. GAAP sales and marketing expenses during the third quarter totaled $4.1 million compared to $2.5 million in the third quarter of 2016 and up from $3.8 million last quarter. The increase in sales and marketing expenses is primarily related to additional headcount expenses, including increased commissions from new bookings in the third quarter of 2017. At the end of the third quarter, sales and marketing headcount totaled 60 people compared to 41 a year ago. GAAP G&A expense for the third quarter came in at $1.7 million which compares to $1.5 million during the third quarter of 2016 and in line with $1.7 million last quarter. Third quarter GAAP net loss was $3.6 million or a loss of $0.09 per basic and diluted share compared to a loss of $1 million or $0.02 per share in the third quarter of 2016 and a loss of $2.7 million or $0.07 per share during Q2 2017. On a non-GAAP basis, Cyren’s net loss was $3.3 million or a loss of $0.09 per basic and diluted share compared to a non-GAAP net loss of $0.8 million a year ago and $2.5 million non-GAAP net loss last quarter. Cyren’s non-GAAP net loss excludes a number of non-cash and one-time items, so please refer to the table in our press release for more details on the reconciliation of our GAAP to non-GAAP results. Cash flow used in operating activities during the third quarter was $0.3 million compared to $0.3 million in the third quarter of 2016, and $1.8 million last quarter. Net cash flow for the third quarter totaled negative $1.6 million compared to negative $1.2 million for the third quarter of 2016 and negative $2 million last quarter. The company’s cash balance at the end of the third quarter was $9.9 million compared to $11.6 million at the end of the second quarter. We also have convertible notes with an aggregate principal value of $6.3 million, which are expressed on the balance sheet as long-term convertible notes in the amount of $4.6 million and an embedded conversion feature valued at $1.5 million. As Lior mentioned, last week, we closed a private placement with Warburg Pincus that were net approximately $19 million in cash into Cyren. Together, this brings our current cash position to approximately $28 million. In conjunction with this transaction, we issued approximately 10.6 million shares priced at $1.85 per share. The $1.85 price represents a 12% premium over the closing share price on November 6. There were no warrants or other special features associated with the private placement. At the end of Q3, we had approximately 39.2 million shares outstanding. So along with the new shares, there are now approximately 49.8 million total shares outstanding. As we close out Q4 2017 and move into 2018, we expand to use this additional cash to more aggressively invest in R&D and sales and marketing as we continue to add capabilities to the Cyren Cloud Security platform and accelerate enterprise customer adoption of CCS. We also anticipate to increase our capital expenditures as we build out our network to accommodate higher capacity. We are in the process of defining budgets and revenue targets for 2018 and beyond, but expect this additional capital will go a long way to accelerate our revenue growth in future quarters. With that, we are now ready to take any questions that you may have. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] We’ll go first to Joe Fadgen of Craig-Hallum.

[Chad Bennett:]

Hey guys. On here for Chad today. Thanks for taking the question. I guess, to that last comment that Mike made using the new cash for both R&D and sales and marketing, I guess, for one, if you could maybe sharpen the pencil around that a little bit and kind of give an indication as to which one do you think needs more investment right now between the sales and marketing or the R&D. And then related to that, what is your sales capacity right now? Or I guess, if you weren’t growing headcount, how much do you think – how much room do you think the sales team still has to grow?

[Lior Samuelson:]

Well, thanks for the question. I think that the – so first, the – as you know, we just received the investment and we’re in the process of building a revised budget. I think that this will enable us to accelerate what we set out to do initially. So the – as you know, the – we have a cloud platform where we serve up mail, web, DNS. And coming around the corner, we have our full cyber solution, which is the sandbox array and the cloud. They will be – both be offered to our big enterprise customers and also some OEM customers. This already functions as part of our mail and web protection. So I think that the plan doesn’t change. What will change is basic time-to-market. And I mentioned in previous calls, our challenges are not technical in nature. Those have been sold. Our challenges are really just basically to be able to fill out the missing feature list as quickly as we possibly can, so we could offer a full featured, full cloud protection to our enterprise customers. So the – I think we got – so R&D or the set of features that we have and our ability to sell kind of basic go hand in hand.

[Mike Myshrall:]

And then on the second question, Joe, you asked about sales and sales capacity. So one thing to remember is that we started building out our sales team in the middle of 2016. So we added the Austin, Texas office and then the London, UK office in the second half of 2016. So the majority of salespeople that are working for us have been with us for less than a year now. So they are ramped up quite substantially and they are much more productive than a few quarters ago. But I think we have plenty of capacity with our current sales team to increase bookings and revenues in a material way in future quarters.

[Chad Bennett:]

Okay. And I guess, to that point, your OpEx at least relative to what we had, revenues came in a bit below. I mean, I think you did a pretty nice job explaining that. But OpEx came in higher, presumably partially because of the good bookings that maybe hasn’t come through to revenues yet. I guess do you expect OpEx, particularly the sales and marketing, in Q4 to be up sequentially again because of either that other large deal that goes live in Q4? Or is this like, look, Q3, we had a lot of things that kind of hit this quarter, bookings-wise, so this was kind of an anomaly and it’ll probably come down a bit?

[Lior Samuelson:]

No, I would expect that there will be slight incremental growth quarter-over-quarter on the expense line in sales and marketing. We have added a few more people since late in the third quarter. And so the expenses that you saw in the third quarter didn’t necessarily include a full quarter’s expense for that headcount. And so I think it’s fair to assume that it’s going to tick up a little bit in the fourth quarter.

[Chad Bennett:]

Okay. And then last one for me. In the press release, you announced a multimillion dollar expansion with a large consumer. How much of that – if you can tell me, how much revenue from that will you recognize on an annual basis? Or I guess, is it a seven figure annual number? Or is that [indiscernible] number either.

[Lior Samuelson:]

Yes. So in the quarter, it was less than one quarter of revenue recognition. So in the third quarter, it didn’t have a full impact. But on an annual basis, it’ll be about $1 million a year.

[Chad Bennett:]

Okay. That will be all from me for now. Thanks guys.

[Lior Samuelson:]

Thank you.

[Operator:]

[Operator Instructions] And it looks like we have no further questions in queue.

[Lior Samuelson:]

Okay. Thank you. So thank you for participating in today’s call. We’re definitely excited about the strategic investment of Warburg Pincus, and we’d like that for Cyren. We look forward to a very good fourth quarter and strong finish to 2017. Thank you very much. Have a great day.

[Operator:]

That does conclude our conference for today. We thank you for your participation.