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Edited Transcript of CYRN earnings conference call or presentation 8-Aug-18 2:00pm GMT

Q2 2018 Cyren Ltd Earnings Call

Netanya Aug 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Cyren Ltd earnings conference call or presentation Wednesday, August 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric 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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* 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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Good day, everyone and welcome to the Cyren Ltd. Second Quarter 2018 Conference Call. This call is being recorded.

At this time, I would like to turn the conference over to Eric Spindel, Cyren's General Counsel. Please go ahead, sir.

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Eric 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 second 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 over the call to Lior.

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

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Thank you, Eric, and good morning to everyone, as we discuss Cyren's second quarter 2018 results. The second quarter 2018 was a very significant quarter for Cyren. We report our highest ever quarterly revenues with a total of $9.2 million, which represents 20% sequential quarterly grow. In addition, we signed the largest contract in Cyren history, a 3-year deal with Microsoft, valued at over $20 million.

Bookings in the quarter from enterprise account, including Microsoft, were up 277% year-over-year, and enterprise revenue recognition was up 43% compared to Q2 2017. Also as we announced earlier this week, we signed a strategic distribution agreement with Arrow, the leading value-added distributor of cybersecurity solutions.

We view the Microsoft win as a great validation of Cyren's technology leadership. As a reminder, Microsoft chose Cyren's anti-phishing technology to be integrated directly into Microsoft Exchange Online Protection and Office 365 Advanced Threat Protection packages, which are available to Office 365 customers. We are leveraging this technology to develop an anti-phishing service, targeted other large enterprise accounts and expect that this offering will be commercially available later this year. We believe that this new service will help further establish Cyren as the leader in helping enterprises combat phishing attacks.

We experienced success in several other enterprise accounts. We signed an agreement with a well-known multinational software company, where Cyren Email Security was selected to protect tens of thousands of users on over 170 enterprise domain.

We were also selected by another large enterprise to provide managed email security services to the company's employees throughout Europe and Asia. Beginning in the fourth quarter, Cyren will be providing advanced email security, including our enterprise cloud sandboxing technology in order to protect the company's 80,000 employees. We believe this customer will have validated Cyren's ability to scale and enable Cyren to win other large enterprise accounts in the future.

Internally, we continue to invest in R&D and product development initiative. During the first half of the year, our R&D team made a number of significant product enhancements to both our threat intelligence and enterprise offerings. On the threat intelligence side, we released an updated stand-alone cloud sandbox solution, which has targeted security vendors and managed service providers. The service leverages mainly our anti-spam, anti-malware and IP reputation detection capabilities, and includes the ability to do real-time threat lookups in our global view database. We have a number of early customers who have expressed interest in leveraging this service.

In May, we released Version 4.5 of our Cyren Cloud Security platform. The latest release added additional data privacy features for GDPR compliance purposes, and also includes Cyren's innovative cryptocurrency mining detection capability, advanced email security imposter detection and cloud apps for security shadow, IP visibility and control.

When released later this year, Cyren's anti-phishing service will interconnect directly with CCS platform, or be usable as a stand-alone second layer of service, so that large enterprises who already have existing secure email gateway or cloud security can supplement the protection, utilizing Cyren's best-in-class phishing detection.

We also continue to invest in ourselves in marketing teams in Europe and the U.S. We already have a number of productive channel partners in both the U.K. and Germany and are driving the majority of new bookings through our channel partners in Europe.

In the U.S. we are transitioning from a pure direct selling model to a hybrid model with direct and indirect channels. As we discussed on Monday, we recently signed a strategic distribution agreement with North America with Arrow Electronics, the leading value added distributor of cybersecurity solution.

Most people know that Arrow provides value-added distribution, business consulting and channel enabled services to the world's leading technology companies under channel partners that serve the commercial and government markets. Through this agreement, Arrow will distribute Cyren's cloud-based email, web and DNS security products to secure the resellers throughout the United States and Canada.

Arrow chose Cyren Cloud Security products in order to complement other cloud-based appliance-based security solution that it distributes through its channels. We are only at the beginning stages of this relation, but I believe that it will greatly extend our channel reach in North America in future quarters.

During the second quarter, we renewed one of our largest OEM partners, who is utilizing several of Cyren's Threat Intelligence Services in its UTM, a cloud security product. This multi-year, multi-million dollar agreement was renewed at over 35% premium to the previous agreement. In this account, Cyren has embedded in hundreds of thousands of security appliances, protecting millions of SMB and enterprise users. We believe this partner is representative of our other large threat intelligence accounts, where our largest customers are becoming larger. And usage of Cyren's services grow in conjunction with the overall strength of their security business.

I will now turn the call over to Mike to discuss Cyren's second quarter financial results. Mike?

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

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Thank you, Lior, and good morning, everyone. I will now provide you with a review of our second quarter 2018 financial results. For more detailed results, please refer to the press release we issued earlier today, which is posted on the Investor Relations section of our website.

Please note that we state our financials under U.S. GAAP, 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 today's press release for a full reconciliation of our GAAP to non-GAAP results.

GAAP revenue for the second quarter of 2018 was $9.2 million compared to $7.8 million during the second quarter of 2017 and $7.6 million last quarter. This is the largest quarterly revenue that Cyren has ever reported and represents 20% sequential quarterly growth, 18% year-over-year and is 11% higher than our previous record quarter. The majority of quarterly revenue can be attributed to Microsoft -- the majority of quarterly revenue growth can be attributed to Microsoft, which launched service during the second quarter, along with another -- a number of other new enterprise accounts.

Second quarter GAAP net loss was $4.3 million or a loss of $0.08 per basic and diluted share, compared to a GAAP net loss of $2.5 million or $0.06 per share in the second quarter of 2017 and a decrease in net loss of 19% from $5.3 million and $0.10 per share last quarter.

GAAP operating expenses for the quarter totaled $9.8 million compared to $7.8 million during Q2 2017, and up slightly to $9.6 million last quarter.

On a non-GAAP basis, Cyren's second quarter 2018 net loss was $3.7 million for a loss of $0.07 per basic and diluted share, compared to a non-GAAP net loss of $2.3 million during Q2 2017, or $0.06 per share.

On a sequential basis, non-GAAP net loss for the second quarter decreased 25% from $4.9 million or $0.09 per share compared to Q1 2018. Cyren's non-GAAP net loss excludes a number of noncash items, so please refer to the table in our press release for more details on the reconciliation of GAAP to non-GAAP result.

In the second quarter non-GAAP gross margin increased to 71% from 67% last quarter, but were down slightly from 74% a year ago. Non-GAAP operating expenses totaled $10.1 million in the quarter, flat compared to Q1, and up from $8.4 million during Q2 2017, mostly due to incremental headcount.

During the quarter we achieved positive operating cash flow of $0.9 million compared to negative operating cash flow of $1.8 million in the second quarter of 2017 and negative $4.6 million last quarter. This positive operating cash flow was related to a large customer annual prepayment during the quarter, which is reflected in the deferred revenue balance on the balance sheet.

Also during the quarter, we invested approximately $1 million in capital expenditures for network and office infrastructure, and invested an additional $0.8 million in technology developments, which were capitalized. Please see the cash flow statement on our press release for more detail.

The company's cash balance at the end of the second quarter was $16.6 million compared to $11.6 million at the end of Q2 2017 and $17.9 million last quarter. Net cash burn for the quarter was $1.3 million.

Cyren finished the quarter with a total of 251 employees compared to 227 employees at the end of Q2 2017. This included a total of 52 people in sales and marketing, which was down from 61 employees at the end of Q1, and 57 employees last quarter.

During the second quarter, we added just under 50 new enterprise logos, which is consistent with our previous 4 quarters. Bookings from new enterprise customers were up 153% compared to the second quarter a year ago. An average new deal size is up 78% for the first half of 2018 compared to the average new deals size for 2017.

Aside from Microsoft, when including both new and upsell enterprise deals, bookings were up 277% compared to Q2 2017, and 31% compared to last quarter. Q2 average price per seat for enterprise services is up roughly 15% compared to Q2 2017, and 2018 year-to-date price per seat is up 79% compared to the full year of 2017.

Excluding Microsoft, enterprise revenue recognition is up 43% compared to Q2 2017, and year-to-date, revenue from enterprise accounts is up 36% over the first half of 2017.

With that, I would like to open up the line for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) I do have a question that comes from Chad Bennett from Craig-Hallum.

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

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Nice job on the bookings side. I guess on the large software, multinational software customer that you closed in the quarter and the large, I think, European 80,000-employee customer that you also closed, can you give us a sense of deal sizes on both of those from an ACV standpoint?

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

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Sure. So the first one that you mentioned, the multinational software company is a several hundred thousand dollar deal. It's basically several tens of thousands of users equivalent, and it's an expansion to an existing customer that we've been working with for a couple of years. On the other deal, the European multinational company, it is close to -- it's approaching a 7-figure annualized contract value. And it's a 3-year deal that should begin revenue recognition in the fourth quarter.

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

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Okay. And are both of these deals, Cyren-branded cloud security deals? Or are they OEM-type deals?

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

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No, they are Cyren branded.

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

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Okay. Got it. And just in terms of where we kind of exit the year, how we think about the exit run rate of the Cyren-branded enterprise, cloud security business, this year -- any sense your, Mike, on kind of what this business looks like exit run rate this year.

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Lior Samuelson, CYREN Ltd. - Chairman & CEO [7]

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Well, Chad, well thanks for the question. But we don't give any guidance. But what we can say is that you can see we did well in the second quarter and we think that we will continue to do well for the rest of the year. So that's basically -- so we feel relatively positive.

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

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Okay. Fair enough. And then last one for me, what's really driving the ASP increase? Is it additional products, cross-sell, upsell? Is it -- do you feel like you have enough kind of flagship customers out there where maybe you have a little more pricing power than maybe you did a year ago? Any color there, and then I'll hop off.

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Lior Samuelson, CYREN Ltd. - Chairman & CEO [9]

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I think, first of all, we're targeting bigger accounts. And I think our products definitely are the combination of just the platform and the strength of our product. And then again, as I said earlier, we are targeting bigger, better accounts.

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Operator [10]

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(Operator Instructions) And that does conclude today's question and answer session. Mr. Spindle, at this time, I will turn the conference back to you for additional or closing remarks.

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Lior Samuelson, CYREN Ltd. - Chairman & CEO [11]

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This is Lior. Thank you for joining the call today, and thank you for your continued interest in Cyren. We are pleased with our Q2 and first half results, and we look forward to sharing more good news with you in the future. Thank you.

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Operator [12]

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And that does conclude our conference today. Thank you for your participation. You may now disconnect.