Cyren Ltd.
Q4 2016 Earnings Call Transcript

Published: 21 Feb 2017

[Operator:]

Good day everyone and welcome to the Cyren Limited Fourth Quarter 2016 Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Eric Spindel, ‎General Counsel and Corporate Secretary, please go ahead.

[Eric Spindel:]

Thank you and welcome everyone to our conference call to discuss Cyren's fourth quarter and full-year 2016 financial results. This call is being broadcast live; it 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 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 now like to hand the call over to Lior.

[Lior Samuelson:]

Thank you Eric. Good morning and welcome to everyone on the call today as we discuss Cyren's fourth quarter 2016 results. In the fourth quarter Cyren’s revenue rose to 8.1 million representing an increase of 14% compared to Q4 2015. This result reflect the sixth straight quarter of revenue growth for Cyren and we finished the year with 31 million in revenue, a solid increase over 2015. We’re also pleased to let you know that during 2016, revenues from our enterprise security as a service solution have also crossed a significant milestone as they now account over 10% of total revenues. This is an important threshold for Cyren. As we have previously stayed our strategy to transition the business from an embedded OEM solution provider which we now call threat intelligence services to enterprise SaaS offerings including Cyren WebSecurity and Cyren EmailSecurity. In fact, during 2016 we recognized in excess of $4 million of the EmailSecurity and WebSecurity revenues from enterprise account. This is the first time we are breaking out our revenue in this fashion, we are doing so to reflect the increased adoption of our staff solution by enterprise customer of all sizes including some very large organizations with over 100,000 enterprises. In the second half of 2016, we added over 100 new enterprise customers but we expect customer acquisition velocity in 2017 to increase both in terms of customer count and size. It should also be noted that these figures do not include the revenues associated with many of our large threat intelligence service customers like Google or Microsoft who’ll use Cyren’s technology to protect their own employees and enterprise end users. Some other security companies count these type of customers as enterprise cloud customers. The above demonstrates that our SaaS solution are battle tested, enterprise approved and poised for significant customer acquisition. During the fourth quarter and throughout 2016 we successfully renewed and expanded the majority of our significant threat intelligence service customers who will offer renewal. In fact, we achieved over 90% renewal rates in our average contract tenure while our largest customers is now approaching eight years, the longest it has ever been in Cyren’s history. We believe these metrics demonstrate the long-term value that Cyren brings to its partners and customers and is a strong indication of the stickiness of our solution. Throughout 2016 we delivered a number of innovations through our technology platforms and cloud offering. Earlier in the year, Cyren was the first in the industry to deliver full proxy based web security, DNS security and sandboxing from a single cloud platform. The CWS platform has continued to improve and mature and we are now at the cusp of delivering another industry first with the release of Cyren Cloud Security 4.0. Cyren Cloud Security 4.0 will be released next month as the culmination of many persistent years of development to deliver the security industry's only converged cloud SaaS solution that combines web security, e-mail security, DNS, cloud sandboxing and cloud access security features from a single platform. We’re excited about this release and believe that this platform will serve as the foundation for future innovation in years to come. Also I would like to know two areas that totally set us apart from every company in the security space. First, our detection is now the fastest in the world. We can provide almost instantaneous protection from unknown threats to all of our customers. Our threat intelligence network analyzes over 17 billion transaction today combined with our cloud infrastructure and advanced threat protection we update all our customers in three seconds. This compares with minutes, hours and days for most companies in the space. Second, we have designed and built our platform for easy and quick consumption by customers. [indiscernible] service, in minutes would literally little or no human interaction. For example, we just introduce self-service online files for our WebSecurity solution that allows a prospect to deploy a fully functional secured web gateway in the cloud in less than 30 seconds. We believe that this is the way of the future in lowering the cost and increasing the speed and ease off security consumption. We recently entered into a partnership with Zimperium to further strengthen our capabilities on mobile threat defense. We intend to integrate Zimperium’s mobile endpoint threat data [indiscernible] threat and detection capability in order to strengthen our threat intelligence services and enterprise SaaS offering. We also feel [Technical Difficulty]. We recently entered into a partnership with Zimperium to further strengthen our capabilities on mobile threat defense. We intend to integrate Zimperium mobile endpoint threat data with our powerful threat and detection capabilities in order to strengthen our threat intelligence services and enterprise SaaS offering. We also feel the partnership will allow us further innovate on the mobile side and bring additional features and functionality to our product roadmap. Looking back at 2016 we expect that industry trend will continue to favor Cyren’s progress through 2017. Among a number of dangerous security breaches and high profile attacks, 2016 was proven to be the year when ransomware became the industry number one cyber threat to businesses worldwide. Thousands upon thousands of businesses were impacted when someone in their company innocently clicked on a web link to open an attachment from an unknown sender only to have their computer hijacked by hackers and demanded hundreds if not thousands of in ransom. Fortunately, Cyren among the leaders in the security industry and was highly excited as the first to defect and prevent several new ransomware attacks, all of Cyren’s partner and customers immediately benefited from a superior detection and ability to react in seconds to new malware attracts. Another trend during 2016 was the evolution of phishing. First with spear phishing, and more recently through high value attacks or whaling. We believe our detection technology and faster reaction time puts us in the forefront of the industry and our ability to detect and prevent phishing. Throughout 2016, our main focus on the sales and marketing front was to expand our footprint with our enterprise SaaS. As we noted on previous calls we invested heavily in expanding the sales team in the US and EMEA while opening new offices in Austin, Texas and the London suburb of Bracknell. We hired new sales leadership in both regions and expanded the teams significantly. Last week, Cyren participated in RSA Security Conference in San Francisco. As many of you know this conference is the largest and most important event in our industry, with over 1000 exhibiting companies and over 40,000 participants. Every year, one or two key themes seem to emerge from the show. And this year the focus was on migration to the cloud and leveraging automation, heuristics and machine learning to combat malware. These are capabilities that Cyren has been utilizing for years and only now are becoming industry buzzwords. We are definitely ahead of the curve. Also many of our competitors have tried to replicate Cyren's offering and messaging [indiscernible] for the past several years. We have long said that the era of appliance-based solutions for enterprise email web security has passed and that the benefits of cloud based platform are clear. We see that many of the legacy appliance players are trying to position themselves as cloud security solution though none have developed the technology the infrastructure and data needed to succeed. I will refrain from naming specific names at this stage. As we look forward to 2017 and beyond we will continue to focus on expanding the enterprise SaaS business. This includes increased investment is sales and marketing to continue to strengthen the Cyren brand with channel partners and enterprise customer. We believe that this investment has demonstrated a good traction today and are enthusiastic that the industry the first converged cloud services platform will continue to translate into financial success. Finally, I am pleased that at the company’s annual shareholder meeting in the December John Becker was approved by shareholders to join Cyren’s Board of Directors as an outside director. John brings over 30 years of security and technology industry experience to Cyren including serving as a CEO of Sourcefire prior to its 2.7 billion sale to Cisco and previously serving as the CEO of several other security and technology companies. John will replace [indiscernible] whose consecutive terms as an outside director will be fulfilled in end of Q1. I would like to thank you for his many years of service to Cyren and welcome John to the board. I will now hand the call over to Mike to go through the full quarter and full-year financial results. Mike?

[Mike Myshrall:]

Thank you Lior and good morning everyone. I am pleased to provide you with a summary of Cyren’s fourth quarter and full years 2016 results. For the more detailed results, please refer to the press release we issued earlier today which is also posted on our website. As always please note that we state our financials under US GAAP Accounting Standards including non-operating expenses and that I would 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 reconciliation on our GAAP and non-GAAP results. GAAP revenue for the fourth quarter of 2016 was $8.1 million compared to $7.1 million during the fourth quarter of 2015 and $7.9 million last quarter. As we previously discussed, this is the sixth quarter in a row of revenue growth and quarterly revenues were up 14% year over year compared to the fourth quarter of 2015. Revenue for the full year 2016 was $31 million compared to $27.8 million for 2015 which represents an annual increase of 12%. Our GAAP gross margin for the fourth quarter was 67% compared to 70% during the fourth quarter of 2015 and 65% last quarter. As we have discussed on previous calls, the primary reason for the decline in GAAP gross margin is associated with the capitalization of R&D project. On a non-GAAP basis, non-GAAP gross margin for the fourth quarter was 72% compared to 73% for Q4 2015 and last quarter. For the full year, GAAP gross margins were 68% compared to 68% last year and non-GAAP gross margins were 72% compared to 71% during 2015. In addition, during 2016, we have adjusted our method for allocating some depreciation expenses which resulted in a reclassification of some depreciation from operating expenses to cost of revenue. These adjustments have been reflected in the 2015 gross margins for comparison purposes. GAAP operating expenses for the fourth quarter totaled $7.5 million compared to $6 million in the fourth quarter of 2015 and $6.1 million last quarter. For the full year 2016 GAAP operating expenses total $26.1 million compared to $23.4 million during 2015. GAAP R&D expenses during the fourth quarter were $2.2 million, in line with the $2.2 million reported during the fourth quarter of 2015 and up slightly $0.1 million compared to last quarter. For the full year, GAAP R&D expenses were $8.7 million compared to $8.8 million during 2015. As a reminder, GAAP R&D expenses for the quarter and the year included some offset from a grant received by Israel's National Authority for Technological Innovation which totaled approximately $760,000 during 2016 and $850,000 during 2015. GAAP sales and marketing expenses during the fourth quarter increased to $3.4 million compared to $2.1 million in the fourth quarter of 2016 and $2.5 million last quarter. For the year, sales and marketing expense rose to $10.8 million compared to $8.1 million during 2015. The increase in sales and marketing expense was due to additional headcount brought onboard during the second half of 2016 in order to strengthen our enterprise SaaS salesforce. During the fourth quarter, we added seven new sales and marketing employees and as of December, total of sales and marketing headcount was 48, up from 41 at the end of the third quarter. This hiring is consistent with the guidance that we've provided on the last two quarterly calls. GAAP G&A expense for the quarter stood at $1.8 million compared to $1.7 million during the fourth quarter of 2015 and $1.5 million last quarter. For the year, G&A expense was $6.6 million compared to $6.1 million during the previous year. Fourth quarter GAAP net loss was $2 million or a loss of $0.05 per basic and diluted share compared to a net loss of $1.2 million or $0.03 per share in the fourth quarter of 2015. For the full year 2016, GAAP net loss totaled $5.3 million or $0.13 per share compared to $4.8 million and $0.14 per share during fiscal year 2015. Fourth quarter non-GAAP net loss was $1.9 million or a loss of $0.05 per basic and diluted share, compared to a non-GAAP net loss $1.4 million or $0.03 per share during the fourth quarter of 2015. For the full year, non-GAAP net loss was $4.8 million, compared to $4.9 million during 2015. The reconciliation between GAAP and non-GAAP net income is included in our press release. Operating cash usage during the fourth quarter was $0.8 million compared to operating cash usage of $0.6 million during the fourth quarter of 2015. For the full year, Cyren generated positive operating cash flow of $2.4 million compared to negative operating cash flow of $1.8 million during the full year of 2015. Net cash usage during the fourth quarter was $1.8 million, compared to net cash usage of $0.5 million during the third quarter of 2016. For the full year 2016, Cyren used a total of $5.8 million compared to cash usage of $6.2 million for the full year of 2015 excluding proceeds from the company's August 2015 capital raise. The company's cash balance at the end of the fourth quarter stood at $10.6 million, down from $12.4 million at the end of the third quarter. Cyren continues to have no debt. As Lior mentioned, during 2016, Cyren’s renewal rate exceeded 90% and many of our threat intelligence contracts were renewed for the second, third or even fourth time. In many instances, we were also able to increase pricing as a result of this longevity and the value that Cyren brings to its customers. As we detailed on the last two calls, we have increased our investment in sales and marketing in order to pursue higher growth in 2017 and consequently, we expect our operating expenses to increase in Q1 as well. The new sales teams are ramping nicely and we added approximately 100 new enterprise SaaS customers during the second half of 2016. We anticipate that this customer acquisition growth will accelerate throughout 2017 and we believe continued investment is crucial as we execute the growth base of our field. With that, I would like to open up the line for Q&A. Operator?

[Operator:]

[Operator Instructions] Our first question today is from Chad M. Bennett from Craig Hallum.

[Chad Bennett:]

Good morning. Hey, so, nice job on what it sounds like is a pretty good second half from a booking standpoint on the SaaS business. I guess it's great that you broke out the percentage of revenue now that you received from that business in 2016. Is there any way to look at what the run rate was, maybe quarterly run rate exiting the year of that business and then maybe what the expectations for growth for that business heading into this year should be?

[Mike Myshrall:]

Yeah. Thanks, Chad. So the reason we broke it out is because as we, we said previously that our strategy was to transition the business into the SaaS, the new platform and we broke it out because we were beginning to see what for us is significant customer acquisition and we believe that this is really just the beginning of a very large customer acquisition in 2017 and beyond. So we expect that quarter-over-quarter, we’ll see a meaningful increase in the number of customers that we acquire on the new platform, especially I think that we will see some very good results in the first quarter. I think we'll see even better results in the second and third quarters as 4.0, we begin to report 4.0 and offer our current customers and future customers more choice and ability to not only to be able to be protected from a variety of threat factor. So, we see -- so far for us, way we look at the business is that we're really crossed probably the most major threshold that we have set to ourselves. When we three years ago sad that this is what we wanted to do. So we're seeing it happening right now and we expect the -- we expected to be accelerated. Now getting into a little more detail, I still don't have enough of a, call the database where I can forecast accurately what the conversion is going to be from let's say prospects, leads, prospects and then eventual sales, because as I said on the call, in my prepared remarks, we see two things will happen. One is we'll get more customers and I think the size of the average customer is going to -- which is now all over the place, is going to change as well. So it's a little bit too early for us to predict. But all the indications are that we are definitely in the right track.

[Chad Bennett:]

Great. And then Lior, can you characterize the nature of the bookings in the second half of the year on the SaaS side and what customers are gravitating towards? I've obviously heard email security specifically has been in pretty good demand for you guys. Are they gravitating towards the suite? Are they focused on point products and how is pricing playing out relative to your expectations?

[Lior Samuelson:]

So I think that what is happening is I think when -- originally, when we go out to sell what security will we find out as many of the people -- many of the customers want both web and email together. And the way we do it is, it's managed out of the same platform, so you get full visibility for both mail and web. So we're seeing, I would say, more than 50%, maybe close to 70% of customers are -- would like to get both solutions. Now, this sort of in line with what originally we hoped would happen, which is that the market in general would have a tendency to gravitate to a suite of solution as a point to point solution. And that's why we invested a long time, invest the time and money in developing a single platform from which we can deliver a variety of services, DNS, mail, web, cyber, [indiscernible]. So it's beginning to play out the way that we hope it would. And so that's what we're seeing.

[Operator:]

Moving on, our next question is from John Lucia from JMP Securities.

[John Lucia:]

Hey, guys. Thanks for taking my questions. First, I just wanted to ask about the enterprise customers. Can you just give us a sense for the size and type of enterprise customers that you're adding? I know it's early, but is there a specific vertical or customer size or type that you're seeing, particular momentum with and then if you can give us any sense of the average deal size. I know, it's kind of all over the place right now, but any sense would be great?

[Lior Samuelson:]

So if you look at, so we have customers at kind of all sizes. I mean, maybe the top is 100,000 seats, but where we're focusing right now, what we're seeing is really the, I would say that the majority or I would tell a large number of the new customers are on the small end of the scale, SME, SMBs. That could be anywhere from hundreds of customer to a few thousand customers. And so that's kind of really what's happening now. A lot of it is by design and primarily because of the customer acquisition cost, the speed of acquisition, we have acquired new customers as a matter of sometimes hours. And so -- and that's what we plan on doing. So I think that so far, I would say while it's all over the map, I think that -- we have a tendency to be -- the majority are kind of SME, SMBs, but our plan is to not abandon that segment of the market, but to make sure that not only the number of new customers increased, but also the average size increases. So we expect that over the next two, three quarters, we'll see a significant change in not only a number, but also on the size of customers.

[John Lucia:]

Okay. And then from a competitive perspective, who have you seen in these 100 customers. Is there a particular competitor that you see or is it a broad swath of competitors? Any color there would be helpful.

[Lior Samuelson:]

I think that it's a broad -- it's all over the place. I think that right now, if you look at the web side, on the cloud side, there's really not a lot of competition and because there are just not -- no one out there, I mean with the exception of Zscaler who focuses on the top end of the market. But what we are right now, there's no one else except for, they see almost the appliance, not competitors. So the numerous appliance competitors, they're out there and -- but really what our strategy is and what we think the market is going is we are definitely aimed to replace most of all the applied guys.

[John Lucia:]

Okay. And my last question, your sales and marketing expense is growing faster than your revenue at least in 2016. I realize 2016 was an investment year. In 2017, should we expect the revenue growth to outpace sales and marketing expense or how should we think of 2017 in terms of investment year versus growth?

[Lior Samuelson:]

Let me answer it this way. So to our core customers, you have to invest. However, our business fundamentally is a very good business, even financially and we that as management of the board, can decide in any given point of time what the investment is versus profitability. So we have the luxury of deciding how much to invest and how to manage our balance sheet and income statement. So I think that this is -- we managed on an ongoing basis. We sold – really, the tradeoff is really between the speed of growth, customer acquisition and the deployment of capital. And that's a decision that we make on an ongoing basis. So what the numbers exactly are going to look like, I'm not so sure. We have internal guesses of what things were going to look like at 2017 and beyond. But I don't have any exact numbers to share with you.

[Operator:]

[Operator Instructions] Our next question is from Erik Suppiger from JMP Securities.

[Erik Suppiger:]

Hi. Good morning. Quick question, just following up on John, you hired about seven people in sales and marketing in Q4. Was that an anomaly or would you expect to at least generate that type of growth again in Q1 or how should we think of that?

[Lior Samuelson:]

Well, mean any time our sales people, you have a plan and normally it takes the sales person a little while to become effective, but we definitely expect the sales people to generate more revenue. There's a lag normally.

[Mike Myshrall:]

But in terms of the actual headcount, so Q3, I think was our most aggressive period of hiring. If you look at the growth in sales and marketing in Q3, it was slightly ahead of Q4. Q4, as you said, we added 7 new heads. Q1, I anticipate that there's going to be another 5 to 10 heads that are added. Some of them were hired in Q4, but they didn't actually start with the company until Q1. But we're now at a point I think where both the US sales team on the enterprise side and the European sales team on the enterprise side are at their mature stage or size for 2017 and so we don't anticipate the growth to be quite as high in Q2 and Q3 with additional hires.

[Erik Suppiger:]

Okay. Then in terms of your existing OEM customers, have you had any discussions or have inquired about your enterprise SaaS strategy at all at this point?

[Lior Samuelson:]

Yeah. We get inquiries all the time. I would say definitely.

[Erik Suppiger:]

Are they comfortable with the situation or any feedback in terms of what their thought process is?

[Lior Samuelson:]

Well, what we said earlier, look I think that we -- one of things that we've done across the board, we have been investing and continue to invest in our prevention and detection technology. And as I mentioned on the call, I think we've done some really interesting things and including in the last year, not only enhancing the stability, but also the speed of detection and the accuracy of detection. We believe that our engines in detection technology today is really second to none and especially in unknown threats. So we provide very -- we provide superior products and services to our customers and I don't think that's going to change. So I think these relationships, I see many of these relationships, especially the big ones, the ones that are important to stay stable and actually be enhanced in the future.

[Erik Suppiger:]

Okay. And then lastly have you worked at all with the MSSP channel, the managed security service provider channel?

[Mike Myshrall:]

We have a few smaller MSSPs in Europe who have adopted our product, both on the email side, but also are starting to look at the web security. Within the US, it’s not a market that we've fully penetrated, but it is an area of opportunity for the future.

[Lior Samuelson:]

I think I mean it's a good question. I think, we have some significant strength in order to service that channel, but I think that in general, we have begun to focus very vigorously on the channel obviously in EMEA in probably the past three, four months and I think we will do so in the US, my guess toward the end of this quarter. So it's a good question. It's just an issue for us, been an issue of priority and timing. But we'll definitely go there.

[Operator:]

Moving on, we have a question from George Melas from MKH Management.

[George Melas:]

Yes. Hi. Good morning, guys. I think my question is a little bit of a continuation of the previous question. Can you talk a little bit about the balance that you have between enterprise sales and channel sales or -- channel sales being service providers.

[Lior Samuelson:]

So I think that -- so let me say that, there's a -- so the two markets where we're focusing mostly on is North America and Europe. And a lot of the focus in Europe, because of the nature of the market, is on channels and we've signed up recently some very, very important and good channel partners, including one that we like very much several card distribution, which used to be an open DNS channel partner that was our channel partner. So in Europe, a lot of our activity is -- are focused on channel. We're also selling direct, but most of the focus is really on channels in Europe. In the US, it's been the reverse. In the US, because of the nature of the market, most of the focus so far has been on selling direct. And then as we prove our model, which I think we're beginning to do so, maybe have done so, then we can drag the channel along with us. So in the US, we have not emphasized as much the channel, but this is something we're about to do.

[George Melas:]

Okay. And then just the new resources that you’re adding, are they primarily focused on the enterprise side?

[Lior Samuelson:]

Correct. Yeah. Most of the resources we’re adding are on the enterprise side.

[Operator:]

And that concludes our question-and-answer session today. Gentlemen, I'll turn the conference back to you for any additional or closing remarks.

[Lior Samuelson:]

Okay. Well, thank you very much. First, let me say thank you all for joining the call today. As you can tell, we're very pleased with 2016 and we're very excited about what lies ahead in 2017. What I would like to add is that we are executing very well on the strategy that we laid out a few years ago and we look forward to a successful launch of Cyren Cloud Security 4.0 at the end of the first quarter. And obviously, we will keep you informed about our progress on future calls. So thank you very much for joining us.

[Operator:]

And that does conclude our conference today. Thank you all for your participation.