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Edited Transcript of CYRN earnings conference call or presentation 14-Nov-18 3:00pm GMT

Q3 2018 Cyren Ltd Earnings Call

Netanya Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Cyren Ltd earnings conference call or presentation Wednesday, November 14, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Avi Spindel

CYREN Ltd. - VP, General Counsel & Corporate Secretary

* J. Michael Myshrall

CYREN Ltd. - CFO

* Lior Samuelson

CYREN Ltd. - Chairman & CEO

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Conference Call Participants

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* Brian Thesenvitz

* Michael Scott Wallace

White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager

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Presentation

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Operator [1]

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Good day, and welcome to the Cyren Ltd. Third Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Eric Spindel, Cyren's General Counsel and Corporate Secretary. Please go ahead, sir.

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

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Thank you, and welcome to our conference call to discuss Cyren's third quarter 2018 financial results. 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 20F, filed on April 27, 2018. 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 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.

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Lior Samuelson, CYREN Ltd. - Chairman & CEO [3]

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Thank you, Eric, and good morning and thank you, everyone, for joining us on the call today. We made very good progress over the past 3 months, and Q3 was an excellent quarter for Cyren. We reported $9.6 million in revenue, which was another record for Cyren. Revenues were up 26% year-over-year. During the quarter, we signed our largest enterprise customer to date onto the Cyren Cloud Security platform, a multinational conglomerate, who chose Cyren to provide e-mail security and cloud sandboxing to its 80,000 employees. The multiyear, multimillion-dollar contract was awarded to Cyren after a comprehensive RFP process, where Cyren was chosen over other well-known e-mail security solutions. We feel that this contract win will serve as a springboard to other significant enterprise accounts in future quarters.

Overall, Cyren added over 60 new enterprise customers into its CCS e-mail and web security platform during the third quarter. The first year orders and average contract value for new customers grew over 190% compared to the third quarter of 2017. Year-to-date through the third quarter, enterprise bookings were up 223% over the same period a year ago, and year-to-date revenue recognition from enterprise customers is up 38% year-over-year.

During the third quarter, Cyren launched a new global channel program called GoCloud. The program provides resellers, managed service providers and distributors with the opportunity to sell Cyren's 100% Cloud Security products and generate recurring monthly SaaS revenue stream. In August, we announced a channel partnership with Arrow Electronics, which is the program's first major distributor in North America. Cyren is working closely with Arrow to train and certify their network of security product resellers in order to enable them to sell Cyren's full suite of enterprise cloud security services. We have already begun to receive our first customer orders from the relationship and think that this partnership with Arrow will serve as a great channel for Cyren to extend our go-to-market in North America.

We continue to hear from prospects and customers alike that phishing has become the industry #1 pain point and is becoming increasingly difficult to detect and prevent. As we disclosed earlier this year, Cyren's technology has been integrated by Microsoft into their Exchange Online Protection and Office 365 Advanced Threat Protection packages to help combat phishing attacks in Office 365. Due to our global view network, where we see billions of secure transactions every day, Cyren's in a unique position to detect and block phishing attacks in real time. We are working to further refine our anti-phishing technology to be able to proactively remediate and remove phishing e-mails after they have been delivered to user's mailbox. Regardless of who the company is using, there's an e-mail gateway for their primary level of protection. We believe that this capability will be unique in the industry and will position Cyren as a market leader in phishing detection that'll make mailbox remediation. We will officially launch this service in early 2019, but expect that it will become a major growth driver for Cyren next year.

In our Threat Intelligence business, we continued to renew our long-term relationships with many of our largest customers. Since the beginning of the third quarter, Cyren renewed and expanded 4 of its top 10 Threat Intelligence contracts for extensions ranging up to 3 years. These 4 companies have been customers of Cyren for over 12 years and together represent annual contract value of over $6.6 million. Overall, the average contract tenure of our 10 largest customers is over 12 years, which points to this -- the reliability and stickiness of Cyren's industry-leading Threat Intelligence Solutions.

Last quarter, we talked about the launch of Cyren's stand-alone client sandbox service within our Threat Intelligence portfolio. Their service leverages our global view database, with billions of daily transactions that allows for real-time threat lookup as well as full forensics on a base of 0 day threats. The early adopter feedback was very positive. And during the quarter, we signed our first deals on the service and we are seeing additional pipeline that could materialize in the fourth quarter and into 2019.

And with that, I will turn the call over to Mike. Mike?

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

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Thank you, Lior, and good morning to everyone on the call today. I am pleased to present our third quarter 2018 financial results. For more details, please refer to the Q3 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 2018 was $9.6 million compared to $7.6 million during the third quarter of 2017 and $9.2 million last quarter. Once again, this represents the highest quarterly revenue that Cyren has ever reported and translates to 26% year-over-year growth.

During the quarter, we added a multimillion-dollar enterprise e-mail security contract in Europe, with over 80,000 employees, where the annual contract value is in the high 6 figures. We recently added another e-mail security customer in the U.S. with 12,000 employees, and another 6-figure annual contract value. These deals are helping to bring our new average deal size up 185% over the third quarter of 2017. And overall, our installed base of annual recurring revenue in the enterprise business is up 52% year-over-year.

Third quarter GAAP net loss was $4.4 million or a loss of $0.08 per basic and diluted share compared to a GAAP net loss of $3.4 million or $0.09 per share in the third quarter of 2017 and $4.2 million or $0.08 per share last quarter. GAAP operating expenses for the quarter totaled $10.4 million compared to $8.1 million during Q3 2017 and $9.7 million last quarter. The increase in GAAP operating expenses is primarily related to an increase in R&D expense, which is derived from lower R&D capitalization of technology compared to last quarter and last year.

On a non-GAAP basis, Cyren's third quarter 2018 net loss was $3.3 million or a loss of $0.06 per basic and diluted share compared to a non-GAAP net loss of $3.2 million during Q3 2017 or $0.09 per share, and $3.5 million and $0.06 per share last quarter. Cyren's non-GAAP net loss excludes a number of noncash items, including the effect of capitalization of technology, which is included in the GAAP results. Please refer to the table in our press release for more details on the reconciliation of our GAAP to non-GAAP results.

In the third quarter, non-GAAP gross margins increased to 72% from 71% last quarter, and we're in line with the non-GAAP gross margins a year ago. Non-GAAP operating expenses totaled $10.2 million in the quarter, an increase of $0.2 million over last quarter and up from $8.7 million during Q3 2017. The increase in operating expenses was largely due to an increased headcount. We finished the third quarter with 261 total employees compared to 239 employees a year ago.

During the quarter, we had negative operating cash flow of $2.6 million compared to negative operating cash flow of $0.5 million in the third quarter of 2017. Also during the quarter, we invested approximately $1.2 million in CapEx and an additional $0.4 million in technology developments, which were capitalized. These cash flows were offset by approximately $1 million in proceeds from employee options exercises and the net cash usage for the quarter was $3.1 million, which compares to $1.7 million a year ago.

The company's cash balance at the end of the third quarter was $13.5 million compared to $9.9 million at the end of Q3 2017. In addition, we maintained another $0.6 million in restricted cash for a total of $14.1 million in total cash, cash equivalents and restricted cash as of September 30.

In September, Cyren filed a shelf registration statement on Form F-3, since our last shelf expired in 2017. The registration statement is intended to give Cyren additional flexibility to access the capital markets on a timely and cost-effective basis, and it enables the company to raise up to $50 million in equity or debt over the next 3 years.

Throughout the third quarter, we had a weighted average of 53.7 million shares outstanding, which is reflected in the per share calculations in the Q3 press release. At the end of the third quarter, we had a total of 54 million shares outstanding, which compares to 39.2 million shares outstanding in the third quarter of 2017.

That concludes our prepared remarks. 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) We will now take our first question from Chad Bennett from Craig-Hallum Capital Group.

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Brian Thesenvitz, [2]

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This is Brian Thesenvitz on for Chad, who is traveling today. I just have a couple of questions. Any potential guidance for 2019 that you could provide regarding cloud security booking potentially?

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J. Michael Myshrall, CYREN Ltd. - CFO [3]

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So we haven't provided guidance yet, and we're not yet at a point to provide guidance for 2019. But what we can say though is that we expect that the traction that we've made in the first 3 quarters of the year, it's been continuing into the fourth quarter. And we're looking forward to the release of the phishing service in 2019 that should help drive the enterprise bookings more significantly during Q2, Q3 and Q4 of next year. So without giving a specific number, we do -- we are very bullish on release of the new service, and we think things are going well on the enterprise side of the business.

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Brian Thesenvitz, [4]

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Perfect. And I just have one more follow-up. Is there a booking mix kind of breakdown between e-mail security and web security that you could provide, I guess, in terms of the overall, the deal breakdown?

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J. Michael Myshrall, CYREN Ltd. - CFO [5]

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Yes. Well, I think, this quarter was skewed a little bit more towards the e-mail security than historically just because of that larger e-mail security deal that we had in Europe. Historically, what we've seen is a mix of both e-mail and web security, and a number of customers who'll take both e-mail and web together as part of the overall suite of services. But I would say, this past quarter was -- on a total dollar value, was primarily driven by the larger deal on the e-mail security side. And then we're also seeing a nice mix of users who are opting for the advanced e-mail security packages, which include the cloud sandboxing, and there has been significant interest as well, especially with -- throughout Europe on our DNS security offerings. But overall, I would say that e-mail makes up the largest component of our enterprise bookings for the quarter.

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Operator [6]

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We'll now take our next question from Mike Wallace from White Pine Capital.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [7]

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Yes, I've got a couple of questions. Looking at gross margins, and I apologize I can probably do this on my own, but I'm kind of mobile today. If you excluded the amortized and capitalized R&D costs and others that flow through that cost of goods sold by now, if you excluded those, what would be the gross margins this quarter?

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J. Michael Myshrall, CYREN Ltd. - CFO [8]

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So on the quarter, on a non-GAAP basis, we're at 72% gross margin.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [9]

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72%. Okay, great. And what was it last year?

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J. Michael Myshrall, CYREN Ltd. - CFO [10]

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So earlier -- so a year ago, in Q3 of '17, it was also 72%. But in previous quarter's Q1, it was 67%, and then it went up to 71% in Q2. So it has trended upward throughout 2018.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [11]

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Okay. And as you think about this quarter and into '19, would it be safe to say that trend could continue?

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J. Michael Myshrall, CYREN Ltd. - CFO [12]

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Yes. I think it's a function of 2 things. Obviously, it's a function of the revenue that we recognized and so as revenue continues to increase, we think that the fixed cost in both operations and support won't increase at the same rate. And so, therefore, our gross margins should improve. However, we are investing in the operational side of the business, both in the data centers as well as kind of our cloud component. And so on a quarter-over-quarter basis, you are seeing a slightly higher cost of goods sold associated with our operational staff and team that is building out the data centers.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [13]

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Okay. I think, you mentioned recurring enterprise revenues were up 52% year-over-year, right?

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J. Michael Myshrall, CYREN Ltd. - CFO [14]

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Yes, year-to-date. So if you look at the first 3 quarters of 2018 compared to the first 3 quarters of 2017, yes, we're up 52%.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [15]

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Okay. And what is that -- can you share that number with us?

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

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I don't have it off the top of my head, but it's north of $6 million now.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [17]

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Okay. And your bookings are really strong. Can you give us some sense of how much of those bookings were recurring revenue bookings or SaaS like revenues versus traditional annual enterprise contracts?

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J. Michael Myshrall, CYREN Ltd. - CFO [18]

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So, yes, we consider all of the bookings as recurring revenue. It's all the SaaS-based model. And so we break it into the 2 components: the enterprise business and the Threat Intelligence business. Both of them are SaaS recurring. The bookings traction that I talked about was specifically to our enterprise business for CCS e-mail and CCS web, and so it's grown very nicely in the quarter, primarily as a result of some of the larger deals that we mentioned during the script.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [19]

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I see. And so if I think about that then, how much cash then was -- did Cyren collect when you signed those contracts? And how do I still want to think about the $13.5 million on the balance sheet and cash? How much of that is -- came from the SaaS contract?

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J. Michael Myshrall, CYREN Ltd. - CFO [20]

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So it's a little bit hard to derive because basically, our deferred revenue balance is a mix of both the Threat Intelligence business as well as the enterprise business. Historically, our Threat Intelligence business has not prepaid upfront, whereas the enterprise business typically prepays a year in advance. But some of it, in the quarter, cash collection is also related to the time of the invoice and when the company -- and when the customer actually pays the invoice. So even though we might have closed the deal in the third quarter, we may not have collected the cash in the third quarter yet.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [21]

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Okay. So as we look into Q4 and into '19, Mike, how should we think about cash building on the balance sheet as you continue to grow the SaaS side of the business?

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Lior Samuelson, CYREN Ltd. - Chairman & CEO [22]

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This is Lior. So as Mike mentioned, we finished the quarter with $13.5 million on the balance sheet, and we're always looking for ways to show up our balance sheet and while making sure or at least paying attention to issues related to dilution. So we're always looking to shore up the balance sheet and making sure that we have our shareholders in line when we do that.

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Michael Scott Wallace, White Pine Capital, LLC - CIO, Managing Partner, Principal and Portfolio Manager [23]

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Okay. And so one maybe final -- one last question. What do you think is a comfortable cash balance that you need?

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J. Michael Myshrall, CYREN Ltd. - CFO [24]

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So certainly, with the ending cash balance that we had this quarter, we're comfortable that it provides a runway well into 2019. But as Lior said, if we're able to add additional cash to the balance sheet, it gives us a lot more visibility and it gives us a lot more flexibility to invest in the R&D and into sales and marketing. But historically, we've operated with cash balances between $5 million and $10 million, no problem. And a year ago, we had about, I think, around $10 million on the balance sheet and we're at $13.5 million right now.

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Operator [25]

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(Operator Instructions) We'll now take our next question from (inaudible)

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Unidentified Analyst, [26]

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My question is, why did you wait until now to publish the fact that you signed the biggest contract you ever had? And if I recall, why did you say it was no good (inaudible). So why did you wait?

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J. Michael Myshrall, CYREN Ltd. - CFO [27]

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Couldn't hear you.

(technical difficulty)

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Unidentified Analyst, [28]

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Can you hear me now?

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J. Michael Myshrall, CYREN Ltd. - CFO [29]

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Yes, operator...

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Unidentified Analyst, [30]

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Can you hear me now?

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J. Michael Myshrall, CYREN Ltd. - CFO [31]

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Yes, we've got the question. Operator?

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Unidentified Analyst, [32]

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You want me to repeat the question?

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Operator [33]

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Can you mute the line, please?

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J. Michael Myshrall, CYREN Ltd. - CFO [34]

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Okay, yes, we did receive the question. The question was if we signed our largest enterprise deal that we've had in the company's history, why did we wait until now to disclose it? And the basic explanation for that is that contractually, we haven't been allowed to do a press release on this customer contract. They launched service in the third quarter, but they haven't allowed us to disclose their name. And so, therefore, from a contract standpoint, we didn't think that it was worthy of a press release at this stage. And so we're hoping that down the road, once the customer meets some milestones that they will allow us to fully disclose their name and we'll do a case study on the win.

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Operator [35]

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At this time, it appears there are no further questions. I would like to turn the conference back to you for any additional or closing remarks.

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Lior Samuelson, CYREN Ltd. - Chairman & CEO [36]

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Ladies and gentlemen, thank you very much for your participation on the call today. We look forward to a strong fourth quarter and a very strong finish to the year. We'll keep you updated on future developments, and we very much appreciate your interest in Cyren. Have a nice day.

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Operator [37]

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This concludes today's call. Thank you for your participation. You may now disconnect.