Q1 2021 Cyren Ltd Earnings Call

Greetings and welcome to sovereigns first quarter earnings Conference call.

At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference.

Please press Star zero on your telephone keypad and as a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host Chad Rose. Thank you you may begin.

Thank you and welcome to Sirens first quarter, 2020, One financial results Conference call. This call is being broadcast live and can be accessed on the Investor Relations section of the siren and website before we begin. Please let me remind you that during the course of this conference call Sirens management May make forward looking statements. These forward looking.

<unk> 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 and the risk factors section of our SEC filings, including our annual report on form 10-K filed on March 31, 2021, any forward looking statements should be considered in light of these risk factors. Please also note as a safe harbor any outlook, we present as of today and management does not.

Undertake any obligation to revise any forward looking statements and 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 and 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 Brett Jackson, Jackson, Chief Executive Officer, and Ken Tarpey, Chief Financial Officer with that I will now hand, the call over to Brad Thanks, Jeff I'd like to add my welcome to everyone.

And for today's call.

IRA and his primary focus continues to be our biggest growth opportunity, helping enterprise customers using Microsoft 365 combat phishing attacks, while our Q1 revenues were down year over year and were in line with internal expectations and the year over year revenue variance is largely attributed to churn associated.

And with legacy products, we continue to execute our plan to develop a leading position and the anti phishing market with Simon Inbox security and good progress was made in Q1 and continuing the process of building this new high growth revenue stream.

As we continue engaging with prospects and we remain extremely bullish on the market need for cyber and Inbox security based on our view of the severity and breadth of the phishing problem among enterprises.

Tricia and clearly remains a top concern among chief security information officers and we believe this will continue to be the case going forward.

Our value proposition proposition resonates with prospects and our unique approach to the problem as well as our competitive differentiation are compelling to buyers.

We offer continuous detection of a based on phishing attacks at the inbox and offer a crowdsource framework for end users it administrators and security operations personnel to report fishing as well leveraging both artificial and human intelligence to prevent phishing attacks.

Most importantly, we provide automated remediation and incident management capabilities to increase the speed of response to threats and neutralize them quickly across an enterprise and.

Additionally.

And our approach provides an automated solution to a traditionally manual process savings.

And security organizations valuable time and effort and addition to providing faster response time to threats.

Q1 was our third quarter and market with cyber and Inbox security in Q1, we saw quarter on quarter AOR growth as we continue to acquire new customers as well as expansion of some existing customers protecting additional users as well as providing our add on $24 seven and incident response service we.

And several large opportunities and our Q1 pipeline that did not close and the quarter due to customer buying process delays and those opportunities remain and our Q2 pipeline.

We did see positive momentum across several leading indicators and particular in quarter pipeline creation increased more than 100% from Q4 2020, largely due to year over year increase and marketing investments and pipeline contribution from our channel partners. We exited Q1 with approximately 20 new.

Channel partners on board to resell hiring and inbox security across the U S EMEA and Asia Pacific regions, ranging from regional Vars to large systems integrators, and we see the channel playing a critical role and our go to market strategy, helping us raise awareness of our anti phishing solution among their customers.

Moving to grow our pipeline and ultimately, helping us to accelerate and scale <unk> Inbox security revenues.

Given our belief and the market opportunity, our confidence and our product is product market fit and competitive differentiation and the key lever for IRR growth and sales pipeline, we have a very capable product team, who will continue to innovate and enhance our offering to provide more value to customers ensure strong differentiation and help our <unk>.

Sales organization and the sales organization and maintained a high win rate it.

It is clear at this point that our top priority relative to achieving market success is to grow our pipeline as aggressively as we can.

Does that and we will continue to invest the majority of our sales and marketing resources and inspire and inbox security pipeline building to maximize size and growth rate of this revenue stream and we are very optimistic that we will continue to build customer traction and market momentum.

While our primary focus is growing our enterprise business with cyber and Inbox security and the majority of our revenues have historically come from our core threat protection and threat intelligence business, we provide our embedded <unk> threat detection services and threat intelligence data for the world's largest email providers, leading cyber security vendors and service providers to help them to help.

And then and there are customers against threats threats from email files and the web.

We deliver our threat protection services via our global view security cloud and through our service delivery process, we gain real time insight and valuable data related to the global threat landscape.

Our focus and this business is to maximize customer retention and provide high quality threat detection services and deliver quality service to our customers during the quarter. Thanks to the efforts of our R&D and customer success teams, we achieved a 90, 696% customer retention rate and have significantly improved our net promoter score over.

And the past several quarters, our R&D teams continue to improve our market leading threat detection capabilities. Our OEM sales team closed several new and expansion opportunities and we are pleased to add another leading cyber security company to our customer portfolio.

Finally, we will continue to manage our costs and look for opportunities to reduce expense improve efficiencies.

Improve efficiencies and reallocate investment to support growth as possible, while not disrupting our ability to serve customers or impact revenue.

I'll now turn the call over to Ken Tarpey, who will review first quarter 2021 financials and offer his comments on the quarter.

Thank you Brett and good afternoon, everyone I'm pleased to present, our first quarter 2021 financial results, but more detailed results. Please refer to the earnings press release and in the first quarter 'twenty 'twenty. One form 10-Q that was issued today and is posted on the Investor Relations section of our website.

Please note that we present, our financials under U S 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 refer to the table in today's earnings release for reconciliation of our GAAP and non.

Non-GAAP results.

GAAP revenue for the first quarter of 2021 was $8 8 million a decrease of 800000 compared to the $9 6 million reported during the first quarter of 2020 on.

On a constant currency basis Q1 revenue decrease.

<unk> 300000 year over year and revenue was actually up 400000 over the fourth quarter of 2020.

GAAP gross margins for the first quarter were 57% compared to 63% during the Q1 and 2020 and.

And on a non-GAAP basis gross margins for the first quarter was 65% compared to 68% during Q1 and 2020.

First quarter GAAP net loss was $4 2 million up 50% compared to the $2 8 million net loss reported during the first quarter of 2020, mostly due to lower revenues and higher R&D expenses compared to the prior year.

On a per per share basis, GAAP net loss was six cents per basic and diluted share compared to five cents per share during the first quarter of 2020.

GAAP operating expenses for the quarter totaled $9 million.

And increased from $8 6 million during Q1 and 2020.

This increase and operating expenses is mainly due to an increase and GAAP R&D expense.

Which increased from 34 per cent of revenue during Q1, and 2020% to 49% of revenue in Q1 2021.

The increase and GAAP R&D expense during the quarter can be attributable to lower R&D capitalization.

On a non-GAAP basis R&D expense also decreased to $4 3 million and Q1 2021 compared to $4 5 million and Q1 2020.

Sales and marketing expense for the quarter was $2 6 million compared to 3.0 million during the first quarter of 2020, representing a day.

Declined from 71 per cent of revenue to 30% of revenue.

G&A expense for the quarter was $2 2 million for both Q1, 2021 and Q1 'twenty.

We continue to make steps to reduce expenses and the business and as a result total reported head count and the company at the end of Q1 'twenty 'twenty. One was 212 employees compared to $2 42 at the end of Q1, 2020.

On a non-GAAP basis, sirens first quarter, 2020 net loss was $3 2 million.

And the loss of five cents per basic and diluted share.

Compared to a non-GAAP net loss of $2 8 million and <unk> <unk> per share during the first quarter of 2020.

Sirens non-GAAP net loss excludes a number of noncash items, including the effect of stock based compensation and amortization of intangibles and capitalization of technology.

Please refer to the table on our press release for more details on the reconciliation of GAAP to non-GAAP results.

During the quarter, we experienced operating cash use and usage of $5 3 million compared to operating cash usage of $4 4 million during the first quarter of 2020.

The reason for the higher cash and cash usage for the quarter was a higher net loss.

Along with the receipt of a multimillion dollar three year prepayment during the first quarter of 2019.

Whereby the deferred revenue has continued to decline as this contract approaches renewal.

Overall, our cash balance increased from $9 3 million at the end of fourth quarter to $16 5 million at the end of the first quarter of 2021.

This increase is the result of the net proceeds from an equity offering we closed on February 16, 2021 of 12 million shares.

$1 15 per share for gross proceeds of $13 8 million before expenses.

This translated into an additional $12 6 million of cash after offering expenses.

The proceeds will be used for working capital purposes, with a primary focus on accelerating the growth of.

And our new product offerings, such as <unk>.

Siren Inbox security.

Like many organizations and 2020, and 2021, which we transition operations to and almost entirely virtual operating environment with most employees working from home.

As part of our overall cost reduction strategy, we have chosen not to renew one office lease and a corner office, we have entered into a new agreement, which reduces our long term commitment and operating costs and 2021 and 2022.

I will now ask the operator open up the lines for Q&A.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and.

A confirmation tone will indicate your line is and the question in queue. You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Our first question comes from Chad Bennett with Craig Hallum. Please proceed with your question.

Great. Thanks for taking my questions.

Brett I see and the release it looks like you guys sign day a.

Pretty material customer for <unk> and the quarter I think it was sick of group.

Can you just give us color on on kind of.

You know how that deal.

Came about and then.

What existing technology security technology around email day were using that you know that they felt.

What's lacking and and what the opportunity was to actually win that business.

Thanks, Chad.

That transaction was closed earlier, but we.

Announced that transaction to the market and the first quarter.

Sika is a Swiss based organization and they've got offices around the world.

They were experiencing fishing problems.

And they did not have a solution in place other than.

On security E Mail gateway.

And we engaged with their security operations personnel, who were interested in gaining visibility into the problem across their global operations.

And they evaluated our product and.

And.

And they were.

Happy with the results that we delivered we gave them visibility across all of our operations.

And when we leveraged our automated phishing detection capabilities.

And we could eliminate.

Phishing E mails from Inboxes across their company, which was assumed a huge time saver for them. They were also impressed with our ability to engage users.

And what we call crowdsource detection and so as users engage with their E mail accounts.

Some of them have received training some of them are just are just knowledgeable about what phishing attempts look like and we give them the ability to report those phishing attempts as well and addition to our automated detection and so.

It was a very nice fit with our product and seekers needs. It's a global operation and fishing tends to be a bigger problem and larger organizations. In this case, we rolled out to 25000 users.

Across 100, I think it was 100 different sites.

So we're helping them get to get a hold of the problem and and successfully remediate. These attacks. Okay. And then just to follow up on the commentary on and on C. O U S pipeline growth and the quarter.

It looks pretty good I think you indicated up a 100% sequentially just any color into to kind of the you know deal size and and and kind of.

You know verticals that you're seeing early traction and foresee I S.

It's a fishing first off Microsoft 365 is used by enterprises across multiple verticals.

So and fishing the phishing problem.

And is also across vertical issue.

So.

The second point.

I would make is that as we are.

And get into the market further with our own sales efforts and as we recruit more channel partners.

We are we are getting into larger opportunities.

And that's the biggest change to our pipeline.

A greater number of large opportunities and I'm talking about opportunities that range in size from 10000 users to probably a maximum of.

Close to 100000 users now.

And now as you know, having a deal and pipeline is no guarantee that it will be closed but.

But we are happy with.

The pipeline growth, especially mid size and large enterprises and these larger transactions and we believe based on our experience with with Zika.

We know the product scales, we know the product is easy to implement and.

And and delivers value for larger user and user population. So so we're very encouraged.

And then last one from me and any kind of color I know, it's still early but reaction from from the email email security market to the proof point transaction and.

And if you believe that's potentially an opportunity for you or or any color you could provide then I'll hop off thanks.

I didn't hear the first part of the question.

The proof point takeout.

And any commentary on on.

And there are opportunity for you guys or otherwise.

Yes, I think I think.

I think it.

It wasn't surprising.

Rising I think the.

Proof points and a variety of businesses, but the security E Mail gateway businesses has been commoditized.

And I don't think represents a great growth opportunity. So it's not surprising the transaction was not surprising.

I do think it's an opportunity for us, but we believe that all along that.

Simon Inbox security as a next generation E Mail security product and the current landscape and secure email gateway products and vendors.

Just don't solve the problem.

So we will continue to pursue the opportunity and prove to customers that.

We provide value over and above their legacy security mail gateway products.

Got it thanks much.

Our next question comes from Michael Gallo, Many a private investor. Please proceed with your question.

Hello, and thanks for taking my call and acquiring about noticed that youre doing a lot of enterprise and ice.

And sorry enterprise customers are you also doing willing to work with governments.

That's my first one.

We have not we.

And we do not have as part of our strategy and initiative to pursue governments, it's not out of the question.

The most obvious opportunity for US is the enterprise at the moment and I think as we gained traction.

We will continue to consider other opportunities and government may be one but it is not currently in.

And our plan for 2021.

And thank you.

Any merger talks.

No. We don't we don't comment on speculation around around mergers.

And as a practice so.

Okay.

And having this.

I noticed that it was it.

You didn't say, who it was that you lost your contract from your last Q.

Part of your contract was it through because that your last part of the contract or.

And missing something there.

<unk> was a new customer.

So I'm not aware of what you're hearing there was.

On your last quarter or year earnings Youre seeing that.

And as of April 1st Youre going to be on one customer you lost part of their contract I guess, because it may be it from me.

If you can elaborate on that one why why did we lose.

Part of that contract.

And that's why the sales were down.

And assuming.

No im not aware of that.

I'm not aware of what you are referring to.

Okay.

And so it's like Okay and that was it just those both two and Theres merger and just if you're going to be strictly on enterprising and from your last.

A question here that you were there.

Building, a bigger and bigger for the enterprise.

And so.

Do you work with other groups to like casino groups and that kind of stuff too or.

Strictly.

365 web males.

So we are with our <unk> Inbox security product. We are currently focused on.

Microsoft 365, which is the most popular E mail platform within enterprises.

And we are looking at the market very broadly so while there may be some concentration and particular verticals. It's a very horizontal problem fishing that is a very horizontal problem.

So I think your question was about gate the gaming industry, yes.

Besides just doing your two shifts five would you be working with those type of groups as well.

We'd be looking for fishing opportunities among Microsoft 365 customers across multiple industries.

Okay Awesome. That's all thank you so much.

Okay.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.

There are no further questions at this time at this point I'd like to turn the call over to Brett Jackson for closing comments.

Thank you all for joining us on the call today, we look forward to keeping you updated on <unk> progress over the coming quarters.

Thanks.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.