Q2 2020 Cyren Ltd Earnings Call
Greetings and welcome to Sirens Q2 earnings Conference call.
At this time all participants are in listen only mode. A question and answer it's actually will follow a formal presentation.
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I'd now like to turn the conference over to your host Mr. Eric Spender.
General Counsel. Please go ahead.
Thank you and well keep desire in second quarter 2020 minutes. All results conference call. This call is being broadcast live it can be accessed on Investor Relations section of its already website.
Before we begin please let me remind you that during the course of this conference call Sovereigns 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 could differ materially from expectations.
These risks are outlined in the risk factor section ever actually see filings, including our annual report on form 10-K.
On March Thirtyth 2020.
Any forward looking statements should be considered in light of these risk factors.
Please also note is it safe Harbor and you look we presented that up today and manage maintenance undertakes no obligation to revise any forward looking statements in the future also during the course of this conference call. We made a non-GAAP measures. We're talking about the company performance reconciliations to the most directly comparable GAAP financial measures are provided.
And the tables in the earnings press release issued today into available on the Investor Relations section of our web site.
These financial measures are included the benefit of investors should be considered in addition to and not instead of GAAP measures.
Joining me on todays call, we have rejected Chief Executive Officer, and make Maestro Chief Financial officer with that I'll now hand, the call over to Greg.
Thanks, Eric I'd like to thank everyone for making time to join our call today.
So I run is now two quarters into the implementation of a new strategy that touches many areas of our company.
Fully implementing a new strategy is clearly a time consuming endeavor, which will span multiple quarters, while we have much work to do and it will take time focus and some patients to deliver the results. We are aiming for we are on track for the first half of our fiscal year.
Before I comment on specifics of our second quarter, let me remind everyone. What we have set out to accomplish.
We are focused on creating and driving growth as our top priority and our newest new strategy gives us multiple avenues to do this with an emphasis on growing enterprise revenues.
We have reprioritized, our core threat intelligence services business. This business has historically focused on an OEM market, providing threat detection services and threat intelligence to major email providers, leading cyber security vendors as well as I must piece.
We have been very successful in this market, but we will expand beyond the OEM market into what we believe is a larger enterprise market opportunity leveraging existing technology, and creating new products for enterprise customers.
In addition to our threat intelligence business initiatives, we are evolving our email security business and leveraging our fishing detection and email security expertise to address the large and growing problem of fishing, especially from users of Microsoft 365, the dominant email platform and enterprises today, our next generation email security product.
Buys enterprises with fishing Mitigations solution that we believe it's far more effective than traditional security mail gateways.
Regarding our second quarter first and foremost we achieved our key Q2 operational milestones related to strategy implementation.
We completed the retooling of our Salesforce and product organizations to support our new product and associated go to market strategies.
We delivered two new enterprise products in the quarter, both on schedule. So inbox security targets email born fishing threats states by enterprises, using Microsoft 365.
Simon Inbox security is the first cloud based service to combine continue with email monitoring and threat detection with automated response and remediation for corporate email in boxes.
So I run threat in depth provides enterprise customers uniquely detailed and actionable threat intelligence that can be used by security teams researchers and incident responders to make the right decisions more quickly threat in depth is the first step and expanding cyren threat intelligence business into the enterprise market.
We closed our first customer orders for both of our new enterprise products, providing initial validation of customer value and product market fit.
In addition to our new product development work, we have a renewed emphasis on enhancing our existing products in the quarter, our R&D and product teams delivered key product road map enhancements to ensure that our products continued to deliver value to our customers, enabling cyren to maximize customer satisfaction and retention.
I have to express my appreciation and thanks to our team for their hard work dedication and achievement of our Q2 objectives. Despite the challenges of living and working in a cobot 19 influenced environment.
Stating the obvious we're at a relatively early stage of strategy execution as I mentioned previously some of the key foundational pieces are in place and we are making headway, but this is a work in progress and there's more to do we fully appreciate the need to grow to build value for our shareholders and we believe we will get there, but it will take.
Time to materially impact our financial results.
Lastly, while achieving growth as our priority and growth requires time and investment. We also understand that we need to continue to rationalize our cost structure, which we review on a regular basis.
I will now turn the call over to Mike will go through our second quarter financials.
Thank you Brett and good morning, everyone I will now present, our second quarter 2020 financial results for.
For more details on these results. Please refer to the earnings press release that was issued earlier today and is posted on the Investor Relations section of our website.
And our quarterly filings on form 10-Q.
Please note that we present, our financial vendor U.S., GAAP accounting standards, including non operating expenses and that I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes non operating items.
Please refer to the table in today's earnings release for a reconciliation of our GAAP to non-GAAP result.
GAAP revenue for the second quarter of 2000 $29.2 million compared to $9.7 million reported during the second quarter 2019.
On a constant currency basis, Q2 revenue would've been approximately $9.3 million or a decrease of 4%.
The decrease in revenue year over year is the result of a few customer terminations in our threat intelligence business in 2019, as well as lower revenue recognition during the quarter from one of our largest customers who recently transition from an annual flat p. contract to a minimum commitment contract with a variable usage component.
In addition, we discussed last year and highlighted in our 10-K annual report during 2019, we announced the end of life and some of our legacy offerings on the Cyren cloud security platform.
<unk>, including Cyren Websecurity and to lower revenue during the period can partially be attributable to the decline of revenues associated with those products.
GAAP gross margins for the second quarter were 59% compared to 61% during Q2 2019.
On a non-GAAP basis gross margins were 66% compared to 69% during the second quarter 2019.
GAAP and non-GAAP cost of goods sold during the quarter with roughly in line with the same period as a year ago. So the reduction in gross margin is largely a function of growth lower revenue.
Second quarter GAAP net loss was $4.6 million inline with the 4.6 million dollar net loss reported during the second quarter 2019.
<unk> per share basis, GAAP net loss was eight cents per basic and diluted share in both Q2, 2020 and Q2 2019.
On a non-GAAP basis, Cyren second quarter net loss was $3.9 million compared to $4.1 million. During the second quarter 2019. This translates to a loss of six cents per basic and diluted share versus eight cents per share in the same period last year.
As a reminder, sirens non-GAAP results exclude a number of noncash items, including the effect of stock based compensation amortization of intangible assets and capitalization of technology. Please refer to the table in our press release for a reconciliation of selective GAAP to non-GAAP measures.
GAAP operating expenses for the quarter totaled $9.8 million down from $10.3 million. During Q2, 2019, a decrease of 5%.
On a non-GAAP basis total operating expenses for the quarter totaled $9.5 million down from $10.5 million in the second quarter 20, 99% decrease year over year.
During the quarter GAAP R&D expense was $4.2 million compared to $4.3 million in the second quarter of 2019, but notably higher than the <unk> GAAP R&D expense of $3.3 million reported last quarter.
The main reason for the increasing GAAP R&D expense during the quarter is attributed to lower R&D capitalization of technology related to our new product development effort for Cyren Inbox security and our threat in debt offerings. Both of which were released ahead of schedule during the second quarter.
Since the initial R&D efforts related to those projects have largely been completed we expect lower R&D capitalization in future quarters, and therefore, GAAP R&D expense is expected to be higher during the second half a year.
On a non-GAAP basis, which excludes the effective R&D capitalization R&D expense for the period decreased from $4.9 million in 2000 $19 million to $4.5 million in 2020.
GAAP sales and marketing expense for the quarter was $3.1 million compared to $3.6 million during second quarter 2019, a decrease of 12% overall sales and marketing expense represented about 34% of revenue compared to 37% of revenue a year ago.
Non-GAAP sales and marketing spends for $3 million compared to $3.4 million during the second quarter 2019.
Just a expense for the quarter with $2.5 million compared to $2.4 million. During the second quarter of 2019 on a non-GAAP basis, Gina expense was $2.1 million compared to $2.2 million a year ago.
We finished the quarter with 230 full time in part time employees in the business down from 265 employees at the end of Q2 2019.
The overall decrease in operating expenses is consistent with the reduction in headcount year over year.
During the quarter, we had positive operating cash flow of $2.5 million compared to operating cash flow zero point $8 million during the second quarter 2019.
During the quarter, we collected several million dollars an annual prepayments from two of our largest customers, which helped to increase our cash balance and also increased deferred revenue from $7.2 million at the end of December 2000, $19 million to $9.7 million at the end of Q2 over.
Overall net cash flow for the quarter was positive $1 million and our cash balance increased from one from $15.1 million at the end of the first quarter to $16.1 million at the end of the second quarter.
Our threat intelligence business renewal activity during the quarter was inline with expectations with no significant churn during the second quarter. We had several of our longstanding threat intelligence customers renew for periods ranging from one to three years.
While pricing pressure upon renewal is always a factor one notable customer renewed for another year at a 15% premium and that account has now been an active customer assignment for over 12 years.
During the quarter, our overall gross retention rate was 94%, which is above our target to keep both renewal and gross retention rates above 90%.
In 2019, we made the strategic decision to narrow down our product portfolio and focus our enterprise efforts on email security and threat intelligence offerings.
This included announcing the end of life or certain legacy cloud security products, including Cyren, Websecurity, which will wind down by the end of 2020.
The decrease in revenue during the quarter is partially attributable to the expiration of these web security contracts that were not renewed due to product end of life.
We expect this trend will continue over the next two quarters until all of these contracts and fully expired.
As Bret mentioned during the second quarter, we really to enterprise products related to our new product strategy, Cyren Inbox security and threat into.
We signed multiple new contracts during the second quarter, but due to the ratable nature of our revenues. These contracts contributed very little revenue recognition quarter.
We believe that it will take several quarters for the revenues of the new product offerings to meaning meaningfully impact our results.
We do not believe the ongoing covert 19 crisis had a significant impact on business operations during the second quarter, well I did take longer to close certain customer contracts and it is more challenging for our sales and marketing team to develop new business. Many of our customers have not experienced the downturn in their business and the need for cyber security solutions is as important as.
However.
We will continue to monitor this situation and the related economic impact that it may have on our business over the coming quarters.
I'll now ask the operator to open up the lines for Kieran.
Jerry Thank you.
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We have a question from Chad Bennett Craig Hallum. Please go ahead Sir.
Great. Thanks for taking my questions a good morning, guys.
So warning.
So either bread or Mike So just on the customer the threat intelligence customer that changed kinda contract terms from annual flat to two a minimum with what's a variable component.
Can you give at least.
Maybe qualitatively.
How much of a change that was in in terms of more importantly to go forward I assume it's somewhat of a headwind to growth, but any more color there.
Sure. So it was a one of our top five customers that obviously, the seven seven figure a year customer.
They are using more of our services than they were previously.
But with the variable usage nature of the contract.
That means that we won't necessarily see revenues increasing from that customer until towards the end of the first contract here. So during the second quarter.
We had a a minor impact on on revenue recognition from that customer, but overall for the full year, we would expect that customer would maintain the same value.
Okay.
Not really a headwind to going forward set fair.
Well it may take.
A quarter two to catch up to the full value.
So.
But in the first and second quarters of the contract.
It was below the flat the run rate from a year ago right and then maybe maybe for.
Brett can can you just speak to.
Kind of the you know Microsoft's obviously phenomenal partner of your.
And it just is there anything in terms of you can share in terms of.
The take rate of Cyren email security and fishing products I know fishing is relatively new but the take rate of of that within that office 365 base at this point and kind of what you're seeing there.
Chad the.
The product, you're referring to a sovereign and Bucks security was was just released April 27, as Mike mentioned and I think you. Both mentioned we've got some initial traction we met our internal sales target for for Q2, but I'd say, it's too early to ER to know the answer your question precisely we we expect that.
We will achieve oh, good penetration of the Microsoft market. This is a big market opportunity fishing is a common problem. There is 200 million Microsoft 365 in boxes. There there is competition no question.
But our experience so far has been very positive with respect to the real need customers have to address fishing. So early to tell but we'll have more data for you in future quarters, as we get a broader into the market.
And then maybe last one for me.
Again, probably for Mike Mike can you remind us from a kind of run rate standpoint.
The mix of of the OEM versus direct business today.
Yes, so the the as of the ended the year 2019, we were at 81% in our threat intelligence OEM business and 19% on the enterprise.
So it's roughly still the same we do anticipate that we're going to grow our enterprise business faster than the threat intelligence business and so we would expect that mix to increase.
Overtime, because we are.
Because we have end of life or some of the legacy products Cyren Websecurity, which did fall under that enterprise they are paid.
It has decreased a little bit but new.
Yes product in a threat index products should add to the enterprise revenue moving forward.
Okay.
And I would I would add as I mentioned earlier in my comments.
Our priority is to drive more enterprise revenue. So you you may have noted that our two most recent product launches were enterprise worked hard at the enterprise and that as are our focus will maintain our position in them and the OEM market, there's more opportunity there, but our strategic focus is to drive more enterprise revenue.
Whose and as Mike said, we'd like to see that mix change it is hard to predict how and when it will change, but that's our focus.
And then maybe one last one for me.
Brett just on on its good to see you're already garnering some wins.
For the.
Threat in depth product in inbox security on the direct to enterprise side. Its business can you just characterize you know from.
Kind of deal size, S.P. standpoint kind of <unk>.
I I guess, what you've seen thus far obviously low numbers, but kind of how you think about deal size going forward for those products.
Yeah, I'd, rather not comment on that Chad until we see we have more data points a lot depends on.
The size of customer so we're looking at.
Our Saarinen Bucks security targeting the mid market as well as the enterprise.
And I think we want to get into the market a little bit further to see how the ASV picture looks so too early to tell but I will have more data for you as we get into the or get through the third quarter, probably we're starting to see.
Our first larger opportunities for sovereign Inbox security, which I think we'll we'll have an impact on ASP, so I'd, rather wait to comment on that.
The the the Cyren a threat in depth.
Solution for the enterprise.
We expect to ASP used to be consistent with those in our OEM space. So those are typically.
You know somewhere around seven figure HCV deals.
Close to close to seven figure ACB deals could be higher consistent with what we've seen the OEM space.
Okay. Good fair enough I appreciate it.
I had I have to correct myself I meant to say six figures seven figures six okay.
Got it I appreciate you taking my questions. Thanks.
As a reminder, if you wish to ask a question Chris Star one on your telephone keypad that star one.
<unk>.
Then there are no further questions I'd like to turn the call back over to Ret Jackson for closing remarks Mr. Jackson.
We'd like to thank everyone for joining us on our call today and your interest in Cyren, we look forward to the second half of 2020, and keeping you updated on our progress in future quarters. Thank you.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.