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Edited Transcript of CYRN earnings conference call or presentation 25-Mar-20 2:00pm GMT

Q4 2019 Cyren Ltd Earnings Call

Netanya Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Cyren Ltd earnings conference call or presentation Wednesday, March 25, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett M. Jackson

CYREN Ltd. - CEO

* Eric Avi Spindel

CYREN Ltd. - VP, General Counsel & Corporate Secretary

* J. Michael Myshrall

CYREN Ltd. - CFO

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Conference Call Participants

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* Chad Michael Bennett

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Cyren Fourth Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Eric Spindel, General Counsel. Thank you. You may begin.

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Eric Avi Spindel, CYREN Ltd. - VP, General Counsel & Corporate Secretary [2]

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Thank you, and welcome to Cyren's Fourth Quarter and Full Year 2019 Financial Results Conference Call. This call is being broadcast live and can be accessed on the Investor Relations section on 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 SEC filings, including our annual report on Form 10-K filed on March 29, 2019. Any forward-looking statements should be considered in light of these risk 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 is 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.

Joining me on today's call, we have Brett Jackson, Chief Executive Officer; and Mike Myshrall, Chief Financial Officer.

With that, I will now hand the call over to Brett.

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Brett M. Jackson, CYREN Ltd. - CEO [3]

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Thanks, Eric. I'd like to thank everyone for joining the call today to discuss our results. The second half of 2019 was a transition period for Cyren with new leadership, a revised strategy with a top priority to increase growth, especially in the enterprise market.

In our last earnings call, I outlined the specific elements of our growth strategy, and let me summarize these for you. First, we'll refocus on our threat intelligence business and expand our penetration of the OEM market through more aggressive new customer acquisition. We have a broad portfolio of product offerings, great customers and a large, stable recurring revenue base to build upon.

Second, we will expand our threat intelligence services beyond our traditional OEM market into the much larger enterprise market with a total addressable market that we estimate to be 5 to 10x larger. We will leverage existing technology, including our GlobalView cloud platform, and enhance or repackage several existing products that will enable us to bring differentiated offerings to market quickly.

Third, we will bring to market our next-generation e-mail security, Cyren Inbox Security, to address the growing phishing problem among Office 365 enterprise customers. This product will provide a critical additional layer of protection beyond existing secure e-mail gateways. Cyren Inbox Security has been in use by early adopter customers for the last several months. And based on very positive feedback, we expect general availability to be at the end of April, in line with our forecast. Post launch, we will focus on building market share as quickly as possible.

These key initiatives leverage our core strengths and are expected to drive more growth, and more importantly, create new revenue streams from the enterprise market. Based on these initiatives, we see an opportunity to grow ARR significantly over the next 3 years and increase shareholder value in a meaningful way. It is important to note that our Q4 results do not reflect any contribution from these new growth initiatives. Our team is fully engaged executing our plans, and we are on track to achieve our Q1 milestones. We expect to see initial customer traction in the second quarter with more material contribution to bookings and ARR in the second half.

Let me move on to the topic that is on everyone's mind, the COVID-19 crisis and the impact on economies and businesses around the world. We all know this is an unprecedented situation. And like other businesses, we are monitoring the situation across all the countries where our teams are located. The health and well-being of our team members is our top concern, and we all -- are all working remotely for the foreseeable future and adapting to a new normal. We fully intend on continuing to deliver a high level of service to our customers, and we'll move forward with our strategy and plans as aggressively as possible.

Of course, we will continuously monitor the crisis and the impact it may have on our business. I believe that organizations will continue to keep cybersecurity a high priority even in difficult economic conditions. As a matter of fact, our threat research teams have noticed a significant outbreak of attacks exploiting COVID-19.

With that said, we will be prepared to make adjustments to our business, including expense reduction, if and when necessary. It is important to note that management had already implemented expense-reduction measures earlier this year in order to reduce our 2020 cash burn.

Last week, we announced that Cyren raised $10.25 million through a convertible debenture private placement. We made the decision to raise capital after our November rights offering fell short of target. The new capital will be used to support our new strategy and key growth initiatives. More importantly, in light of the COVID-19 crisis and challenging economic conditions ahead, the additional capital will also better enable us to weather the storm and keep Cyren moving forward.

I will now turn the call over to Mike, who will go through the fourth quarter and 2019 financials.

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J. Michael Myshrall, CYREN Ltd. - CFO [4]

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Thank you, Brett, and good morning. I am pleased to present our fourth quarter and full year 2019 financial results. For more detailed results, please refer to the earnings press release that was issued earlier today and is posted on the Investor Relations section of our website.

Please note that we present our financials under U.S. GAAP accounting standards, including nonoperating expenses, and that I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes those nonoperating items. Please refer to the table in today's earnings release for a reconciliation of our GAAP to non-GAAP results.

GAAP revenue for the fourth quarter of 2019 was $9.5 million, an increase of $17,000 compared to $9.5 million reported during the fourth quarter of 2018. Full year 2019 revenues was $38.4 million compared to $35.9 million for the full year 2018, an increase of 7% year-over-year and a 2-year compound annual growth rate of 12%. 2019 revenue was split approximately 81% in our threat intelligence OEM business and 19% in our enterprise business. And for the full year, revenue was approximately 47% in Americas, 46% in EMEA and 7% in Asia.

GAAP gross margins for the fourth quarter were 57% compared to 59% during Q4 2018. And for the full year, GAAP gross margins remained flat at 59%. On a non-GAAP basis, gross margins were 68% compared to 69% during the fourth quarter of 2018. And for the full year 2019, GAAP gross margins were 69% compared to 70% a year ago.

Fourth quarter GAAP net loss was $5.3 million or a loss of $0.09 per basic and diluted share compared to $5.6 million GAAP net loss and $0.10 per share during the fourth quarter of 2018. For the full year, GAAP net loss was $18 million, a decrease from a net loss of $19.4 million during 2018.

GAAP operating expenses for the quarter totaled $10.7 million, down from $11 million during Q4 2018. The year-over-year decrease in GAAP operating expense is due to a decrease in R&D expense, a decrease in sales and marketing expense.

R&D expense was $3.8 million this quarter, representing 40% of revenue compared to $4.8 million during Q4 2018, when it was 50% of revenue. The decrease in R&D expense is attributed to higher R&D capitalization of technology related to our new product development efforts which are scheduled to be released during Q2 and later in 2020.

Sales and marketing expense for the quarter was $3.4 million or 35% of revenue, down from $4.1 million, representing 43% of revenue during the same quarter last year.

G&A expense for the quarter was $3.6 million or 37% of revenue compared to $2.2 million or 23% of revenue during the fourth quarter of 2018. This onetime increase in G&A expense during the fourth quarter was largely a result of a legal settlement with a former vendor that was resolved during the fourth quarter of 2019.

For the full year, R&D expense decreased to 41% of revenue from 45% in 2018. Sales and marketing was down to 36% of revenue compared to 45% in 2018. And G&A expense increased to 28% of revenue compared to 23% during 2018.

Total headcount in the company finished 2019 at 248 employees compared to 278 at the end of 2018. During Q1, we have taken additional steps to reduce headcount to around 230 employees in an effort to decrease overall expense in the business.

On a non-GAAP basis, Cyren's fourth quarter 2019 net loss was $3.3 million or a loss of $0.06 per basic and diluted share, down significantly from a non-GAAP net loss of $4.4 million and $0.08 per share during the fourth quarter of 2018. For the full year, Cyren's net -- non-GAAP net loss decreased to $15.3 million or $0.28 per share compared to $16.1 million or $0.30 per share in 2018.

Cyren's non-GAAP net loss excludes a number of noncash items, including the effect of stock-based compensation, amortization of intangible assets and capitalization of technology as well as the onetime legal settlement during the fourth quarter which was included in the GAAP results. Please refer to the table in our press release for more details on the reconciliation of GAAP to non-GAAP results.

During the quarter, we had operating cash usage of $4.6 million compared to operating cash usage of $5.6 million during the fourth quarter of 2018. Overall, cash increased from $9.5 million at the end of the third quarter to $11.6 million at the end of the fourth quarter. As a reminder, during the fourth quarter, we closed the rights offering totaling approximately $8 million in net proceeds from our existing investors.

We originally sized the fourth quarter rights offering at $12.5 million during the summer of 2019. This offering was priced at a premium to market, and as a result, we received gross proceeds of just over $8 million or roughly $4.5 million short of our target. We recognize that this shortfall, in conjunction with the overall economic slowdown during Q1 2020, could present a liquidity challenge for the business looking out 12 months into early 2021. For those reasons, we decided to pursue additional capital in the form of convertible debentures which we announced and closed last week.

On March 17, we announced $10.25 million of aggregate principal amount of convertible notes in a private placement which subsequently closed March 19 with net proceeds of approximately $9.6 million. The notes carry a 5.75% coupon, payable semiannually in cash or shares and have a 4-year term which matures in March 2024. The debentures have a conversion price of $0.75 per share and are convertible into 1,333 ordinary shares per $1,000 principal investment. The conversion price may be subject to adjustment based on the pipes and timing of future equity offerings and other customary adjustments. We believe the cash proceeds from the debentures will provide us ample liquidity to operate the business until mid- to late 2021 despite the economic slowdown associated with the ongoing COVID-19 crisis.

The investor presentation that was used in the offering was included in our 8-K filing on March 17, and a copy of the presentation is available on the Investor Relations section of the Cyren website.

I will now ask the operator to open up the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Chad Bennett with Craig-Hallum.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Great, guys. Brett, maybe for you first. Just on the kind of enhanced focus or strategic focus with the threat intelligence product into the OEM market. I know you've certainly talked about this shortly after the time you joined. Where are we? And I guess how should we think about that OEM business maybe from an ARR growth rate standpoint, not necessarily revenue rec, as we kind of get into the second half of the year here?

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Brett M. Jackson, CYREN Ltd. - CEO [3]

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I think -- first off, I think the -- we are -- the company was not as focused on new customer acquisition in the prior several years in the OEM space. So the opportunity we see is to be far more aggressive. We think there's a bigger market opportunity there. And I don't see dramatic growth in that space, but I think there will be the opportunity for good growth, good ARR growth. It's a space we know well, we've got a good brand, and we think there's a lot of additional opportunity.

The more important point, I think, related to threat intelligence, Chad, is the -- our desire to expand into the enterprise market, which is a far larger market that we think we are well suited to participate in. And I think that market opportunity could have a much higher ARR growth rate.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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And Brett, when you talk about expanding into the enterprise market, I assume you mean your direct branded product. And what would change relative to the company's previous strategy of approaching the direct market?

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Brett M. Jackson, CYREN Ltd. - CEO [5]

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So the company has not ever had a real effort to take its threat intelligence services into the enterprise. As you know, the company's threat intelligence business has been one where we embed our services into our OEM's products. So the enterprise opportunity is an opportunity to leverage our same technology and offerings but take them to market directly to enterprise customers.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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So do you have, from an infrastructure standpoint, well I guess, specifically sales and marketing, will that take increased investment from where you are today? Or how should we think about that?

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Brett M. Jackson, CYREN Ltd. - CEO [7]

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No increased investment for 2020. We have -- our go-to-market today is set up to address both markets, both the OEM and enterprise markets. So we have a dedicated go-to-market team for the OEM market and we have a separate and dedicated team for the enterprise market. So our enterprise team will sell whatever products we have in our enterprise product portfolio, including threat intelligence services.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Okay. And then maybe one last one for me. Brett, can you give us an update on the Microsoft relationship and progress there, specifically the Windows Defender ATP integration and kind of rollout there?

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Brett M. Jackson, CYREN Ltd. - CEO [9]

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Yes. So we are GA-ready. So Cyren is ready to go. The integration is -- has been completed. Microsoft has been spending time surveying their customers. We've gotten very positive feedback, which I think we have reported in past calls. We have received several hundred leads directly from Microsoft customers who are interested in the capability. We've had multiple inbounds from Microsoft VARs who would like to take our product into their customer base. And we are, I think, in the final stages of conversation with Microsoft on how exactly Microsoft would like to deliver our product capabilities to their customers.

So this is going slower than we had hoped, but I think we're getting close. Our work is done from a product standpoint. And we know there is demand in the market and we're eager to address that demand. We've just got to finalize the go-to-market with Microsoft.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Got it. And then maybe one last one for Mike. Mike, how should we think about -- you indicated some additional headcount reductions and cost cuts, I think, since the year flipped over. How should we think about run rate OpEx from where you were in the December quarter? And then I'll hop off.

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J. Michael Myshrall, CYREN Ltd. - CFO [11]

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So we finished the year with around 248 employees, both full-time and part-time employees. We since brought that down to about 230 employees, so a reduction of less than 10%. It cuts across multiple departments, some technical positions as well as some turnover on the sales and marketing side as well. So we're looking at additional expense reductions as well with some of our other outside services and vendors. But at this stage, it would be considered less than a 10% decrease of OpEx from the Q4 run rate.

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Operator [12]

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Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Jackson for any closing remarks.

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Brett M. Jackson, CYREN Ltd. - CEO [13]

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Thank you all for joining us on the call today. We look forward to keeping you updated on Cyren's progress over the coming quarters.

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Operator [14]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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J. Michael Myshrall, CYREN Ltd. - CFO [15]

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Thank you.