Cyren Ltd.
Q4 2014 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

Good day everyone and welcome to the CYREN Ltd. Third Quarter and Full Year 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Garth Russell with KCSA’s Strategic Communications. Please go ahead sir.

[Garth Russell:]

Thank you and welcome to our conference call to discuss CYREN's fourth quarter and full year 2014 financial results. This call is being broadcast live and can be accessed on the Investor Relations section of the CYREN website. Before we begin, 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 prospectus filed on July 3, 2014 and our prospectus supplement filed on July 25, 2014. Any forward looking statements should be considered in light of these factors. Please also note that as a Safe Harbor, any outlook we present is as of today. 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. A reconciliation of the most directly comparable GAAP financial measures are provided in the tables in the earnings press release issued earlier today and available on the Investor Relations section of our web site. With me on today's call 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, Garth, and thank you for joining us today, as we provide an operational update and this and discuss our 2014 fourth quarter and full year results. 2014 was a very good and transformative year for CYREN. When I took on the CEO responsibilities heading into the year, my mandate was to ensure that the company’s offerings are addressing the new challenges of the cyber security market and capitalizing on emerging business opportunities more quickly. The company executed well on the plans that we laid out at the beginning of the year. We successfully rebranded the company at CYREN to emphasis our commitment to emerging as a leader in the cyber security sector. We achieve partner, reseller and customer attraction at rolling out web security to thousands of end users and successfully sold our cyber security intelligence solutions to some of the largest companies in the world. We exit 2014 with late momentum heading into 2015 and are excited about the opportunities that lie ahead. There are a couple of fundamental issues when facing modern day cyber threats. First, accessing the most up-to-date and wide range cyber intelligence; second, managing increasing exposure to security threats across multiple channels. For instance, as the world has become more mobile a company’s exposure to cyber threats has increased dramatically. And the enterprise is no longer able to protect itself by simply implementing appliances on its network and solution only service in PC’s given the sophistication of today’s threats and the continued acceleration of cloud and mobile computing trend. In addition, organization of any size realized that identifying breaches depend on reliable, accurate and ongoing cyber intelligence threat. We believe the best approach to achieve the highest level of protection is the implementation of a massive scale a multi-tenant cloud-based architecture that ensures cyber intelligence decisions are always in sink across all data centers. This architecture enables us to support over 12 billion transactions every day. By combining our massive cyber knowledge base, machine learning and dynamic repetition calculation with the ability to deeply inspect almost the inbound and outbound employee traffic, our cyber security cloud software provide unmatched protection using a modern nonstick mature based approval. The foundation of this approach is cyber - is CYREN cyber threat protection, which helps security vendors apply cyber intelligence from around the globe in several phases of the Cyber Kill Chain organizations. We offer our Cyber WebSecurity, a cloud service that provides a clean pipe through the Internet from any device in any location, including in office, roaming users, and mobile devices. These new solutions build on our existing technology and origins as a cyber-security company. Together this one suite of solutions provide us with a competitive advantage in the market place in a new source of growth. In order to better reflect the expanded capabilities of our business we branded the company in the first quarter of 2014. On the sales and marketing side, we developed the foundation from which we got market awareness for CYREN WebSecurity and our portfolio of cyber threat protection offering. Our initial safe strategy was to offer CYREN WebSecurity to distributors and resellers, including several online reseller marketplaces. By the end of the fourth quarter, we had acquired key distribution partners to help us reach potential customers. This includes ALSO Holding AG an information and communication technology providing serving more than 100,000 customers throughout Europe. Our CWS solution was also launched on SYNNEX's CLOUDSolv, a leading technology distributor that works with more than 20,000 resource and retailers throughout the United States, Canada, Japan and Mexico. These strategic partnerships are strong examples of the positive trend we’re seeing in our channel sales model. In the fourth quarter we introduced our new direct sales strategy. It was an important strategic step for CYREN as it allows us to address opportunities to enterprises that prefer to buy directly from the vendor. It also gives us greater insight into the market and the sales profit. The combined approach has already started to show a positive result. This is the strong indication of the growing market demand for a powerful cloud based security solution that reflects the markets’ growing interest in our flagship offering. In Q4, we secured several significant new customer wins in the UK, India, Germany, the United States and France, which we believe positioned us for sustained growth in 2015. For example, Reliable Networks, the British IT support [indiscernible] of the United Kingdom’s largest trade union to a 1500 seat license for CYREN WebSecurity and cloud-based offering. And Bangcle, the world’s largest mobile application security provider employed CYREN to provide its 500 million customers with two mobile security solutions CYREN Embedded Antimalware and CYREN Mobile Security for Android. These deals represent our rapidly expanding global footprint and commitment to our network of international partners. Simultaneously we are also seeing interest in our existing customers and partners to deepen their CYREN relationship of purchasing additional services to increase the level of threat protection for their organization and end users. In the fourth quarter we saw record bookings, which were driven by several new large and multi-year partnerships including a high profile joint-venture. As I mentioned before the fact that we can combine industry leading events, threat protection coupled with a comprehensive cyber security solution makes us stand out from the cloud. Our development team is working hard to continually add new features on a regular basis to keep all the products at the cutting edge. We see significant potential for CYREN to penetrate the market even deeper. Many potential customers have limited cyber security protection or rely upon [indiscernible] protection for network appliances and package software. This protection is running on end points of servers and 1990’s approach of information security, the declines in capability year after year with the evolution of cloud and mobile enterprise computing trends and events cyber threat actors. Our unique competitive franchise [ph] has always been the ability to collect knowledge data in the cloud on the global scale to identify attacks. We made great strides in applying a unique capability to detect cyber threats. In 2014 we helped our partners deliver this insight and apply that unmatched cyber intelligence to directly protect enterprise customers with our security as a service solution. In summary, as we’re heading further into 2015, we are starting to see the benefits of our long-term growth strategy and are well-positioned to meet the growing market demand for comprehensive web-based security solution. With that, I’ll hand over the call to Mike to further elaborate on the result. Mike?

[Michael Myshrall:]

Thank you, Lior, and good morning everyone. I will now provide you with the summary of our fourth quarter and full-year 2014 results. With the more detailed results, please refer to the press release we issued earlier today which is posted on our website. In addition, please note that we compiled our financials under US GAAP which includes non-core operating items. In order to better analyze our business performance, I will also discuss certain financial metrics on a non-GAAP basis, which excludes those non-core 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 fourth quarter of 2014 was $7.8 million, compared to $7.7 million in the previous quarter and $8.2 million in the fourth quarter of 2013. Full-year 2014 revenues totaled $31.9 million, compared to $32.2 million in 2013 or a decline of 1%. The decrease in revenue was driven in part by currency exchange rate fluctuations, particularly the 11% decline in the euro during the second half of 2014. Approximately 40% of CYREN revenues are generated in Euro. Our GAAP gross margin for the fourth quarter was 75%, compared to 74% in the previous quarter, while our non- GAAP gross margin for the quarter was 77%. Our GAAP gross margin for the full-year was 75% and our non- GAAP gross margin was 78%. GAAP operating expenses for the fourth quarter were $7.9 million, up from $6.2 million in the third quarter of 2014 and compared to $6.1 million in the fourth quarter of 2013. The increase in operating expenses included higher R&D costs, as we continued to expand our service offerings and develop our new advance web protection cyber security offering. Our G&A expenses for the quarter also included several one-time adjustments including a bad debt expense of $0.3 million and litigation and legal settlement expense of $0.2 million and a provision for potential growth receipt tax of $0.2 million. These G&A expenses had a negative impact on quarterly profitability but should not be considered as ongoing expenses when looking forward into 2015. It should also be noted that when comparing the Q4 GAAP results to the previous quarter and the previous year, credit adjustments to earn-out obligations of $0.7 million and $3.3 million were previously booked during Q3 2014 and Q4 2013 respectively. Fourth quarter GAAP net loss was $2.2 million or a loss of $0.07 per basic and diluted share, compared to a loss of $7 million or a loss of $0.26 per basic and diluted share for the fourth quarter of 2013. Our fourth quarter non-GAAP net loss was $1.4 million or a loss of $0.04 per basic and diluted share, compared to non- GAAP net loss of $1.9 million or a loss of $0.07 per basic or diluted share in the fourth quarter of 2013. The reconciliation between GAAP and non- GAAP net income is included in our press release. Now turning to the balance sheet, our cash balance at the end of the quarter stood at $11.1 million, while the balance on our revolving line of credit was $4.8 million. Operating cash used in the fourth quarter was $1.5 million, compared to the operating cash usage of $0.2 million during the fourth quarter of 2013. Our fourth quarter cash usage can be attributed to operating loss as well as a slight increase in accounts receivable and a decrease in deferred revenue. Total deferred revenues as of December 31, 2014, were $5.1 million, down 16% compared to $6.1 million at the end of the fourth quarter of 2013. During 2014, we achieved solid bookings growth with Q4 finishing at almost three times the level of bookings in Q1 and two times the bookings in Q2. On the renewal front, we managed to renew several of our largest OEM partners well into the 2017, 2018 timeframe, further solidifying the business for the coming years. In sum, our core embedded business remains profitable and we plan to continue to invest the cash it generates into our CWS and cyber security initiative. Looking ahead, we plan to continue the partner traction we achieved Q4 2014 and expect to achieve revenue growth in 2015. At this point I’d like to turn the call back to Lior for closing remarks.

[Lior Samuelson:]

Thank you, Mike. It’s really an exciting time for us to be in the cyber security business. I believe that we’re taking all the right steps, position ourselves to be a leader in the industry. With the introduction of cyber sec - with CYREN WebSecurity and our ability to apply unique cyber intelligence directly to the protection of the enterprise customers, our company has never been in better position to address market requirement. In addition as our multichannel sales approach evolves, we’re well positioned to continue to grow our bookings and sign larger customer agreement. And with that we’ll open the call for questions. Question-and-Answer Session

[Operator:]

Thank you. [Operator Instructions] Our first question will come from Marcel Herbst from Herbst Capital Management.

[Marcel Herbst:]

And thanks for taking my question. I’m curious about the stage and makeup of the CYREN WebSecurity pipeline that your internal sales team has developed, so maybe you can give us some color on this space and type of deals that are in there and if they’re mostly in an early or later state?

[Michael Myshrall:]

Okay, thank you Marcel. So our pipeline is built of several different components. As you know we have distribution partners, reseller partners and our direct sales efforts as well. The pipeline is comprised of various opportunities ranging from very small business 50 seats and below to enterprise deals that are between one and 3,000 seats. Our direct efforts in the enterprise arena are squarely focused at the one to 3,000 seat market and we’re in various stages of deployment and evaluation of those deals. We’re constantly monitoring the progress of our partners and provisioning a new trial and evaluation customers and we anticipate closing several new customer relationships during the first quarter.

[Marcel Herbst:]

And speaking of your partners, do you have an estimate on how many resellers are fully trained and have started to offer CYREN WebSecurity to their customers?

[Michael Myshrall:]

So, as we discussed in previous calls we have a distribution network of distributors and resellers between 25 and 30 distributors now and resellers; and some of those distributors also have reseller partners below them, so it’s a multi-tier type of relationship. I would say that more than two thirds of our partners now have gone through this training and certification process and they’re in various stages of signing up end user customer. In our provisioning system we currently have several dozen partners and entity that have various stages of licenses in the system and basically we have at this stage between 50 and 100 entities that are currently using the service.

[Marcel Herbst:]

Okay, that’s helpful and can you give us an update on the timelines for launching your integrated as well as freestanding cyber security modules and also can you talk a bit about key differences in functionality between the embedded cyber security module and the freestanding cyber security module?

[Michael Myshrall:]

As we mentioned in our remarks, so we started selling some of the cyber modules already to some customers, in fact we signed some - a few very interesting deals with some of the largest technology companies in the world. Primarily these are cyber intelligence products that we have. We are in the process of - so what we decided to do is, sell some of the modules on a standalone basis and our plans right now - our engineering plans is that by the beginning of the third quarter of this year we will have an integrated large complete solution that is going to sit on top of our CYREN WebSecurity platform.

[Marcel Herbst:]

Okay and if I may, two quick housekeeping questions. What are you planning to spend on OpEx and CapEx this year and also do you expect your gross margin to remain similar to last year?

[Michael Myshrall:]

So we do expect that the gross margins will be basically in line with 2014. On a CapEx basis we have increased the budget. I think we did around $1 million in CapEx during 2014. We’re increasing that closer to $1.5 million for 2015. In terms of the total OpEx, we’re basically looking at kind of continuing the Q4 rate throughout Q1 and Q2. Now I would note that there are a couple of onetime items in Q4 that we commented on both in the press release and in the script that you can back out of G&A, but there’s roughly about $700,000 in G&A that were considered onetime items that you don’t have to consider for Q1 or Q2 in 2015.

[Marcel Herbst:]

Okay, great and thank you and congratulations on such a great bookings quarter.

[Michael Myshrall:]

Thank you.

[Operator:]

[Operator Instructions] We do have a question from George Marima [ph], a private investor.

[Unidentified Analyst:]

Hi, good morning Lior.

[Lior Samuelson:]

Hi.

[Unidentified Analyst:]

I was wondering if you can comment on - from a technology standpoint there is some, I guess it’s someone emerging endpoint technology that’s called isolation technology which is kind of still there to being superior to all kinds of blocking type solutions. Have you seen this in the marketplace, do you guys employ any isolation technology in your product and have you seen this out there yet?

[Lior Samuelson:]

No, we haven’t run into it and our technology people haven’t spoken to us about it. So it’s - yeah.

[Michael Myshrall:]

I think most of the activity that we’re seeing is actually moving away from the end point and more towards cloud based solutions. So most of the R&D activity that we’re focused on right now is to take our technology and further cloud enable it. In the future it’s possible that the end point technology maybe complementary to the cloud but at this stage everybody is migrating toward the cloud.

[Unidentified Analyst:]

And in case I’m not sure, you may have commented but again - but I didn’t catch it but the - on 2015 in terms of new product roll out, what sort of your road map to product in 2014 especially on the enterprise side?

[Lior Samuelson:]

So fundamentally what we’re going to do, as we mentioned we before in our - we’re going to do fundamentally two things, one is we’d continue to enhance CYREN WebSecurity. Our footprint - we’re going to add a lot of features to it. We continue to enhance our detection capabilities. We’re probably one of the only - the only vendor out there that has all - its own detection technology. So all the engines that we run to mail to malware to web related to phishing - where these are our engines and that’s - and in fact as you know we sell a lot of the engines to some of the biggest players including our competitors. And so we’re going to enhance the features of our - CYREN WebSecurity which would enable us to sell to some of the largest enterprises around, that’s part of the plan. And the second thing we’re doing which is very complimentary is enhance or continue to build enhanced cyber security or cyber security offering, not only the modules, but primarily immigrating the modules into first on - that sit on top of our CYREN WebSecurity and second to be a standalone multi-protection. We will protect multiple parameters to enterprises, so that’s really where most of our investment in R&D is going right now.

[Unidentified Analyst:]

Okay, all right, thank you and one more if I may. On the embedded appliance business, you still have some large opportunities on your pipeline?

[Lior Samuelson:]

I think so. I mean we don’t demand. As we said before, I think we’ve done a nice job in managing that business. It continues to be a good business. We have some this year in the fourth quarter. We renewed some of our largest customers. So I think it’ll continue to be a pretty good business and I think we have - as Mike mentioned earlier, we have a very, very good pipeline.

[Unidentified Analyst:]

Excellent, well congratulations. Thank you.

[Lior Samuelson:]

Thank you.

[Operator:]

[Operator Instructions] We’ll go next to Don McKiernan from Landolt Securities.

[Don McKiernan:]

Thank you. So my question is concerned to web security and whether be through your own internal sales or through your resellers, can you give us an idea of a couple of things, the competitive landscape, are you going up against comparable competitors like Zscaler and secondly how easy is the sales, because it’s really a new way of doing things by the enterprise and are they receptive to this approach or is it a tough sale, so?

[Lior Samuelson:]

So I think - I think you correctly identified the competitive landscape. I mean right now I think that the majority of people are using appliances to web security, which is - has several shortcomings as you are aware of. First of all, today’s limiting - it limits your ability to work. It’s very, very limiting. Second, it doesn’t afford you the protection that you need and obviously cannot protect the mobile work force. I mean if you walk out of the premise [ph] you just don’t - you’re not protected. So we are seeing a movement. So I think people recognize it. Second, so people are becoming much more, much more receptive to the class, so in a sense I think the sale and I think Zscaler played I think a very important role. They were out first. They’ve been around for a long time. From what we can tell, it’s a private company. Well, what we can tell, they’re doing a very nice job and we are just very glad they’re out there because they are doing the - they’re doing a lot of the work for us, they’re educating a lot of people and so I think they are right now - as we look at it, they’re probably the most significant and the most serious competitor in the market. And so there is nothing negative that I can say about Zscaler. They’re a very, very good company. I will reiterate that we come at web security from a slightly different angle and the angle that we come at it is that our competitive advantage and that we are hoping and work very hard to keep our detection capability. Now our algorithms, which are - a lot of them are automated but also the amount of data that we collect as we all say we serve today 550 million end points. There are a very few people in the industry including some of the biggest companies that have the kind of data that we have. We have extraordinary data and we have very good algorithm to analyze the data. So what I think that in the future, in the near future, I think winning is going to be dependent to a large extent on your detection capability and I think that one and so I think when we go head to head, we feel very, very confident that our detection capability is as good or better than anybody out there, because this is really our origin.

[Don McKiernan:]

Okay and from a financial economic standpoint for an enterprise to switch from a non-premise to a web security, is it about the same? Are they saving money to go with you or the opposite?

[Lior Samuelson:]

I think they save a lot of money. I mean think about it, right, you don’t need appliances. You need to need only the appliances. The positioning is much simpler. So it’s a lot easier and also I mean they don’t need as much IT staff. You have a lot more control. It’s just a much, much, much better value proposition.

[Don McKiernan:]

Okay, thanks and good luck.

[Lior Samuelson:]

Thank you very much.

[Operator:]

To moving on, we will take a question from Lisa Thompson from Zacks Investment Research.

[Lisa Thompson:]

Hi, good morning, or afternoon or whatever you folks are. I have a couple of questions. One is just to clarify when you talked about those one-time items, are they taken out of the non-GAAP numbers?

[Michael Myshrall:]

So only a portion of one of them is taken out of the non-GAAP items. If you were to look at the GAAP to non-GAAP reconciliation number eight on settlement expenses, roughly a $128,000 has been excluded from the non-GAAP numbers. However, the total amount for legal and litigation settlement and components is roughly $200,000. So, about a $128,000 of that was excluded for non-GAAP purposes. The other remaining items, the bad debt expense and the tax related items are still contained within the GAAP and non-GAAP numbers.

[Lisa Thompson:]

Okay, good, that’s a big difference. All right, thanks. Now I think the one thing that everyone is wondering is going forward or is there some way that you are going to give us metrics about how the new products are going whether you can give us like an end of the quarter run rate or number of seats or something because I think that’s what I was looking for as a sign that everything is working out and I was wondering if you planned on giving anything out in the future to let us know possibly how things are going?

[Lior Samuelson:]

I mean this was - I think you are asking a regular question. Let me tell you kind of what I think. So the sales pipeline is really still in the process of being built out, a lot of moving parts, a lot of exciting things. So while we keep some regular contact with our partners, we work with them daily and obviously with our direct sales team, it’s a little bit too early for us to set a bar for our sales or any customer acquisition that could either set the wrong expectation or even put a limit of what we expect. So it would be - so that’s kind of the best way I can articulate it.

[Lisa Thompson:]

Right.

[Lior Samuelson:]

When we feel - when we feel that we can get something that’s credible that we have really good visibility, we will do so.

[Lisa Thompson:]

But in opposite to the forecasting part, is there a way that you can give us like a historical or present day number and say what your run rate is right now and then what it’s going to be at the end of next quarter, something, some sort of metric to see where you are?

[Lior Samuelson:]

So the one thing I can say to you is that I mean in - so I’ll say two things that I think I can say with some confidence. One is that we had - in the fourth quarter we had the best booking quarter in the history of the firm, okay. So bookings that doesn’t - translation into revenues is not straightforward as you know. That’s number one. Number two is in the fourth quarter, in the fall I mean, today we have a lot of people in the network that were not there before. We have thousands of thousands of people on CYREN WebSecurity network that were not there before. So I understand what you are asking and I fully appreciate it, but we were not - but we are in much better shape today - much better shape that we were a year ago or three months ago, or two months, or a month ago for that, but that’s all I can say without disappointing you or disappointing myself in the future.

[Lisa Thompson:]

Okay. You making it hard on us, but thank you.

[Lior Samuelson:]

I know, I know and I apologize.

[Lisa Thompson:]

Okay, that makes it better.

[Lior Samuelson:]

Thank you.

[Lisa Thompson:]

Okay.

[Operator:]

[Operator Instructions] It appears there are no further questions today. Mr. Russell, I’ll turn the conference back to you for additional or closing remarks.

[Garth Russell:]

Thank you for joining today’s call. Lior, do you have anything you want to say before we go?

[Lior Samuelson:]

Just a short comment, I mean, I’d like to say that from our perspective, from a management team’s perspective I think 2014 was a - is a year where we’ve built the foundation for 2015 and beyond both from a technology standpoint and from an operational standpoint. So we are very optimistic and thank you all for joining us in the call today.

[Operator:]

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