Cyren Ltd.
Q3 2016 Earnings Call Transcript

Published: 15 Nov 2016

[Operator:]

Good day ladies and gentlemen, welcome to the CYREN Limited Third Quarter 2016 Results and Webcast. Today's conference is being recorded. At this time, I would like to hand things over to Mr. Dan Maier, CYREN's VP, Marketing. Please go ahead sir.

[Daniel Maier:]

Thank you and welcome everyone to our conference call to discuss CYREN's third quarter 2016 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 Form 20-F issued on March 31, 2016. Any forward-looking statement should be considered in light of these 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. 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 like to now hand over to Lior.

[Lior Samuelson:]

Thank you Dan and good morning everyone. I would like to thank everyone for joining us on the call today as we discuss CYREN's third quarter 2016 results. In the third quarter, CYREN's revenues increased to 7.9 million representing a 14% year-over-year growth. This is our fifth straight quarter of revenue growth. The number of deals in our pipeline is the largest in the company's history in our detection and prevention technologies continue to make join strides and differentiates us from the competition. During the third quarter, we accelerated invest in marketing and sales, we enhanced the size and quality of our marketing sales teams. We opened European sales and marketing headquarters in UK and increased the size and quality of the team. We are also continuing to expand the size of our Austin and Sunnyvale teams. During the quarter, we signed a number of new customers to our web email, cyber and Threat Intelligence Services. We also signed new and significant channel partnerships and anticipate announcing additional channel partnership in the near future. I’ll discuss the nature of some of these contracts a little later. Throughout 2016, we have continued to invest in the accuracy and speed of our security engines, algorithms and big data to response to the increase in cyber attacks, affecting businesses and consumers. We also continued the enhancement of our real cloud platform, by the end of Q1, 2017 we expect to offer our current and prospected clients superior WebSecurity, BMS, EmailSecurity and CyberSecurity, all from the same cloud passing. We expect this to be an industry first and position us well for the future. The demand for CYREN’s technology cuts across all of our product lines. We have recently regrouped our embedded cloud security solutions into what we now call Threat Intelligence Services, which combine our AntiSpam, AntiMalware, and URL filtering technologies along with our cyber intelligence and assisting services. These solutions I believe we have signed global view cloud in real time to protect thousands of businesses and hundreds and millions of users from the latest cyber attacks. Science Threat Intelligence services give our partners and customers the ability to react with a millisecond [indiscernible] malware, phishing and cyber attacks across a broad range of threat factors including email, web and social media. As we detail the third quarter science threat report, the primal phishing has never be more relevant and all companies immune. In fact, our researchers found that approximately 43% of small and medium size businesses in the United States have been the target of phishing attacks during the past 12 months. Cyber criminals are realizing that phishing is a relatively in expensive way to obtain sensitive personnel financial information; they can then be resold in the black market to use directly for monitory gain. The type of phishing attacks have evolved overtime, but one common threat seems to be the use of personal information available from social media and well-crafted or convincing email, the primary attack vector. Fortunately, CYREN’s customers and partners continue to benefit for the massive amount of cyber data, we collect and analyze on a daily basis across email, web and DNS vectors and our ability to react quickly to new and evolving threats. We believe CYREN anti-phishing technology is among the best in the security industry. During the third quarter, we signed several new customers during several significant contracts with existing customer using our Threat Intelligent Services. As an example, we expanded our relation with Jiransoft, a long time partner based in South Korea, which allows Jiransoft to distribute and resell. CYREN’s Threat Intelligence Services to customers throughout the Asia-Pacific region including Korea, China, Taiwan and Japan. We expect that this multi-year contract will increase CYREN’s penetration in the APAC region, while at the same time improving our detection capabilities for the latest security threats that are prevalent throughout Asia. In addition, we also expanded several customer relationships in the EMEA region; we renewed a contract with one of our largest customer and increased the contract value with several other customers by up-selling additional Threat Intelligence Services and locking in multi-year agreements. CYREN’s Threat Intelligence Services continue to provide the backbone of our technology and financial assets to enable future growth initiatives. Among this growth initiatives, during the quarter CYREN released an innovative online web security diagnostic tool, for SMB and enterprise customers to easily check the performance of their existing web security solutions. The free online diagnostic tool enables user to test the vulnerability to six common attack methods used by hackers to penetrate company’s protection. The test is available on the CYREN home page and can be long in less than 30 seconds from any web browser in order to check whether your current web security solution is vulnerable to common cyber threats. Thousands of users have tried the tool and 96% of users who run the test have found one or more vulnerability that require immediate attention. In fact, over 50% of users who run the diagnostics, held the majority of core security tests including the tool. Fortunately, there is a solution. CYREN WebSecurity not only addresses these vulnerability, but also enables enterprises to plug the host of many other appliance and cloud based security solutions. We believe that our web-based security tools will continued significantly the future customer acquisition and we will introduce additional security diagnostic tools in the very near future. Speaking of CWS, during the third quarter, the company released version 3.1 of the service, which includes several notable enhancements. These includes improvements privacy features, user reporting and active directory integration. The platform continues throughout grow and the feature set has never more robust. Our CWS sales efforts continue to pay dividends and during the quarter, we added number of new CWS customers in the U.S. and Europe. The solution continues to gain traction across SMB and SME customers and spends multiple industry segments including healthcare, manufacturing and service verticals. A common threat amongst CWS adopters is the frustration with traditional appliance based WebSecurity solutions that are desired to move to the cloud in order to improve detection and increase mobility for employees. The vise mobility is the key feature that security comp appliances simply cannot provide as effectively as cloud base solution. We also began the process of marketing and selling to larger enterprises. Also on the enterprise side of the business, we signed a number of new customers to sign email security, our cloud base securities as a service email solution including a well-known global automotive manufacture with over 25,000 employees. In this account, CYREN successfully won [Indiscernible] against several other email security vendors to close of three year deal valid several $100,000. As we mentioned on the last earnings call, we are currently integrating our cloud based email security, WebSecurity, BMS security and sandbox in platforms. In early 2017, we anticipate bringing together all four offerings onto a converse platform, which will allow SMB and enterprise customer to enjoy the benefits of these solutions from a single web based management platform. We believe this integration will further differentiate CYREN’s solutions while at the same time improving the security performance and ease of use for enterprise customers. Overall, we are very thrilled with a progress we made throughout the third quarter. We anticipate continued traction of both the Threat Intelligence business as well as enterprise solutions CES and CWS and expect to continue the success into the fourth quarter as we finish our 2016. At this time, I would like to hand the call over to Mike to go through the third quarter financial results.

[Michael Myshrall:]

Thank you, Lior, and good morning everyone. I will now provide you with a summary of CYREN's third quarter 2016 results. For the more detailed results, please refer to the press release we issued earlier today, which is posted in 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 excludes those non-operating items. You can refer to today's press release for a full reconciliation of our GAAP and non-GAAP results. GAAP revenue for the third quarter 2016 was $7.9 million compared to $6.9 million during the third quarter of 2015 and $7.6 million last quarter. As Lior mentioned, this quarter represents the fifth straight quarter of revenue growth and quarterly GAAP revenues were up 14% year-over-year compared to the third quarter of 2015. GAAP revenues for the first three quarter of the year were $22.9 million compared to 20.7 million for the first nine-months in 2015, representing an increase of 11% year-over-year. In terms of trend, we are seeing average selling price for both our Threat Intelligence Services and our enterprise services including CWS and CES improve. In the Threat Intelligence business, we are seeing the renewal contact value that a premium to previous contract as well as an increase in reported usage by some customers. Some of these increases may prove to be onetime a nonrecurring adjustments but the overall trend seems to be positive as customers shift from lower price services to higher value Threat Intelligence Services. On the enterprise side, we are seeing two trends emerge, an increase in the CWS price per seat as customer interest in shifting from CWS standard to CWS plus and advance packages as well as a larger trend of customers who are interested in purchasing both WebSecurity and EmailSecurity from single vendor. The result is an increase in average revenue for user and we believe this trend bodes well for the future when CYREN releases its planned converged web and email security platform. Our GAAP gross margin for the third quarter was 67%, compared to 69% during the second quarter of 2015 and 68% last quarter. As I mentioned, on the last call, the primary reason for the decline in GAAP gross margin is related to the accounting associated with capitalization of R&D projects. In previous quarters, CYREN capitalize several technology development projects and now that those projects has been completed, the R&D costs associated with the development are recognized this part of cost of sales. This as an accounting impact of reducing the GAAP gross margin compared to prior period where less technology amortization have been recorded. However, on a non-GAAP basis, non-GAAP gross margin for the third quarter was 75%, compared to 72% during Q3 2015 and down slightly from last quarter when we reported 77%. GAAP operating expenses for the third quarter totaled $6.2 million, compared to $6.2 million in the third quarter of 2015 and $6 million last quarter. GAAP R&D expenses during this third quarter were $2.1 million down slightly from $2.2 million during the third quarter of 2015 and relatively flat compared to last quarter. GAAP R&D expenses for the quarter included some often from the R&D grant receive by Israel’s National Authority for Technology Innovation, which was awarded during the second quarter of 2016, but excluded some expenses associated with R&D technology capitalization projects. GAAP sales and marketing expenses during the quarter increased to $2.6 million, compared to $2.1 million in the third quarter of 2015 and $2.1 million last quarter. This increase in sales and marketing expenses is consistent with the guidance we provided on the last call, when we discuss the plan to increase sales and marketing headcount during the second half of 2016. As Lior mentioned, we had 15 years sales and marketing employee during the third quarter and total sales and marketing headcount at the end of the quarter stood at 42. We expect this expense increased again in Q4 with the full quarter impact of employee added in the third quarter, as well as some additional hiring in the Q4. GAAP G&A expense for the quarter dropped to $1.5 million, compared to $1.9 million during the third quarter of 2015 and $1.7 million last quarter. These expenses were in line with our expectations and do not include any unusual items. Non-GAAP operating expenses for the third quarter were $6.6 million, compared with $6.3 million during the third quarter of 2015 and $5.9 million last quarter. Non-GAAP expenses exclude stock-based compensation executive termination expenses and amortization of intangible assets and also excludes the offset to expenses due to R&D capitalization, as detailed in the non-GAAP reconciliation in our press release. On a non-GAAP basis, both R&D and sales and marketing expenses were up year-over-year and on a sequential basis primarily due to increased headcount in both departments. Third quarter GAAP net loss was $1 million or a loss of $0.02 per basic and diluted share, compared to a net loss of $1.3 million or $0.04 per share in the third quarter of 2015. Third quarter non-GAAP net loss decline to $0.8 million or a loss of $0.02 per basic and diluted share compared to a non-GAAP net loss of $1.3 million or $0.04 per share during the third quarter of 2015 The reconciliation between GAAP and non-GAAP net income is included in our press release. Operating cash flow for the third quarter was $0.4 million compared to operating cash flow of $0.6 million during the third quarter of 2015 and operating cash usage of $0.2 million last quarter. Net cash usage for the quarter was $0.5 million compared to net cash usage of $1.1 million during Q2 2016. Year-to-date, CYREN has generated $3.2 million in operating cash flow and has used the total of $3.9 million on a net cash basis including the $4.2 million repayment of our line of credit during the first quarter of this year. The company's cash balance at the end of the third quarter stood at $12.4 million, down from $13 million at the end of second quarter, both our cash usages and ending cash balance are ahead of plans. We continue to have no debt on the balance sheet. As Lior mentioned, we anticipate Q4 will continue the momentum we have build over the past five quarters and that we will exit 2016 with a revenue run rate much higher than year ago. Consequently, we have also increased our investment in sales and marketing in order to pursue a higher growth in 2017. And we expect our operating expenses to increase as well, translating into higher cash front for Q4 and for first half of 2017. However, we are optimistic that these investments will continue to pay off as our investments and our efforts to acquire new customers and increase the average revenue per user will continue to 2017. We hope to share more meaningful metrics related to this progress as we report future quarter. With that, I would like to open up the lines for Q&A.

[Operator:]

[Operator Instruction] We will go first to Joe Fadgen, Craig-Hallum.

[Unidentified Analyst:]

Hey guys its [Ron] (Ph) here for Chad, thanks for taking the question. First one I guess at a real high level, just kind of the market recognition overall, are you seeing a better recognition whether it would be more inbound calls or maybe when you go approach new customers, are you having to kind of explain who you are less than maybe you did before. Is that something that you are seeing over the last few quarters?

[Lior Samuelson:]

Yes, thanks for the question. I think that we have been making a lot of focus that concerned efforts to managing our brand and I think it's every week, every month it's getting easier and better. We are not what we would like to be, but as I mentioned in my remarks, I think our pipeline of deals is by far the larger it’s ever been. So it's getting much, much better.

[Unidentified Analyst:]

Yes, okay and then on the pipeline that’s kind of lead into my next question. If I think about the overall cadence of either adding customers to the pipeline or kind of moving them along the pipeline among the steps of the pipeline. Are you seeing any change that whether become moving them too faster or as you move often larger enterprise level customers, should we expect maybe it will take a longer time to close some of these or do you expect the conversion rates to change. Is there any kind of the dynamics there, if you could expand on that?

[Michael Myshrall:]

I think that the sale cycle is actually is good, it’s relatively short cycle. Of course bigger customers takes a little bit longer, but again what we’re working on is again increasing the convert factor, which is all the way from a prospect to the sale, but it’s getting better every week and we anticipate it to continue to get better.

[Unidentified Analyst:]

Okay. And then I just got two more. On the large multi-year, multi-million dollar renewal that you called out in your press release. Is that something where we should expense the revenue will be recognize kind of the same quarter each quarter or well it kind of ramp and scale overtime are there any moving parts there to just a constant revenue rate?

[Lior Samuelson:]

Okay. Thanks for the question. Actually, that particular contract, we would expect that we will continue around the same revenue recognition rate for the next 18 to 24 months. And we don’t anticipate ramping up significantly, but it was a nice renewal of one of our largest customers.

[Unidentified Analyst:]

Okay. And Mike you alluded to this a bit on the top and thinking about kind of the cash burn through either first half of ’17. If you can tell us, where do you expect kind of the cash drop to be as you kind of get [Indiscernible] to build out of your sales and marketing team going forward?

[Michael Myshrall:]

So we think the Q4 will be slightly increased in cash usage compared to Q3. And then Q1 and Q2 will also be burning cash as well. However, in the second half of 2017, we anticipated that trend will start to reverse and the increased revenue will start to offset the cash burn.

[Unidentified Participant:]

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

[Lior Samuelson:]

Okay. Thank you.

[Operator:]

[Operator Instructions]. Next is Neal Goldman, Goldman Capital Management.

[Neal Goldman:]

Hi Lior. Two how to stocks in the marketplace is ProofPoint and MineCraft. They appear to be in the same industry, so as three times your revenue rate that you sell for. Could you explain the differences, I mean, I know they have been successful and I know they are growing and a faster rate today. Could you describe the differences in the technology? Thank you.

[Lior Samuelson:]

Okay. You always ask some good questions Neal. So let me take one at the time, I think both are very good companies and they are executing very well. I think let me kind of, both MineCraft and ProofPoint are primarily especially MineCraft are basically the email companies, MineCraft in email company. They provide email service, they provide disaster recovery or people refer to as continuity, they provide over timing. We share sales a little bit differently than for example, MineCraft we see from all is a security company and I would say email company, we provide email and email securities. But our competitive advantage I think over the people that you mentioned is that we own all our detection engines. And what distinguishes us from [Indiscernible] that I think will create the differentiation down the line is that we I think have superior technology in email, web, sandbox, threat intelligence. We have more data and so I think the main distinguishing factor is the fact that they provide email security and we provide suite of security. Having said all that, they are good companies, and some of them are even our clients. So I think that one other thing that you are saying is clearly they are both trading, their customer acquisition is good and growing. I think that they are very well run companies. They started way before we did, sort of kind of the CYREN, we burn on this game now maybe a little bit of three year, they have been added for a while longer. My guess is I do not view; my current view is that we will accelerate our customer acquisition and then your future and hopefully we get the rate of customer acquisition. But again, I think the distinguishing factor is really our security technology.

[Neal Goldman:]

Okay. Thank you.

[Operator:]

[Operator Instruction] And everyone, there appear to be no further questions.

[Lior Samuelson:]

Okay, so thank you for joining our call. I have to say that we are very thrilled by our performance in the third quarter and believe that we are building a significant and very valuable asset. We look forward to a strong finish to 2016 and great success in 2017. We are participating in Sell Investor Conferences over the coming weeks and would be happy to update you in a face-to-face meeting or on our next earnings call. Until then thank you and have a very good day.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.