Q2 2021 Cyren Ltd Earnings Call
Person, we will discuss the details later in my comments as well as in our Cfos comments.
Not apparent in our overall revenue.
Commentary.
<unk> highlight of our second quarter the performance of our enterprise any anti phishing product siren Inbox security.
Really momentarily.
<unk> <unk> as it is known internally has literally been a startup within <unk>.
Really.
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<unk> are very excited.
Thank you for calling income.
About acceleration provides us further.
Conference thoroughly.
<unk>, we are helping customers solve an urgent problem.
Really.
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<unk> Q2.
The conference operator.
To continue in Q3.
Later.
<unk> with the potential for further strong quarter over quarter growth.
Just on the size and maturity of our.
Sure.
Line, the number of customer transactions already closed in the third quarter.
Yes.
The 2021 marks the one year anniversary of Siren Inbox security being in Mark.
Wow.
And we are within striking distance of $1 million of IRR, which is a significant milestone for us.
While this revenue stream is not immaterial to our overall results. We are very encouraged with its trajectory and potential.
Let me cover the details of <unk> Inbox security performance in the second quarter 2021.
We saw new and expansion.
<unk> more than 240% from Q1 with most of this from new customer acquisition.
This quarter over quarter growth was driven by a 55% increase in customer order volume from the prior quarter with transactions from customers across six countries.
While the majority of the Q2 <unk> growth is from new customers. We are seeing an increasing stream of expansions from existing customers as they add more licensed users.
In Q2, we also saw our first customer contract renewals and we are pleased to see 100% gross retention, which is another validation point that <unk> Inbox security is an invaluable solution, helping our enterprise customers solve their fishing problems.
A key element of our go to market strategy is leveraging channels to help us scale, we committed to developing the channel early in our go to market execution and we are pleased to report that 55% of our Q2 bookings were through channel partners. We are beginning to see new opportunities sourced and completely managed end to end by our partners.
With some sales cycles as short as 30 to 60 days.
It is still early days building, our indirect channel, but we are encouraged by the progress that has been made and our channels team will continue to add new partners as aggressively as possible.
It is also important to point out that our win rate on product evaluations remained strong at more than 70% Spa.
Specifically when a prospect decides to evaluate our anti phishing solution.
More than 70% of the time, they choose to purchase our solution instead of competitive alternatives.
This win rate is well above our expectations and we have several takeaways from this.
First.
We believe the phishing problem is widespread across enterprises and customers are keen to solve it despite prior investments and secure E mail gateways and security awareness training.
Second our product has strong product market fit our product team understands the phishing problem and has created a product with the right functionality and ease of use to quickly and effectively solve it finally, we believe that <unk> inbox security as a highly differentiated anti phishing solution that when evaluated stands.
Versus alternatives, let me share a recent customer example is an illustration.
One of Cis's strength is how easy it is to implement with just a few clicks and deliver immediate value. Our recent prospect deployed our product in approximately 10 minutes and Cif immediately identified enactive phishing campaign that was also automatically remediated. It turns out that this prospect.
<unk> had been unsuccessfully fighting this phishing campaign for several months and their team was spending many hours every week trying to remediated within one week from the successful product evaluation, the customer purchased <unk> Inbox security of.
Of course, not all sales cycles can be this short, but the key point is that when we identify a prospect with a phishing problem, we can quickly and effectively solve their problem and we believe we do this better than any other solution.
We continue to believe that the anti phishing market for Microsoft 365 in the enterprise is large and Underpenetrated. The recent increase in ransomware attacks highlighted in the media have only added fuel to the fishing fire in our opinion and the opinions of industry experts fishing is viewed as a common method of distributing ransomware.
Stop phishing and you eliminate a key source of ransomware in fact, we have a growing number of customers who recognized <unk> Inbox security is one of the essential components of their defense in depth strategy to protect themselves from ransomware attacks.
Given validation of our strong product market fit our compelling competitive differentiation an exceptional win rate. It is clear that we need to scale. Our go to market as quickly as we can to take better advantage of the market opportunity simply put we need to get our anti phishing solution in front of more prospects. If we can effectively do this.
We absolutely believe we can build a much larger high growth revenue stream that can increase sirens market value and reward our shareholders. Thankfully. This past July at our annual meeting our shareholders approved an increase to our authorized share capital, which gives us the potential to raise additional capital at the appropriate time to <unk>.
<unk> go to market expansion as well as continued product innovation.
Let me now move to our threat intelligence services business. We are pleased to report that we acquired multiple new customers in the second quarter of note. We closed a contract with one of the most successful brands in the World, who selected sirens threat intelligence data service to help mitigate fraud and account takeover after a detailed and thorough evaluation.
<unk> of several competitive offerings siren was chosen over other vendors due to our ability to detect security threats in real time on a global basis, leveraging our global view security cloud and.
In fact, Simon demonstrated an ability to detect malicious phishing sites earlier than other alternatives in some cases as much as 24 to 48 hours ahead of competitive offerings.
We also experienced strong OEM customer renewals in the quarter with extremely low churn more than 20 OEM contracts contract renewals were closed in Q2 with five of these having annual contract values ranging from $500 million to $2 million.
With that said, we did renew a contract within the quarter with our largest customer at a substantially lower value. We were notified in early Q4.2020 that this customer did not intend to renew one of its contracts at full value, which we disclosed in our Q3.2020 10-Q. The contract was originally signed in <unk>.
18, and had two components the customer decided to remove renew just one of the components moving forward effective April 2021, our relationship with the customer remains strong. We are currently providing five different siren threat intelligence services across several contracts to multiple parts of the customers' business the latest serviced.
To be added was a seven figure four year contract executed in November 2020, and we believe there is future opportunity for additional assignment services given this contract reduction gross retention in our OEM business was approximately 87% for the quarter.
I will now turn the call over to Ken who will go through our second quarter financials.
Thank you Brett and good afternoon, everyone I will now present, our second quarter 2021 financial results, but more details of 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 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 a reconciliation of our GAAP.
And non-GAAP results.
GAAP revenue for the second quarter, 2021 was $7.6 million compared to $9.2 million reported during second quarter 2020.
The decrease in revenue year over year is primarily the result of our contract reduction by our largest customer.
We had previously disclosed this change and it took effect in Q2.2021.
The impact of this customer this contract reduction.
It was a $900000 reduction and a $1 million reduction for the three and six months ended June 32021, respectively.
Some other factors that were impactful, though smaller which impacted our Q2.2021 revenue were impact of foreign currency exchange rates over the period.
Customer renewals at lower values in churn.
And end of life of several legacy enterprise products during 2020.
Which also contributed to the decline in revenue during 2021.
GAAP gross margins for the second quarter of 2021% or 50%.
Compared to 59% for Q2.2020.
On a non-GAAP basis gross margins were 60% and to that end in Q2.2021 compared to 66% during the second quarter of 2020.
GAAP and non-GAAP cost of goods sold during the quarters was roughly in line with same quarter a year ago. So the reduction in gross margin is it really a function of lower revenue.
Second quarter 2021, GAAP net loss was $5.6 million compared to $4.6 million during Q2.2020.
On a per share basis GAAP net loss was <unk> seven per basic and diluted share for Q2.2021 compared to eight per basic and diluted share for Q2.2020.
On a non-GAAP basis, <unk> second quarter 2021, net loss was $4.5 million compared to $3.9 million during the second quarter 2020.
This translates to a loss of six cents per basic and fully diluted share in both Q2, 2021 and Q2.2020.
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 costs.
Please refer to the table in our press release for a reconciliation of the selected GAAP to non-GAAP measures.
GAAP operating expenses for Q2, 2021 totaled $9.1 million down from $9.8 million during Q2.2020, a decrease of 7%.
On a non-GAAP basis total operating expenses for the quarter totaled $8.7 million down from $9.5 million in the second quarter of 2020, an 8% decrease year over year.
During the recent quarter GAAP.
GAAP R&D expense was $4.1 million.
Compared to $4.2 million in the second quarter of 2020.
The main reason for the level of GAAP R&D expense during the second quarter 2021.
Attributable to a lower R&D capitalization of technology, which reduces expenses related to our new product development efforts.
Another consideration is lower head count in Q2, 2021 as compared to Q2.2020.
Weighted to R&D head count.
On a non-GAAP basis, which excludes the effect of R&D capitalization.
R&D expense for the period decreased from $4.5 million in 2020 to $4.2 million in 2021 Q2.
GAAP sales and marketing expenses for Q2, 2021 was $2.7 million compared to $3.1 million during the second quarter of 2020.
Non-GAAP sales and marketing expense was $2.6 million compared to 3.0 million during the second quarter of 2020.
GAAP expense for Q2, 2021 was $2.3 million compared to $2.5 million during the second quarter of 2020.
On a non-GAAP basis, G&A expense was $2 million in Q2, 2021, compared to $2.1 million a year ago.
Employee head count at the end of the year was two excuse me at the end of Q2.2021 was 201 full time and part time employees down from 229 employees at the end of Q2.2020.
The overall decrease in operating expenses year over year is consistent with the reduction in head count.
During the quarter, we had negative operating cash flow of $2.3 million.
Paired to positive operating cash flow of $2.5 million during the second quarter of 2020.
The decrease was largely driven by an increase in net loss a decline in deferred revenue driven by the receipt of a multiyear multimillion dollar prepayment from one of our largest customers in the first quarter of 2019.
And the decline in deferred revenue due to down sales on various other customer renewals.
Overall net cash flow for Q2, 2021 was negative $2.5 million.
And the cash balance.
$13.9 million at June 32021.
During the second quarter of 2020, we release Siren Inbox security.
We continue to increase the number of contracts signed each quarter, but due to the ratable nature of our revenues. The revenue contributed during the quarter was not material for these new products. We continue to believe that it will be a number of quarters before the revenues of this new product offering will begin to have a meaningful impact on our revenue.
<unk>.
As previously disclosed the company received written notice from NASDAQ of noncompliance as the share price was below $1 for 30 consecutive days the.
The share price continues to be below one dollar.
And the current cure period ends on October five 2021.
If the company cannot regain compliance by then the company intends to request the second 180 day cure period.
However, there is no guarantee that this will be granted.
We are following COVID-19 protocols at our offices. These protocols have not been an impediment to our communication collaboration and conducting commerce with our customers and our employees.
We will continue to monitor government governmental guidance to ensure a safe environment for our employees customers and vendor partners.
I will now ask the operator to open up the lines for Q&A.
Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad income.
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Once again Thats star one to ask a question at this time, one moment, while we poll for questions.
Our first question comes from Chad Bennett with Craig Hallum. Please proceed.
Great. Thanks for taking my question so.
It seems like the majority of the impact in the quarter.
It was from your obviously your large OEM customer.
It was well telegraphed in terms of the change in conditions. There by you guys a couple of quarters ago.
But just Brent I think you talked about a couple of new.
<unk> threat intelligence customers.
In the quarter.
I guess, how do you view that.
Part of the business just from a run rate standpoint from where you ended in the June quarter and is there any more risk in the second half either.
Related outright churn related or just contract modifications that you see out there.
Chad, we're not aware of any major risks as we look forward of course.
Things can change we have had.
Churn in prior years.
As a result of one of our customers end of life ing, a product or selling a part of their business. So it's a it can be unpredictable, but we're not aware of any major risks.
You. We did we did see a number of new logos in Q2.
That was a very positive change year over year.
You may remember that we have talked in the past about.
Re prioritizing this business and re engaging with customers.
We've done that we've improved customer satisfaction and we're starting to see.
Some additional opportunities from current customers as well as new logos. So it's not a high growth business, but it's a stable business with a lot of great customers.
And it's a profitable business.
No.
That's how we see this as a steady part of our business a key source of our threat intelligence data that we think can can drive.
Additional enterprise products in the future.
Is there any change in just kind of from a historical perspective on the nature of the new logos youre going after in that business either from a type of company a use case kind of.
I would say if I look at U S.
Traditionally we have we are.
Our customers in this in this particular part of our business are the world's largest E mail providers.
And the world's largest cyber security vendors. We also have a number of managed service providers.
I would say in the second quarter.
We saw more interest from.
Online brands.
Who are doing commerce and are dealing with a number of problems including fishing.
And fraud so.
Some.
Some new profile and the mix.
Don't know how that will play out going forward, but again I think we've seen a bit.
It have an increased momentum in our in our traditional OEM business again, not going to be a high grower like our anti phishing business, but a good solid set of customers with some opportunity in the market.
Interesting and then.
Then shifting focus real quick to the Sis business another.
Pretty pretty staggering.
Our sequential growth quarter I nowhere.
We're still trying to scale that business, but it looks like another very very strong bookings quarter.
No that again.
Few quarters, so to speak into this.
You know kind of direct business and repackaged product.
And any any kind of learnings that you have there Brett in terms of.
Type of customer average deal size kind of regulated non regulated verticals or are there any trends youre seeing or is it pretty diverse.
So I would say.
It's fairly diverse there are some concentrations, but I just think thats a function of us building that customer base, mostly nonregulated so far.
I think this is a problem fishing is a problem that cuts across verticals, which is good news from our perspective suggests.
A large.
The addressable market.
And.
It's the most exciting that was the most exciting part of our quarter.
The acceleration of that business in Q2.
New customer acquisition, starting to see expansion from existing customers.
And of course.
Small number of renewals, but 100% renewal rate so 100% gross retention.
I think as far as new learnings, maybe not as much as validation of things that we have.
We have been assuming and we have learned in past quarters. We've been at this now for as I mentioned just about a year.
And.
I think we firmly believe this is a real problem in the enterprise.
When we engage with a prospect who has fishing.
Very straightforward conversation they know they have the problem they want to solve the problem and it's a question of evaluating our product and potentially products from other vendors, we evaluate quite well.
Mentioned, our our win rate to date.
Which is well above industry norm, we've got really strong product market fit.
We're very differentiated easy to implement great detection and.
Of course remediation, which is a key strength of the product so more confirmation and validation of what we have seen early days than what we assumed.
And.
And we think the acceleration will we'll continue we think we will see.
Likely to see another strong quarter in Q3.
So we're really excited about what we saw in Q2 really.
Really happy with.
Finally, starting to see this acceleration based on all the hard work our product team and sales teams have been doing.
Good great too great to see the progress on <unk>.
Congrats.
Thanks.
Once again, ladies and gentlemen to ask a question Thats Star one on your.
Telephone keypad at this time, our next question comes from Michael Santana, a private Investor. Please proceed.
Hello, there and thank you for taking my call.
Noticed that your net loss, obviously was higher this.
Q2, and also the net revenue.
Lower and because of.
The loss of the OEM reduction the contracts.
So I know you're pumped up quite a bit about your Q2 ending with your new.
Anti phishing the revenue stream, there, but still the net loss is quite significant.
And the revenue quite significantly lower can you.
I can say guarantee but are we expecting Q3 to beat Q3 of 2020.
In 2021 Q3 is my one question second question I think you've covered that that there is not going be a reverse split looks like this year.
Even though.
We are quite well down on our stock price. So if you can answer that one it would be much appreciate it. Thank you so much.
Ken would you like to take this oh.
Oh, sorry also.
Will you be doing more OEM.
Products and will you only be staying with private companies on the screening anti phishing or will you try to maybe even governmental either internationally or in the U S or when not if that's right.
Thank you.
Okay.
Okay. This is Ken Tarpey I'll start with the first couple maybe Brett.
A third patient might be better with but.
As it relates to looking forward, we don't give guidance, but this was we did telegraph that this is a significant customer change the.
The impact of it is still going to be our number one customer, but not as concentrated as it was in the past so that impact will continue through in our business over the next several quarters until we get to the anniversary date of that change.
We don't go any further as I said, we don't give formal guidance any further than that.
Yes your point on the reverse split is it's definitely an option.
And there are other things that we are trying <unk> been.
We're monitoring to see what might have a benefit to the stock price. So the second period, who would allow US then to really look again at the.
The impact of the reverse split.
And I think Brad kind of answered your question about CIS customer targets at this point in time anything else to add there Brett.
No I'll, just Michael I would say that we are not limiting ourselves.
Our enterprise anti phishing solution <unk> Inbox security is targeting mid size and large enterprises.
And whether they are private companies or public companies regardless of industry.
And regardless of geography in fact in Q2, we we closed transactions with customers in six different countries.
So and we have customers.
Small is.
500 users and as large as 25000 users.
So we're looking to go after mid size and large enterprises in all the key markets globally. That's why the partner channel is so important to us.
55% of our bookings in the quarter came through partners and our partners are very geographically.
Distributed.
So hopefully that answers your question.
Thank you. Thank you very much.
Okay.
Thank you at this time there are no further questions in queue I would like to turn the call back over to Mr. Brett Jackson for closing comments.
There are no further questions and we'd like to thank you all for joining us on the call today and thank you for your interest in Siren, we look forward to.
Keeping you updated on our progress through the rest of the year. Thank you.
Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.
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Okay.