Q3 2020 Cyren Ltd Earnings Call
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Greetings and welcome to the Cyren <unk> third quarter earnings Conference call. At this time, all participants are in a listen only mode.
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On our presentation.
Acquire operators and the conference Please press star zero telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr., Eric and Dan <unk> General Counsel. Thank you Sir you may begin.
Thank you and welcome to Cyren <unk> third quarter 2020, <unk> financial results Conference call. This call is being broadcast line. It 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.
Iris 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 on the risk factor section ever going to see it filings, including our annual report on form 10-K.
On March 32020.
Any forward looking statement should be considered in light of these risk factors.
He's also note as a safe harbor any other UK day is as of today.
And management does not undertake any obligation to revise any forward looking statements on the future also during the course of this conference call. We made its GAAP non-GAAP measures on talking about the company's performance reconciliations to the most directly comparable GAAP financial measures.
Why didn't the tables in the earnings press release issued earlier today and available on the Investor Relations section on our website. These financial measures are included for the benefit of Investor day and should be considered in addition to and not instead of GAAP measures. Joining me on today's call, Brett <unk>, Chief Executive Officer, and Mike Maestro.
Financial officer with that I'll now hand over the call to Brett.
Thanks, Eric I'd like to thank everyone for making time to join our call today.
During the third quarter Cymer reported revenues of 9.1 million well Q3 revenues were down slightly year over year. It is important to point out that our results do not yet reflect material contribution from our growth initiatives, although significant progress on that on was made in the quarter.
On a highlight on the quarter related to driving future revenue growth is the progress that was made with our next generation email security product Cyren Inbox security Q3 was our first full quarter in market with this new product.
Based on our customer engagements to day and Q3 customer wins, we believe that C. O. Yet is cyren, most compelling new opportunity and we believe that it can generate a significant new enterprise revenue stream over time.
Given that our top corporate priority is to grow revenues. It is clear to see how Ya is our most impactful initiative and the key growth driver for Cyren, we will focus on it and funded accordingly.
As a reminder, cyren inbox security or see I asked as we know it internally is a cloud based email security offering with a 100% subscription based recurring revenue model.
I asked provides continuous inbox monitoring and automated response and remediation for fishing business email compromise and malware threats that have penetrated existing defenses such as traditional secure email gateways.
See I asked provides an important additional layer of defense is easily integrated with Microsoft 365, and on boarding large numbers of users is accomplished quickly and painlessly.
And as we have mentioned in past calls leading security market research firms like Forrester and Gartner have reported on fishing as one of the biggest email security threats organizations face today.
During the third quarter both of these organizations recognize hiring and firing <unk> security as a solution to this widespread problem.
Let me review the market opportunity that we see.
Microsoft 365 continues to be the dominant cloud based email platform used by enterprises today with over 250 million users and the user base is still growing.
You based on phishing attacks continue to bypass security mail gateways as well as Microsoft's native security capabilities.
She is clearly a problem on most customers that we have spoken to and IP and security organization are keen to get this problem under control.
We also believe that fishing is a problem for enterprises, regardless of size or industry and our market analysis suggests a total addressable opportunity exceeding $1 billion.
Given the size of the opportunity and our experience on success today, we will continue to prioritize our sales and marketing and R&D investment on this opportunity.
In our third quarter, new recurring revenue from Cyren Inbox security nearly tripled from Q2 2020, and our sales teams experienced an exceptionally high win rate. Thanks to a product that has so far demonstrated strong product market fit.
This is a testament to our product team, who spent two years researching the market and working with customers to understand the size and scope of the fishing problem within enterprises.
We also had a thorough and disciplined process of working with early adopter customers, who are effectively design partners to help us test and tune our value hypothesis and develop the right feature set.
In the third quarter, we closed a number of new customer transactions with midsize and large enterprises in the U.S., the UK and Europe.
All of these customers had email security measures in place, but we're still experiencing significant phishing attacks.
As an example, we engaged with a European based multinational manufacturer with more than 5 billion on an annual revenues and subsidiaries in more than 50 countries. The customer uses Microsoft 365, as their corporate email platform and despite also having hit on that at Microsoft Advanced threat protection.
The customer was still experiencing an unacceptable level of fishing issues.
Cyren Inbox security was rapidly deployed to more than 20000 users and the customer saw immediate value with a dramatic decrease of fishing as well as much better visibility into phishing attacks across the entire company.
As another one of our other pleasant as another one of our customers. So clearly pointed out Cyren inbox security offers capabilities to deal with fishing, that's secure email gateways just don't happen.
As we look for our sales and marketing teams will continue to ramp the <unk> sales and new recurring revenue as aggressively as possible we.
We expect to exceed 100000 active users by calendar year end, the key to maximizing growth, but this opportunity is to continue to focus the majority of our sales and marketing spend on this effort build and leverage channel and responsibly scale, our sales and marketing investment to take advantage of the immediate market opportunity.
Before I turn the call over to our CFO I'd like to comment on two other topics.
First while growth is our priority principally through investment in execution of our Cyren Inbox security strategy, we will continue to identify opportunities to reduce expenses and other areas of our business, we clearly need to be on a path towards profitability and will continue to rationalize our cost structure to enable us to make progress against this goal.
Second we continue to monitor the COVID-19 situation since the outbreak of the pandemic, we have not experienced a major impact to our business with that said over the past three months, we believe that the pandemic has made it more challenging than normal to identify engage new prospects. Additionally, some customers are taking.
Longer to execute.
We are concerned about a potential third wave other pandemic as we approach the colder months and depends on potential impacts to our business.
I'll now turn the call over to Mike My Shrill, who will review our third quarter financials.
Thank you Brad and good afternoon, I will now present, our third quarter 2020 financial result.
For more detailed results. Please refer to the earnings release that was issued this afternoon and is posted on the Investor Relations section of our website and our quarterly filings on form 10-Q. Please.
Please note that we present, our financials on New York, GAAP accounting standards, including non operating expenses, and then I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes those non operating items. Please.
Please refer to our press release for a reconciliation of our GAAP to non-GAAP results.
GAAP revenue for the third quarter of 2020 with $9.1 million compared to $9.5 million during the third quarter of 2019.
Net revenue decrease is primarily related to the end of life on some of our legacy offerings on the Cyren cloud security platform, including Cyren Websecurity and the installed base is winding down through 2020 and into mid 2021.
The lower revenue recognition during that period is partially attributed to the decline of revenues associated with those products.
GAAP gross margins for the third quarter were 58% compared to 60% during Q3 of 2019.
On a non-GAAP basis gross margins were 66% compared to 69% a year ago.
GAAP cost of sales during the quarter with slightly higher than it was on the same period a year ago due to the increase in amortization of capitalized technology and increased depreciation expenses.
During our first three quarter of the year, we have accelerated our cost savings initiatives in our Globalview network by shutting down several private data centers and moving to a hybrid private public cloud architecture, which is more agile and scalable for service delivery.
Third quarter GAAP net loss was $4.9 million compared to $3.5 million net loss reported during the third quarter of 2019 rigs.
The GAAP net loss included some one time expenses, which I will describe later in further detail.
On a per share basis GAAP net loss was eight cents per basic and diluted share compared to six cents per share during Q3 2019.
On a non-GAAP basis, Cyren third quarter net loss was $2.9 million, a decrease of 16% compared to $3.5 million during the third quarter from on key.
This non-GAAP loss per share was five cents per basic and diluted share compared to six cents per share in the same period a year ago.
Hi, current non-GAAP results exclude them from the number of non cash items, including the effects of stock based compensation amortization of intangible assets and capitalization technology. Please.
Please refer to the table in our press release from reconciliation on selected GAAP to non-GAAP measures.
GAAP operating expenses for the quarter total $10 million, an increase from $9 million during Q3 2019.
On a non-GAAP basis total operating expenses for the quarter totaled $8.7 million down from $9.6 million in the third quarter of 2019, a 10% decrease year over year.
This quarter, there was a fairly large discrepancy between GAAP and non-GAAP operating expenses and other mainly due to the effect of R&D path, we've made from a technology.
On a GAAP basis capitalize on R&D expenses were normally decrease overall R&D expense, because we are investing in new technologies from which will be amortized in future periods.
During the third quarter, we capitalize on a smaller amount of R&D expense from prior quarters, because we recently launched two new product from the market. So the R&D capitalization for those products depended on.
As a result, GAAP R&D expense during the period was higher than our prior quarters. In addition, during Q3 and a currency in particular this effect was amplified even more because we decided to write off from older technology development on the Mark from R&D projects moving back in 2017 that never materialized during the day.
Product.
So GAAP R&D expense during the third quarter from crude the one time nonrecurring adjustment of approximately $9.7 million from those terminated projects.
However, on a non-GAAP basis, which excludes the impact of R&D capitalization and amortization armed.
R&D expense from $4.2 million compared to $4.6 million from year ago and decreased from 9%.
GAAP sales and marketing expense for the quarter was $2.9 million compared to $3 million during the third quarter from 19 non.
Non-GAAP sales and marketing expense per into $2.8 million compared to $2.9 million during the third quarter from them.
Non-GAAP sales and marketing expense represented about 30% of revenue in both Q3 2020 in Q3 2019.
DNA expense for the quarter totaled three on sorry, $2.3 million compared to $2.5 million during the third quarter from 90 on a non-GAAP interest DNA expense was $1.7 million compared to $2.2 million from year ago, a decrease of 22% and that represents about nine.
10% from Q3 revenue.
At the end of the third quarter, we had 226 full time and part time employees from Cyren down from 255 employees at the end of Q3 2019.
Operating cash usage during the quarter was $3.6 million compared to operating cash usage of $1.7 million during the third quarter of 2019.
Overall net cash flow from the quarter was negative $3.2 million compared to negative $2.9 million in Q3 2019 on.
Our cash balances ended the quarter with $12.9 million compared to $9.5 million has on September Thirtyth 2019.
The majority of new customer acquisition in the quarter came from assignment inbox security product, including some customers that also optum opted for that 24 by seven incident response service.
We also managed stop sales some of our existing cloud email security customers onto the platform.
Overall bookings for the CIO has tripled triple.
Tripled compared to the prior quarter.
The largest contract exceeding six figures.
Overall renewal activity during the quarter with net as discussed previously we have end of life. Several legacy products earlier this year and for the contract for these customers will not be renewed during the second half of 2020 in the first half from 2021 easy.
These legacy products represented at around $1.4 million on the annual recurring revenue. So at the end of life for these products creates a headwind from quarterly revenue growth.
And our threat intelligence business all of the larger customers, who are up for renewal in the quarter pretty near their agreement for derivations ranging from one per year although.
Somewhere on lower volume from previous years, this resulting decrease in air on our base, we're likely on the impact on future quarterly revenue until the growth in new enterprise products from yes offset.
Net income.
Earlier in the year in advance from Cobot crisis, we need to modest expense reductions in the business now that we are several months EBIT crisis in the past.
And Dan Mckenzie and worsening in the near term.
We are looking at additional expense reductions in coming months.
The majority of our employees are still working from home. So as we look out through 2021, when we have office leases expiring. We anticipate that we may take further cost reduction initiatives by cutting back on non critical services and possibly not bringing on some of the office leases and office related expenses.
I will now ask the operator current to open up the line are key revenue.
Thank you we are on that.
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Hi, This is Nick body actually on for John balance Thanks for taking my questions.
First I just wanted to start out with a little bit more of your view on the environment. As you saw in Q3 and then he got a share. That's what you saw on Q2 and then maybe if you could give us some color on what you've seen so far in this quarter Q4.
The other thing you'd be more specific about what you're referring to.
Yes ill other is deal cycles, lengthening or your pipeline or anything like that.
Just on the pilot programs like the overall environment over the past couple of quarters ago.
Those GAAP metrics Sera indications have been improving or not.
Sure, let's let's yes.
Let's start from the context of covert because I think in Q2.
We were you know what the depending on the pandemic started to take hold the various economies.
We did not see impact to our business, we felt that pipeline growth would continue as normal.
And did not see any major impact on renewals.
As we got through Q3, I think our sales teams notice that it was more challenging to engage with the with new prospects.
That might have been a combination of spending reductions.
From COVID-19, or other people working from home and being a less available for some reason, but we did see our prospecting efforts become a bit more challenging in the third quarter.
And I think that was the biggest thing we saw.
We also saw.
Customer buying processes in some cases extend more than we saw in the second quarter. So those are the two the two key comments I would make about the differences from Q3 to Q2.
Got it. Thank you and then just to dig a little deeper on the on the enterprise initiatives while on.
Good day doubled the pipe line, you're seeing from both us Cyren biosecurity throughout and then.
Also if you've learned anything new I guess in this quarter to other feedback from customers or on the competitive now these products have been in the market for no other corridor.
Yeah, the cyber and lock security is the for US is the is the big story of Q3.
As I as I as I covered in my comments.
We'd now ahead.
Ahead several months.
The product in market and we were able to get hands on experience we've.
We've had very positive feedback.
I've been in software for a long time on this particular product launch was far better than most I've I've done.
Largely because the price the product market fit seems to be so strong.
And as I said in my comments that.
Likely due to.
Our team working very closely with a number of early adopter customers well in advance of general availability. So we know there is a large problem in the market.
It's common knowledge that fishing is causing Microsoft 365 customers a problem.
The larger the organization the bigger the problem is.
We have engaged with enough customers to know that debt problem really does exist. We can confirm that and we can confirm that product market fit is better than we expected it to be in other words were not our product teams are not scrambling to add additional functionality to the product to allow us to compete.
So when we get into an opportunity.
More often than not we're winning.
So.
That is a that's the big Thats, the big news of the quarter breadth and depth.
Is a repackaging of our love the threat intelligence that we offer our OEM customers, but this is pointed at the enterprise that is a newer offering that really just on the market. So we're still in the phase of dealing with early adopters and and ensuring that we've got product market fit.
So there is opportunity there, but the big story for US is Cyren Inbox security.
And the success, we've had and re affirming our belief that it's a big market opportunity and we need to work as hard as we can to capture as much of that opportunity as soon as we can and we're again, we're encouraged with win rates really high win rates.
And now it's a question of of getting into as many opportunities as possible and building our channel as quickly as we can.
Awesome. Thank you.
Good color and then just kind of what you do things on the mix of OEM and enterprise. So both 80 20 in.
Q3, and then kind of how should we think about that mix change in the future or other next quarter next year. Thank you.
Yes.
It's still roughly 80 20.
With with the new bookings growth on the enterprise side, we do anticipate that enterprise will become a larger piece of the pie.
Over the coming quarters, and so you should see that day.
Increase in Q4 on Q1 in Q2 next year, yes.
Our focus Nick is is we've got a we've got a stable OEM business that's been around for a while.
Some strong customers, but the real growth opportunity for us is in the enterprise and today it Cyren Inbox security.
And.
So thats the focus and you know we'd like to see that mix shift more aggressively time will tell how well, we do but thats what were focused on.
Awesome. Thank you that's all permit.
Thanks, Nick.
Thank you once again.
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Mr. Keith.
From my question.
There are no further questions at this time I'd like to turn the call.
Thank you Mr. Jackson for any closing remarks.
I'd like to thank everyone for joining us today and your interest from Cyren, We look forward to a strong finish to 2020 and keeping you updated on an ex calling 2021. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your line.
Thank you for your participation and have a line.
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