Cyren Ltd.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Greetings, and welcome to the Commtouch 2013 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Gould, Investor Relations for Commtouch. Thank you, Ms. Gould. You may now begin.

[Monica Gould:]

Thank you, and welcome to Commtouch’s second quarter 2013 financial results conference call. I would like to remind everyone that the Safe Harbor statement issued in today’s press release also covers the content of this conference call. With me on the call today are Mr. Shlomi Yanai, Chief Executive Officer; and Mr. Brian Briggs, Chief Financial Officer. I would now like to hand the call over to Mr. Shlomi Yanai.

[Shlomi Yanai:]

Thank you very much, Monica. Good day, everyone and thank you for joining us. Commtouch delivered solid second quarter performance with revenue growth of 42% year-over-year and 2% sequentially. Those results were slightly lower than our expectations and included an internet revenue from our new Cloud-based offerings. Most notably, our Email Security-as-a-Service solution and our new mobile security for Android detection service, which we launched in the first quarter. The rollout of our new services has gone well with several important wins in the second quarter. We won key new customers in hosting clients for our private label Email Security-as-a-Service product. Those initial contracts have the potential to grow substantially as customers begin to rollout the services. We are pleased with the initial (traction) that our new offerings is granted. Demand for those products from both new and existing customers remains robust and validate our strategy to transform Commtouch from a best-in-class embedded malware detection service provider to a supplier of the complete Cloud-based security-as-a-service solution. As we lead organization through this transformation, we anticipated some execution challenges. As previously announced, we have been investing in the build out of our worldwide sales and marketing organizations to support the rollout of our new upcoming Cloud-based offerings. However, it is taking us longer than expected to complete some key hires and ramp up in this area. As such, we believe it is prudent to moderate our full year outlook to account for the potential of a more gradual new product sales rep. We now anticipate GAAP revenue of $32 million to $33 million for 2013 down from $34 million to $35 million results we provided previously. While we are disappointed that those transformation challenges have impacted our short-term outlook, our confidence in our strategy has never been higher. We continue to evolve and broaden our product portfolio enabling us to expand our addressable market by increasing our market share with existing customers as well as expanding our reach to new customers, including retailers, distributors, hosting providers, and mobile application developers. Throughout 2013, we have been gearing up to launch our second major Cloud-based product offering with the release of our new Cloud-based web security solution during Q4 2013. This offering will focus on web security in the Cloud services, which are easy to provision and use. Those services will be built on the market-leading security detection platforms and will be delivered by our partners as private label services. This go-to-market strategy will allow our partners to quickly be able to deploy Cloud-based web security to their existing customer base as part of Commtouch continued new product initiatives. Our research and development efforts of the advanced (inaudible) detection services, we remain on track for release toward the end of 2013. I am also pleased to report that our efforts to integrate the two acquisitions we completed in the fourth quarter of last year are nearing completion and we continue to streamline the business to achieve cost synergies. Lastly, we are delighted to welcome David Earhart to our Board of Directors. David currently serves as a Senior Vice President of CA Technologies Security business and has extensive experience in security, networking, storage, and system management. He has a long track record of building high-performing teams and scaling businesses. In summary, while I am disappointed with the transformation of challenges, which have impacted the growth of our sales and marketing expansion, I am very encouraged by the demand we are seeing for our new products in the marketplace. This combined with our upcoming product launches give us confidence in our strategy to transform the company and position Commtouch for a long-term growth and improve profitability. With that, I would like to hand the call to Brian to further elaborate on the quarterly results. Brian, please go ahead.

[Brian Briggs:]

Thank you, Shlomi and hello everyone. I will now provide you with a summary of our second quarter 2013 results. For the more detailed results, please refer to the press release we issued earlier today. In addition, please note that we compile our financials under U.S. GAAP which includes non-operating expenses. In order to better analyze our business performance, I will also discuss certain financial metrics on a non-GAAP basis, excluding these 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 second quarter of 2013 was $8.1 million, up 2% sequentially from Q1 2013 and up 42% from a year ago. The Q4 2012 acquisitions of our German and Icelandic operations accounted for the majority of the year-over-year revenue increase. Non-GAAP revenues for the second quarter totaled $8.2 million compared to $8.1 million for the sequential first quarter of 2013 and $5.7 million in the second quarter of 2012. Non-GAAP revenue includes the full book value of deferred revenue amounts from the two acquisitions completed during the fourth quarter of 2012. Our GAAP and non-GAAP gross margin for the quarter was 78% and 80% respectively. We continued to anticipate a gradual improvement in gross margins over time as we realize efficiencies from our ongoing integration and streamlining process. GAAP operating expenses for the second quarter were $7 million compared to $7.2 million in Q1 2013 and $4 million in the second quarter of 2012. Non-GAAP operating expenses for the quarter were $6.4 million, flat relative to Q1 2013 and compared to $3.5 million for the second quarter of last year. We expect operating expenses to gradually decrease as we complete the integration process and begin to realize the benefits of our rationalization efforts in the second half of this year. A detailed analysis showing the differences between GAAP operating expenses and non-GAAP operating expenses is included in our press release. Second quarter GAAP net loss was $0.7 million or a loss of $0.03 per basic share compared to net income of $0.8 million or earnings of $0.03 per diluted share in the second quarter of 2012. Our second quarter non-GAAP net income was $126,000 or zero cents per diluted share compared to $1.1 million or $0.05 per diluted share in the second quarter of 2012. The differences between GAAP and non-GAAP net income are included in our press release. The primary differences include intangible amortization, stock-based compensation, adjustments to earn-out obligations, adjustments to deferred revenue, deferred tax benefits and customer contract settlement agreements. Now turning to the balance sheet, our net cash at the end of the quarter stood at $5 million compared to $5.1 million as of December 31, 2012. Net cash provided by operating activities was $1.5 million for the quarter compared to cash usage of $0.2 million in the first quarter of 2013. Major cash usage items during the second quarter included an earn-out payment on the acquisition and the purchases of property, plant and equipment, $3 million was drawn on the company’s line of credit during the quarter. Total deferred revenues as of June 30, 2013 were $7 million or 39% compared to the $5 million at the end of the fourth quarter of 2012. The rise in deferred revenue is primarily driven by customer prepayments on contract renewals. Moving now to our financial outlook, based upon the company’s current expectations, we are updating our guidance for the full year of 2013. Due to the longer than anticipated ramp up in our sales and marketing capabilities, we have moderated our full year outlook and now anticipate 2013 GAAP revenue will be between $32.0 million and $33.0 million, an increase of approximately 34% to 38% compared to the prior year. Full year 2013 GAAP net loss is expected to be less than $2 million and non-GAAP net income is expected to greater than $1.5 million. With the bulk of our integration and streamlining expenses behind us and cost efficiency efforts in place, we project profitability to improve in the second half of 2013 and to be much more reflective of the baseline profitability of the core business. Please also note as a Safe Harbor any outlook we present is as of today and we do not undertake an obligation to update estimates in the future. At this point, I would like turn the call back to Shlomi for closing remarks.

[Shlomi Yanai:]

Thank you very much, Brian. In conclusion, we continued to execute on our growth strategy and made great progress to-date by signing key new customers for our next generation mobile and Security-as-a-Service growth engines in the second quarter. Those milestones provide us with increased confidence in our ability to deliver further growth. And with that, we’ll be happy to take your questions. Operator, please proceed for the Q&A.

[Operator:]

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Our first question comes from the line of Jay Srivatsa with Chardan Capital. Please proceed with the question.

[Jay Srivatsa:]

Yes, thanks for taking my question. Shlomi, can you expand on your comment about the sales firm, I guess I’m trying to understand in terms of your full year guidance that you lowered, how much of it has to do with just product demand and sales versus your inability to hire more sales people near-term, could you expand on that please?

[Shlomi Yanai:]

Sure, thank you, Jay, thank you for joining us and for your question. So, as I said it earlier (Technical Difficulty) we’re focused on selling those, obviously we still don’t have the new services, we are launching the Web SaaS at the end of the year, which will be to big transformational point for us and for growth – for future growth and accelerated growth. And at the same time we are focused on building up the sales and marketing teams. So, the sales team it was a major test. We probably under estimated how hard it’s going to be to hire tens of people because we are talking about tens of people worldwide. If I look at the sales marketing services organization we are looking at around 50 people organization which majority is new. I can say now that the majority of the team is on board, we are still missing some key people (inaudible) completed. And we are continuing to focus there. But the second piece is obviously the traditional detection services and how fast those can grow. And unfortunately, those are not growing as we originally anticipated and hope they will. So, the combination of the two made us decide to update our guidance and to be a bit more conservative towards the end of the year looking towards the new services that the growth engine that was at the end of the year.

[Jay Srivatsa:]

Okay, in terms of growth you basically guided for a flat quarter for the next couple of quarters, given that lot of it is licensed driven, contract driven, when do you expect that to start to materially increase your revenue profile as you look at 2014?

[Shlomi Yanai:]

So, there is two main features to our business, context to-date still rolling many on the traditional services that we used to sell 6 or 7 years ago, the detection services. So, if we look any two acquisitions we made here, they had similar business models and when you merged the companies together and you probably do the math you can see that we are not growing too much this year, but we are also not going back while merging companies, while integrating and growing for all those interesting obviously challenges that it brings. So, the business is stable, we succeeded to stabilize it from having the business growing back a year and two years ago because this is what we’ve been. Last year as we shared was a very good booking year for us, but there was obviously also we’re hearing a lot of legacy drags of the business and termination. So, if you look forward the traditional business is stable now and it’s probably growing single-digit low level, which is something we’re new when we started and went to the direction of building our new strategy. The new strategy we’re introducing is going to be much more filling and we anticipate there more than 20% growth as we move forward and starting our other services. Obviously, it will take down to roll those, but the launch of the Web SaaS will come at the end of the year and now it starts with the launch in Q1. We’re starting to gain customers there. But the new strategy will did the same it clearly reflects the company from being flat to really start and accelerate growth. And this is why we’ll still focus there and we’ll continue to focus there.

[Jay Srivatsa:]

Alright, then Brian in terms of OpEx following the integration, the numbers have gone up quite a bit, what kind of synergies have you been able to achieve and how do you see that OpEx going forward for the next couple of quarters?

[Brian Briggs:]

Sure. And I’ll focus more on the non-GAAP OpEx. Again through the second quarter, we’ve done the fairly significant amount of the integration related to sales, marketing and the engineering groups. I think the integration steps in the second half of the year focused more on what I call the infrastructure of the business, which is accounting, finance, IT, human resources, administration those types of areas. Again I think as we continued to work through those in the second half of the year, we’ll see some cost savings efficiencies as we streamline the organization there is some redundancy between the locations that we currently have that’s the focus of the integration here in Q3 and Q4.

[Jay Srivatsa:]

Thank you.

[Shlomi Yanai:]

Thank you, Jay.

[Operator:]

Our next question is from the line of Ken Nagy of Zacks Investment. Please proceed with the question.

[Ken Nagy:]

Hi, thanks for taking my question. Just Brian if you can give an update on the lower business for Android?

[Brian Briggs:]

Yes, for sure. Thank you, Ken for joining us. So, it’s part of our long-term strategy. We are obviously focusing mobile to be key element and a growth driver for the cloud services, have the new employees on the road, employees using their mobile devices and for browsing the internet (inaudible) the key element. And the first thing we did as part of our long-term strategy is to release is Q1 scale on the traditional services a kind of a solution for Android mainly in the complete suite for Android for both Malware and Web Security that is targeting software developers, application developer, security vendors that want to enhance their offering by bundling a mobile security for Android. Our main focus obviously was lab, complete lab for the technical services to identify malwares for Android. And we are probably based on what we see from investors and market, the only vendor that is doing very, very high detection level services there. So, what we gained in Q1 is first a large customer in Europe and unfortunately we cannot read out the name as part of the agreement. That is using the technologies and advancing it. I can tell you that we have more prospects that are looking at the technology the service. Those vary from application developers, online services, financial institutes that wants to bundle of security as part of the mobile online services, over their mobile application. But our long-term strategy is obviously more focused when we look at the web security in the cloud on now we end-to-end going to store for web security and browsing for employees on the road mobile devices, and leverage the technologies we already have in place to enable complete end-to-end solution for SMB, primarily for mobile users and employees on the road to protect computer hazards when they are browsing internet.

[Ken Nagy:]

Great, thank you.

[Operator:]

Thank you. (Operator Instructions) Thank you. There are no further questions at this time. I would like to turn the floor back Mr. Yanai for closing comments.

[Shlomi Yanai:]

I would like to thank you all for joining us today and for your continued support and interest in Commtouch. I look forward to updating to you all on our next conference call. Thank you and have a great day.

[Operator:]

This concludes today’s teleconference. Thank you for your participation. You may now disconnect your lines at this time.