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Edited Transcript of CYRN earnings conference call or presentation 13-Nov-19 3:00pm GMT

Q3 2019 Cyren Ltd Earnings Call

Netanya Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Cyren Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 3:00:00pm 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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* Christopher Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

* Nicholas Paul Mattiacci

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

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Presentation

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Operator [1]

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Greetings and welcome to the CYREN Ltd. Third Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Eric Spindel. Please go ahead.

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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 Third Quarter 2019 Financial Results Conference Call. This call is being broadcast live and can be accessed on the Investor Relations section of the Cyren website.

Before we begin, please let me remind you that during the course of this conference call, Cyren's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors section of our SEC filings, including our annual report on Form 10-K filed on March 29, 2019. Any forward-looking statement 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 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 Mr. Brett Jackson, Chief Executive Officer; and Mr. 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. Hello, everyone, and thank you for joining us today to discuss our third quarter 2019 results.

As I highlighted in last quarter's call, our clear top priority is to enable and drive more aggressive revenue growth, especially in the enterprise market. To accomplish this, we've identified our best growth opportunities, sharpened our strategy to provide focus on these opportunities and are executing several key initiatives.

Let me review our strategy at a high level. First, it is clear to me that our core strength as a company is e-mail security, and this will be our focus going forward. We are reinvigorating our threat intelligence services with the goal of growing our traditional OEM business and expanding into the large enterprise market.

Cyren's threat intelligence services are the foundation of our company, constitute the majority of our ARR and generate billions of security transactions daily, which enable our threat detection technology. More than 90% of our OEM customers use our threat intelligence in e-mail use cases. We have an impressive set of customers like Google, Microsoft and Check Point, and we think there's a large addressable OEM market and the opportunity for further penetration.

Beyond the OEM market, there are 2 opportunities to expand our threat intelligence business into the enterprise market and create a new, valuable enterprise revenue stream. First, as previously mentioned in past earnings calls, we have integrated our web filtering service into Microsoft Defender ATP. Defender ATP is currently in private preview with certain Microsoft Enterprise customers with general availability expected in Q2 2020. While there are still details to be worked out, if this partnership moves forward as expected, Defender ATP Enterprise customers will have the opportunity to trial and purchase Cyren's web filtering service.

In addition to the Defender opportunity, we believe our threat intelligence offerings could provide value to enterprises who have security operation centers, which we would target directly through our sales force. We will validate this opportunity over the next several months.

Moving beyond our threat intelligence services and leveraging our experience providing Office 365 customers with a cloud-based secure e-mail gateway, our team has been working hard to bring to the market our new Cyren Inbox Security offering, targeted at the enterprise market, which has been discussed in prior calls.

This new offering will play in an exciting new emerging market segment that Gartner refers to as cloud e-mail security supplements, which include products that focus on specific threats like phishing and provide both detection and remediation. It will provide a layer of protection beyond the secure e-mail gateway for Office 365 users and is secure e-mail gateway independent. We have been working with early-adopter customers over the past several months and expect general availability in Q2 of 2020.

Beyond Inbox Security, we think there will be additional product opportunities for Cyren to augment or complement Office 365's native security capabilities. While the Office 365 market is large and growing, we also believe other messaging services will grow in popularity over time and, inevitably, threats will follow the users. Longer term, Cyren has ambitions to extend its security capabilities to multiple messaging platforms beyond e-mail.

Turning to our third quarter performance. Our reported revenues of $9.5 million were flat year-over-year. While the lack of growth is disappointing, we are working to address this, and we believe our strategy and focused execution over the next several quarters will deliver a much more aggressive ARR growth trajectory.

I'll now turn the call over to Mike who will go through the third quarter financials.

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

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Thank you, Brett, and hello to those of you joining us on the call as I present our third quarter 2019 financial results. For more detailed results, please refer to the earnings press release, which was issued earlier this morning and is posted on the Investor Relations section of our website.

Please note that we state 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 full reconciliation of our GAAP to non-GAAP results.

GAAP revenue for the third quarter of 2019 was $9.5 million compared to $9.6 million reported during the third quarter of 2018, a decrease of 1%. On a constant currency basis, Q3 revenues would have been slightly above Q3 2018 levels of $9.6 million or essentially flat year-over-year when rounded. Year-to-date revenues were $28.9 million in revenue, which is up 9% compared to $26.4 million for the first 3 quarters of 2018.

While we are disappointed with third quarter revenue, this is primarily driven by weaker-than-anticipated new and upsell bookings in the quarter and year-to-date. We expect to see positive revenue impact from our growth strategy and new product initiatives during the second half of 2020.

GAAP gross margins for the third quarter were 61% compared to 62% during the Q3 2018. Gross margins declined slightly as a result of continued investment in our global network and data centers as well as additional expense in our support and operations groups compared to the prior year. On a non-GAAP basis, gross margins were 69% compared to 72% during the third quarter of 2018.

Third quarter GAAP net loss was $3.5 million or a loss of $0.06 per basic and diluted share compared to $4.4 million GAAP net loss and $0.08 per share during the third quarter of 2018. GAAP operating expenses for the quarter totaled $9 million, down from $10.4 million during Q3 2018. This year-over-year decrease in GAAP operating expenses is due to a decrease in R&D expenses and a decrease in sales and marketing expenses.

R&D expense was $3.5 million this quarter, representing 37% of revenue, compared to $4.3 million during Q3 2018 when it was 45% of revenue. The decrease in R&D expense is largely attributed to higher R&D capitalization of technology compared to Q3 2018 as a result of our new product development efforts.

Sales and marketing expense for the quarter was $3 million or 32% of revenue, down from $3.9 million, representing 41% of revenue during the same quarter last year. As Brett mentioned on the last call, we brought in a new North American sales leader during the third quarter and have been optimizing our go-to-market strategy, so the decrease is the result of these efforts.

G&A expense for the quarter finished at $2.5 million or 26% of revenue compared to $2.2 million or 23% of revenue during the third quarter of 2018. The increase in G&A expense is related to expenses for ongoing legal matters with a former vendor that was disclosed in our 10-K annual report.

On a non-GAAP basis, Cyren's third quarter 2019 net loss of $3.5 million or a loss of $0.06 per basic and diluted share compared to a non-GAAP net loss of $3.3 million and $0.06 per share during Q3 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, which are 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 $1.7 million compared to operating cash usage of $2.6 million during the third quarter of 2018. Overall, net cash burn for the third quarter was $2.9 million compared to $3.1 million during the third quarter of 2018. We began the quarter with $12.4 million in cash and finished the quarter with $9.5 million in cash.

During the third quarter, we announced the rights offering to current shareholders of record as of September 25. The subscription price of the offering was $1.73, was set at a 12% premium to the closing share price the day prior to the announcement on September 11 and gave all Cyren shareholders an equal opportunity to participate in the offering.

Warburg Pincus, Cyren's largest shareholder, exercised their basic subscription rights for the pro rata share of the offering and also exercised oversubscription rights to purchase a total of 4.6 million shares in the offering.

The rights offering closed on November 6. And therefore, the $8 million gross proceeds from the offering are not reflected in the Q3 balance sheet but will be included in the cash balance as of December 31. As a result of the rights offering, Cyren now has approximately 59.3 million shares outstanding and Warburg Pincus owns approximately 54.3% of Cyren's outstanding shares.

That concludes our prepared remarks. I will now ask the operator to open up the lines for Q&A. Kevin?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Chris Van Horn from B. Riley FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [2]

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I was wondering if you could comment on the pipeline and what kind of visibility you have kind of into the fourth quarter and maybe into 2020. Any sort of commentary around what you're seeing there?

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

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Chris, we're -- we -- as we have previously reported, we've hired a new North American sales leader recently, early in the quarter, July, and both he and our EMEA/APAC sales leader are very focused on preparing for 2020. And I think we've got good visibility in our pipeline. More importantly, our sales teams are working very hard to grow pipeline, which is one of the things we must do to support our 2020 expectations.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. Got it. And then kind of on that front, how do you see your OpEx spending playing out? Do you think that more staffing is needed either on the R&D or the sales side? Or do you think the team do you have now can kind of support that pipeline? Any sort of commentary around that?

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

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Yes. We're -- at the moment, we're -- as we finalize our 2020 plan, our view is that we will hold the line on OpEx, and we're going to focus on increased efficiency and productivity from our current team.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [6]

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Okay. Got it. And then you cited kind of -- on the rights offering, you cited working capital as kind of use of proceeds. Could you provide any more detail there, what you're thinking on the capital side?

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J. Michael Myshrall, CYREN Ltd. - CFO [7]

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So the $8 million of proceeds helped shore up the cash balance on the balance sheet. We finished the quarter with about $9.5 million cash in the bank. And quarter-over-quarter, we are still burning cash on a quarterly basis. So it helps to extend our runway through 2020 and provide basically the cash we need to expand the business in the second half of 2020.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [8]

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Okay. Got it. And then last from me. In your prepared remarks, you cited a lot of interesting opportunities outside of what you do from a core perspective. When you look at the competitive landscape, those new opportunities, are those kind of new end markets, if you will, for the space in general? Or is there a displacement function that will happen, you'll have to take some share to kind of -- to get into those opportunities?

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

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Well, I think the biggest new opportunity we have is our Inbox Security product, which we mentioned that we expect to bring to market in the second quarter. That is an emerging new market, so there is no established competitive landscape. There are a number of players that are participating in that market, but we think we have an opportunity to establish a position in a new market.

I mentioned a couple of initiatives around our traditional threat intelligence business. That is a situation where we think there's more headroom in the market. And it is probably more displacement than anything else, but we think there are opportunities to do that. And I think the other initiative with Microsoft and its Defender ATP, we think that is a -- we look at that as another new opportunity without a lot of typical competitive pressure.

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Operator [10]

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Your next question today is coming from Chad Bennett from Craig-Hallum.

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Nicholas Paul Mattiacci, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [11]

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This is Nick Mattiacci on for Chad Bennett. So first, just a question for Brett. You stated last quarter and reiterated this quarter that your main focus is on revenue growth going forward. So after another quarter at the company, how has your outlook or conviction changed from when you joined to where you are now?

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Brett M. Jackson, CYREN Ltd. - CEO [12]

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No real change, Nick. I think I spent the first couple of months trying to get to know the company. We identified several opportunities that could help us grow, and we've been working on a set of initiatives around those growth opportunities, and we're in the process of execution. That execution will take several quarters to unfold and deliver benefit, but we think we're on the right track. And we'll be focused on early indicators, which are -- which will be new bookings growth, and that's what our product and our sales and marketing teams are all focused on.

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Nicholas Paul Mattiacci, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [13]

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All right. And then could you just give us any updates on feedback -- or on some early feedback you're receiving from the Windows Defender ATP partnership and the Inbox Security product?

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Brett M. Jackson, CYREN Ltd. - CEO [14]

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So it's early days, and we've had some but limited exposure to some of the enterprise customers who have looked at our capability. I would say that the feedback has been very positive. I think the enterprise customers we've engaged with see a need. And so we're very encouraged by what we hear, but I need to point out that there's still details for us to work out. But we think it's a very, very interesting opportunity for Cyren, again another initiative to drive more enterprise revenue.

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Nicholas Paul Mattiacci, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [15]

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Awesome. And then finally from me, I didn't see or hear an enterprise ARR number for the quarter. Would you be able to share that with us?

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J. Michael Myshrall, CYREN Ltd. - CFO [16]

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Sure. So at the end of the quarter, the enterprise ARR is roughly $7 million, which is up over the prior quarters. I don't have the quarter-over-quarter growth rate, but we finished the quarter with about $7 million in ARR.

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Operator [17]

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Thank you. We have reached the end of the question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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Brett M. Jackson, CYREN Ltd. - CEO [18]

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

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Operator [19]

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Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.