Cyren Ltd.
Q4 2017 Earnings Call Transcript

Published: 14 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cyren Ltd. Fourth Quarter and Full Year 2017 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 General Counsel. Please go ahead, sir.

[Eric Spindel:]

Thank you and welcome to our conference call to discuss Cyren’s fourth quarter and full-year 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 Factors 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. 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. 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 the call over to Lior.

[Lior Samuelson:]

Thank you, Eric, and welcome to everyone on the call today as we discuss Cyren’s fourth quarter and full-year 2017 results. During the fourth quarter, Warburg Pincus invested $19.6 million in Cyren at price of $1.85 per share. Warburg Pincus also completed a tender offer at a price of $2.50 per share and now owns approximately 52% of the outstanding shares of Cyren. This investment constitutes a significant milestone for the Company. Cyren will benefit from the expertise and capital of one of the world’s most prominent, growth equity investors. Cyren finished the fourth quarter on a positive note with new and upsell bookings in our enterprise business up 112% over the fourth quarter a year ago. For the full-year, enterprise bookings were up 158% over 2016. During the fourth quarter, we continued the momentum that we experienced earlier in the year and for the full-year we added around 250 new enterprise customers using Cyren’s email security or web security solutions. As we discussed on last earnings call, some of these 2017 wins include large customers with tens of thousands of seats in two very large organizations in excess of 100,000 email accounts. For the year, enterprise bookings represented 24% of total bookings compared to only 11% during 2016 and enterprise revenue was accounted for around 14% of total Cyren revenue. One of the main reasons Cyren is seeing growth in the enterprise business, is due to the continued demand for superior detection and protection from businesses of all sizes. 2017 was a year when ransomware became the industry number one security threat from the WannaCry and Petya outbreaks earlier in the year to the lesser reported but equally troubling Bad Rabbit attack during the fourth quarter. Most of these ransomware outbreaks originated phishing attacks that penetrated traditional appliance vendor security. Fortunately, Cyren’s cloud security platform detected and blocked each of these malware variants in real time without a single report of customer infection. Cyren repeatedly demonstrated our ability to be first to detect and first to protect. During 2017, we dramatically improved the capabilities of the Cyren Cloud Security platform. Most recently, we added email archiving, which simplifies regulatory compliance with email management, protection and retention in the cloud. Cyren’s archiving is fully integrated with Cyren email security servers and offers the same low total cost of ownership. It simplifies email management and requires no hardware or software, and leaves administrators in complete control of email archiving policy management. Several of our newly added customers are using the archiving capability and the feature has been very well received by Cyren customers. We will continue to roll out additional capabilities on the CCS platform throughout 2018. During the fourth quarter, we saw a number of Cyren customers who initially purchased a single CCS solution such as email or web protection, come back to us to add additional functionality such as DNS protection or cloud sandboxing. We feel the strength shows the stickiness of Cyren’s enterprise security solutions and also demonstrates the need from enterprise customers to improve their security posture and simplify their operations by cutting down the number of vendors, as well as consuming more of their strategic solutions on the cloud. As the end of 2017, less than 10% of Cyren enterprise customers were consuming multiple services which represents a great expansion opportunity in 2018 and beyond. Throughout 2017, we added numerous distribution and reseller partners in Europe and the United States. One such example in Europe is Daisy Group, the UK’s leading provider of IT, telecom and cloud services. Daisy selected Cyren’s platform as an alternative to appliance based web security solution, particularly for Wi-Fi deployment, and during the fourth quarter added a number of new customers using Cyren web and DNS security. Most recently, we announced the addition of CARVIR, a global cyber security company with over 500 managed service provider partners and a leader in monitored and managed security for the MSP and IT services channel. CARVIR spent a lot of time searching for technology vendors who can deliver cloud based security solutions to the thousands of enterprise customers. After a lengthy evaluation of Cyren’s email and web security solutions, CARVIR partnered with Cyren to bring our CWS and CES solutions to its customer base. We’re encouraged by the early success we have experienced through the partnership. In Cyren’s threat intelligence business, during the fourth quarter, we successfully launched service with Rackspace, one of North America’s largest and most successful managed cloud service providers and a company known and respected for its customer care. In this account, we displaced incumbent vendor Cloudmark, now owned by Proofpoint to provide several Cyren threat intelligence services and especially outbound anti-spam, a major pain point for many MSPs and service providers. Cyren technology was proven superior to Cloudmark in its ability to the detect and block new malware and phishing attacks and dramatically improve protection for Rackspace customers. We are honored to be selected by Rackspace as their preferred cloud security vendor. As we’ve detailed on previous calls, earlier in the year, we experienced some turnover in several threat intelligence accounts from customers who were enable and were unwilling to accept price increases for Cyren services. This was the contributing factor to the year-over-year decline in revenues from the threat intelligence business. However, during the quarter, we renewed and expanded several contracts including one of our largest customers, which along with new customers like Rackspace should ensure that 2018 revenues rebound from the slight decline we experienced in 2017. I will now hand over the call to Mike to go through Cyren’s fourth quarter financial results. Mike?

[Mike Myshrall:]

Thank you, Lior, and good morning. I am pleased to provide you with a review of our fourth quarter 2017 and full-year financial results. For more detailed results, please refer to the earnings release we issued earlier today, which is posted on the Investor Relations section of our website. As always, 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 basis, which exclude those non-operating items. Please refer to today’s press release for a full reconciliation of our GAAP to non-GAAP results. GAAP revenue for the fourth quarter of 2017 was $7.5 million compared to $8.1 million during the fourth quarter of 2016 and $7.6 million last quarter. The decline in revenue is consistent with what we discussed in the previous two quarters and is mostly attributed to the threat intelligence contracts that were terminated earlier in the year and the timing of revenue recognition from new contracts. During the quarter, we began revenue recognition on several new threat intelligence contracts, including Rackspace and we expect that these customers will continue to have a positive impact on revenues in future quarters. Fourth quarter GAAP net loss was $7.5 million or a loss of $0.16 per basic and diluted share compared to a net loss of $2.9 million or $0.07 per share in the fourth quarter of 2016 and a loss of $3.6 million or $0.09 per share last quarter. There were two major factors that contributed to the increase in GAAP net loss for the quarter and both were related to the transaction with Warburg Pincus. As we previously announced, during the fourth quarter we completed a private placement to Warburg Pincus for $19.6 million, representing roughly 21% ownership in Cyren. Subsequent to the private placement, Warburg Pincus launched a special tender offer priced at $2.50 per share, which when completed on December 24th, increased their ownership in Cyren to approximately 52%. As a result, this transaction was defined as a change of control event for Cyren, which triggered certain non-cash accounting costs for the Company during the fourth quarter. First, the change of control triggered accelerated vesting for a portion of outstanding, employee owned stock options which had an immediate impact on stock-based compensation expense during the quarter. This translates into a one-time expense of approximately $1.1 million during the quarter, which is further illustrated in the stock-based compensation line in the GAAP to non-GAAP reconciliation table in our press release. On a GAAP basis, this additional one-time expense had a significant impact in each of the cost of sales, sales and marketing, R&D and G&A line items on the income statement which makes it difficult to compare these GAAP line items to previous periods. Second, the change of control also triggered additional non-cash financial expense of approximately $1.8 million during the quarter. This financial expense is due to the change in fair value of the convertible notes that were issued in March 2017. The original conversion price of the note was $2.50 per share, but due to a private placement of $1.85 per share and subsequent change of control, the $6.3 million notes were converted into approximately 3.5 million shares prior to year-end. The one-time financial expense is purely an accounting expense and did not have a cash impact during the quarter. On a non-GAAP basis, Cyren’s fourth quarter 2017 net loss was $4.3 million or a loss of $0.09 per basic and diluted share compared to a non-GAAP net loss of $1.9 million during Q4 2016 and $3.3 million non-GAAP net loss last quarter. For the full-year 2017, Cyren’s non-GAAP net loss was $12.4 million or $0.30 per basic and diluted share, compared to $4.8 million or $0.12 per basic and diluted share for the full-year of 2016. 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 GAAP to non-GAAP results. Cash flow used during the operating activities during the fourth quarter was $2.9 million compared to $0.8 million in the fourth quarter of 2016 and $0.3 million last quarter. During the quarter, we received approximately $19 million in cash net of expenses associated with the private placement. We also invested approximately $1 million in capital expenditures in our network and invested an additional $1.1 million in technology and developments which were capitalized. The Company’s cash balance at the end of the fourth quarter was $24 million compared to $10.6 million at the end of Q4 2016 and $9.9 million last quarter. As I described earlier, the convertible notes which previously had an aggregate principal value of $6.3 million, have been thoroughly converted into equity and therefore the Company no longer carries any debt on our balance sheet. As we reported on the last call, as part of the private placement, we issued approximately 10.6 million shares, an additional 3.5 million shares were issued through the conversion of the convertible notes. At the end of Q3, we had approximately 39.3 million shares outstanding along with the new shares that are now approximately 53.4 million total shares outstanding. For the purposes of the earnings per share calculation, there were our weighted average of approximately 46 million shares outstanding during the quarter. During the fourth quarter and throughout 2017, we saw a dramatic improvement in our enterprise business. As Lior mentioned, for the year, new and upsell bookings in the enterprise business were up 158% year-over-year. Between the first quarter of 2017 and the fourth quarter of 2017, the average new customer order grew 175% in terms of users and over 200% in terms of average dollar value. Renewal rates have been steady at around 90% and approximately 20% of customers how renew their contracts also do so at a higher rate or by taking additional products and services. We are encouraged by these trends. For the year, total headcount finished at 239 employees compared to 213 employees at the end of 2016. This included a total of 61 people in sales and marketing compared to 48 people at the end of 2016. Moving forward into 2018, we expect to deploy additional capital strategically with focused investment in R&D, sales and marketing in order to accelerate our product roadmap and increase the rate of growth in enterprise sales. We also expect additional capital expenditures over 2017 as we continue to make improvements through our global network and improved performance for all of our customers. Finally, we are investing a great deal of time and effort into ensuring that our infrastructure, processes and procedures are fully compliant with the General Data Protection Regulation, also known as GDPR, which is scheduled to take effect in May. We want to assure all of our customers in Europe and around the world that we take our progress very seriously. And we intend to comply with the new requirements to ensure that their personal data is fully protected. We encourage those companies in Europe who feel that their current security vendors may not address their privacy needs, to take a close look at Cyren for their web security, email security and email archiving needs in 2018 and beyond. With that, I would like to ask the operator to open up the line for Q&A.

[Operator:]

[Operator Instructions] And will go to Joe Fadgen with Craig-Hallum.

[Joe Fadgen:]

Hey, guys. I’m here for Chad. Thanks for taking the question. First is just kind of a housekeeping. It looks like the gross profit margin dipped down lower than it’s been for past several quarters and lower than we have been modeling. Was that just kind of investing in infrastructure, that buildout or what’s the cause of that?

[Mike Myshrall:]

Yes. That’s correct. As I mentioned during the call, we had some additional CapEx in the second half of 2017 as we invested in the network. And so, we see a little bit of the additional expense happening in the fourth quarter, which has brought down the gross margin. I think, if the revenues had grown a little bit more, then it wouldn’t have as much of an impact in the quarter.

[Joe Fadgen:]

Right. And so, are you -- I guess, -- I mean, I know you don’t guide, but would we expect that a lot of that investment is done and that we should see it tick back up in -- and certainly Q1 probably over 70% in Q1, or is there still more to be done there?

[Mike Myshrall:]

We are still investing throughout 2018 as part of an improvement to our network. We’re adding additional capacity for additional growth. But, we’re also making some very strategic investments, as I mentioned where we’re rolling out some GDPR related activities. And so, there is a lot of activity investment on the operational side of the business. So, I would expect that over the next couple of quarters, you’ll see continued investment in our infrastructure.

[Joe Fadgen:]

Okay. And then, some good color on the threat intelligence as well as the enterprise. You have been talking about some of the customer churn, delayed go lives, things like that for a quarter or two now. Are we mostly through any of the -- at least the bulk of the customer churn as far as you know and are delayed? Are there any more concerns that we should worry about as far as like delayed go lives or anything like that -- are we kind of through the rough now, so to speak?

[Lior Samuelson:]

I think from what we can see, I think we’re kind of the -- most of the turnover that we had looks like it’s over. There are -- and I think there might be some I would say, positive surprises. So, I don’t think that the threat intelligence business would get hit, at least not in the foreseeable future or not that we can see. We see some positive things on the horizon.

[Joe Fadgen:]

Okay. And then last one for me. I appreciate getting an update on the enterprise business. 14% of rev in the year. I guess, is that -- as we start thinking about that in 2018, from a revenue standpoint, never mind bookings for now, but is that a 20% plus growth business? Could it be 30%, 40%? I mean, again, I know, you don’t guide, but can I get just kind of even a ballpark of what’s kind of the base case that you would expect for that business?

[Lior Samuelson:]

As we said earlier, we’ve been saying all along, the enterprise side of the business is where a lot of our focus is, both from a product standpoint and from a marketing and sales perspective. So, we fully expect it to grow. I can’t tell you exactly how much. We fully expect it to grow. And we’re in the process of really building out all the feature set that we have. And I think that so -- in the future, two to three years down the road, maybe and before that clearly we will become the dominant part of the business. And that’s a plan and I think that’s what we’re seeing and that’s what I believe will happen.

[Operator:]

[Operator Instructions] Will go next to Mike Wallace with White Pine Capital.

[Mike Wallace:]

See, I just want to get a little bit of your perspective on the Warburg Pincus investment, and how that came about and what they are going to bring to Cyren that you didn’t have before outside of obviously the money they invested?

[Lior Samuelson:]

Well, of course, when we said there were -- as a company we’re extremely happy and excited that they chose to partner with us. And I think we -- as we I think in the filing said, we’ve had discussion with them over several months, which resulted and they are deciding to invest in the Company. And we look forward to basically gaining from their expertise. As you know, they have many, many successful investments including in the tech sector, including security. So, I think, we can -- I think, they can teach us a few things and we’re willing to learn.

[Mike Wallace:]

Did they approach you or did you approach to them or how would that -- how did the conversation start?

[Lior Samuelson:]

I think if I recall, we met them at RSA conference, if I recall. We met them at RSA conference. We go to these conferences and people -- so, I think that’s where we first met them.

[Mike Wallace:]

Okay. And they have a one-board seat, is that right?

[Lior Samuelson:]

They have -- so far, they have two board seats. Right now, they have two board members.

[Mike Wallace:]

And then, could you -- I know, they are very savvy investors and have lot of investments in the security space. So, what -- could you give us a little bit of color on what they can bring to Cyren and that you didn’t have before and maybe some more specifics on that?

[Lior Samuelson:]

We have two very experienced, very smart people on the board. And as I said early, we look forward to benefitting from their expertise. I don’t have any more details.

[Mike Myshrall:]

I think one of the things that excited about them about Cyren was the technology. They have seen -- they have looked at other security companies in the space and they are happy with Cyren’s product offerings.

[Mike Wallace:]

And are they bringing some relationships along, too, to help with the sales process?

[Lior Samuelson:]

I’m not so sure exactly. I’m sure things will develop in the future, but they just -- as you know, they joined the Board just recently. So, I don’t have any further information on that.

[Mike Wallace:]

Okay. All right. Maybe we could talk offline on that. But, thank you. I appreciate that.

[Lior Samuelson:]

Welcome.

[Operator:]

[Operator Instructions] And it appears we have no further questions in queue at this time. I would like to turn it back over to today’s speakers for any additional or closing remarks.

[Lior Samuelson:]

Well, thank you very much for joining us today and for the interest you’re showing in Cyren. And we look forward to keeping you updated on our progress in the future quarters. So, thank you very much. Have a nice day.

[Operator:]

And that concludes today’s conference. Thank you for your participation. You may now disconnect.