CyberDefender Corporation Q3 2009 Earnings Call Transcript

CyberDefender Corporation (CYDE.OB)

Q3 2009 Earnings Call Transcript

November 12, 2009 4:30 pm ET

Executives

Kevin Harris – CFO

Gary Guseinov – Chairman and CEO

Analysts

William Thompson [ph] – Colo Banker [ph]

James Ragan – Crowell, Weedon & Co.

Brian Jacobrali [ph] – The Rivers Consulting [ph]

Terry Rettig – G2, Inc.

Presentation

Operator

Greetings and welcome to the CyberDefender third quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Kevin Harris, Chief Financial Officer for CyberDefender. Thank you, Mr. Harris, you may begin.

Kevin Harris

Good afternoon and welcome to the CyberDefender third quarter conference call. We will be discussing the quarter ended September 30, 2009. With me on the call today is Gary Guseinov, CEO of the company.

Before we get started, I’ll read the Safe Harbor statement. During the course of this conference call, the company will make forward-looking statements. We caution that any statement that is not a statement of historical fact is a forward-looking statement.

This includes any projections of earnings or revenues, sales, cash or other financial statements; any statements about plans, strategies or objectives of management for future operations; any statements regarding expectations for the success of our business; any statement concerning proposed new products; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumption underlying any of the foregoing.

These statements are all based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

These risks are described in the Risk Factors section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009. Investors or potential investors should read these risks. We assume no obligation to update these forward-looking statements to reflect future events or actual outcomes and we do not intend to do so.

So, thank you. And now I would like to turn the call over to Gary, who will review our progress for the quarter, then I’ll come back to review the financials, and then we’ll open up the call for Q&A session. Gary?

Gary Guseinov

Good afternoon, everyone, and thank you for joining us here today. I would definitely like to give you a quick overview of our company and give you some of the highlights that we have experienced over the past three months and for the most of this year. We have had a fantastic quarter. I can tell you that we have had triple-digit GAAP revenue growth for the quarter of 2009 with $4.3 million. We had 268% increase compared to same time last year of 2008. We had a 20% sequential increase in GAAP revenue, which is fantastic for CyberDefender. Our total sales receipts were greater than $19 million for the nine months ending September 30, 2009.

In addition, our conversion of short-term debt obligations as of September 30, 2009 has reduced our debt significantly. We had a sixth consecutive quarter of growth in CyberDefender, which we think is a great accomplishment for the company.

I’ll also give you quick overview for some of you who don’t know what CyberDefender does or like to get an update, I’ll give you corporate overview on that as well. CyberDefender is in the Internet security space, particularly focused on the consumer security, desktop security products. We sell and market antivirus, antispyware, identity protection services, remote tech-on-call services, and PC optimization and software services.

We have also developed a unique Collaborative Internet Security Network, which is a proprietary patent pending technology that allows us to address the zero hour gap for the space that exists between the time that the threat is discovered to the time the software or the end user is protected against the new threat. So we successfully had this for the software and as many as 5 million active users and have over 17 million people download the software for this technology so far up to date.

In addition, I’d like to just make everyone aware that cyber crime continues to be spreading, as you have seen with the growth in other companies in our space. We are seeing that this industry continues to expand because of this. We anticipate that the industry will grow to about $79 billion this year. Consumers continue to spend more money on security than SMBs and enterprises on per-user or per-PC basis. And we are seeing this continuing to grow, particularly as we can see people spending more money on tech-on-call and remote repair services.

Marketplace data tells us that the consumers will actually purchase at least two Internet security applications and services in the course of their usage of one PC, therefore making competitive – giving us competitive advantages where competition is actually healthy and create more opportunity for us.

I’d like to go over some core metrics. We have achieved over 350,000 paying subscribers to date and continuing to add 20,000 to 25,000 new subscribers per month. We have reported a 62% sequential increase in new licenses up to 157,000 licenses for the three months ending September 30, 2009, which we believe is a significant achievement.

We also want to give you quick updates on partnerships. Our partnership with Guthy-Renker continues to expand and is doing very well. We are currently in this – almost a fourth – third quarter of this relationship and continuing to advertise and market our products across top US markets successfully and profitability. We are going to continue to ramp up our media spending on television and radio because we are seeing significant good results from our cost-per-view and cost-per-order basis.

So I’d like to also make you aware of some of the campaigns that we are running since we are not using cyberdefender.com or CyberDefender name in some of these campaigns for attracting purposes. So we hear commercials with doublemyspeed.com or mycleanpc.com. These are commercials that are playing on radio and televisions that are CyberDefender-driven. But if you hear these talks or see these TV commercials, it’s basically CyberDefender.

So as we have scaled our operations, we’ve had to beef up our infrastructure. And because of this, we’ve added additional staff and we also added additional software and improved that operation. But while scaling our revenue and increasing our profitability, we have maintained good quality service and maintained an A-rating with better business bureau and have maintained a very low refund and chargeback ratio. So we are very happy about these accomplishments as well.

Our other significant partnership is with a group called Wiley or For Dummies brand. Wiley publishing For Dummies brand, and we are planning to launch this product – the Antispyware For Dummies product at the end of December. And we will be marketing this product actively through our direct response channel, including online and television and radio channel throughout 2010.

In addition, I want to give you a quick update on Allianex or our retail distribution channel. As we have made public release with the press releases in the past, we had fund [ph] on significant amount of retail chains around the world. We have recently launched with 1,600 retail stores on the East Coast. Some of these stores include Cumberland Farms, and if you are in East Coast, you should be able to buy our product on the shelf there. So CyberDefender continues to expand the retail channel. We will report more in our next call. We believe that this can be a significant opportunity for us and we will see most of the results of this particular channel in 2010.

I’ll also like to give you another recent development. We have recently signed a contract with Microsoft, and we will be distributing the Bing toolbar, which is the new search engine for Microsoft. Microsoft is paying us a small bounty for every user we bring to them. And we believe that because of our significant user base where we generate over 2 million new users for CyberDefender product, we anticipate that this could be a pretty significant opportunity for us in the next 12 to 18 months and should generate millions of dollars in revenue.

Lastly, I’d like to add that we have added some improvements to our technology. We reinforced our back-end infrastructure that deals with threat research and updating of our software. We have committed to doing more threat research internally by partnering with third parties to develop a better detection, better research and a better overall threat research capability across all of our products.

We have added and in the process of adding double threat or double scanning capabilities to our antivirus and antispyware software. We are building a brand new interface that we believe will revolutionize the Internet security industry. We will be launching that soon.

We have a new technology that identifies road [ph] anti-modular software. I’m sure you’ve heard about this type of software in the news. We have also built a very efficient web crawling technology that allows us to analyze threat around the world, around the web very quickly and efficiently, and we have passed over 90 million websites analyzed just in the past three months.

We are also in the process of building our reputation tracking and management platform, which we will be launching next year. We are also in the process of launching our safe web browsing technology, which we believe will significantly improve security for the average consumer.

In addition, lastly I’d like to add that we have made some improvements administratively. We have recently launched new cyberdefender.com website. When you have a chance, please take a look at it. It’s a lot more streamlined and a lot simplified compared to the last version of our site. We have also launched a new corporate website, which is cyberdefendercorp.com, which is directly focused on our investor and public relations or outward-facing activity. Please take a look at our sites, and if you are not registered with us, please do so, so we can keep you updated on the most recent events.

We have also added some new staff for the management team. We have added Brian Yoder who is our VP of Engineering. Brian was one of the first people who developed Norton Antivirus, and he is a successful entrepreneur who just joined the company and would [ph] contribute significantly to the team. And we’ve added – promoted actually Steve Okun to Chief Revenue Officer. And Steve came to us from LeadPoint, where he successfully grew revenues from $3 million to over $45 million in revenue in just three years.

So with this, I’d like to turn it over to Kevin to give you some updates on our financials and that's it. We’ll then go to Q&A after that.

Kevin Harris

Great, great. Thanks for that update, Gary. As Gary said earlier, we are very pleased with the results for the quarter. Just to reiterate and go back over some of the highlights for the quarter, our GAAP revenues for the three months ended September 30th were $4.3 million compared with $3.7 million in the three months ended June 30 and $1.2 million in the same period – in the same three months ended September 30, 2008. This represents a 268% growth year-over-year and a 20% growth sequentially quarter-over-quarter.

It’s also important to note that our cash receipts from the sales of new licenses. The cash receipts become deferred on the company’s books over the 12 to 36-month term of each license. These were $6.3 million for the third quarter compared to $5.5 million in the second quarter and $2.5 million in the third quarter of 2008. It represents a 152% growth year-over-year and a 15% growth sequentially.

It’s important to note that those numbers do not include some of the revenues that the company receives from the sale of a backup CD as well as advertising revenues related to its toolbar that is out there. So that brings our total cash receipts for the quarter to $6.7 million and total cash receipts for the nine months ended September 30th of just over $19.2 million.

Gross profit in the third quarter of 2009 grew significantly to $3.4 million compared to $2.9 million in the second quarter of 2009 and only $564,000 in the same quarter last year. It’s important to note that the company narrowed its net loss to $3.6 million for the quarter compared to $4.8 million in the second quarter and $3.9 million in the same quarter last year.

It’s important to highlight that our advertising expenditures, which is how we drive our customer acquisition strategies, as a percentage revenue, again improved on both the sequential and year-over-year basis. In the third quarter of 2009, advertising expenditures decreased to 80% of revenues compared with 93% of revenues in the second quarter and 227% compared to last year.

Our net loss for the quarter also improved both sequentially and year-over-year, decreasing to $3.6 million or $0.15 per share compared to $4.8 million in the second quarter and $3.9 million in the year-ago period. Revenue results showed tremendous progress. The company is continuing to drive its top line while now currently focusing on driving the bottom line and profitability.

Based on the trends that we are seeing, the company is continuing to anticipate cash flow positive operations by the end of the fourth quarter of this year. We also had some improvements in our balance sheet. We’ve ended our quarter with cash and cash equivalents of $1.2 million. Total assets increased to approximately $5.7 million in our current assets.

After the close of the quarter, we completed the second tranche of our previously announced financing by raising just north of $2.2 million, which was in the form of long-term convertible debt. Thus I’d estimate our current cash position to be in the range of $3 million, with the expectation of cash flow positive operations for this quarter being the fourth quarter of 2009. We believe that this raise will give us the sufficient amount of cash to support us until we reach profitability. Most of this cash will be used to continue to invest in our infrastructure and the scaling of our media and call centers.

So it’s important to note we currently have no short-term debt at September 30. And along with the debt that we just recently incurred to shore up our balance sheet, which was long-term. We ended the quarter with current deferred revenue at $8.4 million. Important to note that this is cash that we have already collected and will turn into GAAP revenues over the next 12 months.

Another highlight for the quarter, many of you may not have had a chance to read through the Q yet. But it’s important to note that all of the negative billing concerned language that we have included in all of our previous filings has been removed.

That concludes my financial overview. I’ll turn it back over to Gary who will give you a quick wrap-up and then we will open up the call for some Q&A. Gary?

Gary Guseinov

Thank you, Kevin. Once again, we’d like to say that we are very proud of our results. We think that CyberDefender is well positioned to continue to grow quarter-over-quarter, month over year and year-over-year. Consumer demand for security software and services continues to grow. CyberDefender is continuing to extend its operations, continues to extend its market share. And with millions of millions of new users per month, we believe that we will reach significant scale in 2010.

So I’d like to thank you all for your time and I’d like to turn it over now to Q&A for additional questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of William Thompson [ph] with Colo Banker [ph]. Please go ahead.

William Thompson – Colo Banker

Yes. You mentioned – first of all, I’m very impressed with the progress you’ve made over the last year, especially the last quarter.

Gary Guseinov

Great, thank you.

William Thompson – Colo Banker

A question about Guthy-Renker. I understood they were going to be involved in TV as well as the radio ads, but no TV. And I have another question after that. Do you have any other relationships with any media companies other than the ones you mentioned?

Gary Guseinov

Sure. Let me answer that. For Guthy-Renker, we are running TV commercials. There is a commercial out there that’s called MyCleanPC, and there is another TV commercial out there called DoubleMySpeed. Now DoubleMySpeed is also on radio. So you might hear it on radio, but there is a TV commercial. Now keep in mind, the television, we are not spending enough money where every market in the United States will be able to see the TV spot, but very soon we will be. And in terms of radio, we are spending a lot of money. So if you’ve got cable, if you have regular radio in your car or at the office, you’ll definitely hear our ads several times a day.

On television, if you watch History Channel or ESPN or MSNBC, you should be able to see our ads. But again, it’s a limited form and we are starting to ramp up our expenditures there as well. In terms of other media partners, we have actually hundreds of media relationships with different companies. And that includes companies like Google, Yahoo!, MSN, The Search Agency. We do a lot of business with CBS, download.com. I can go on and on. But we have a lot of relationships with – and have a lot of very solid media partners that are distributing our product online. And for television and radio, our relationship with Guthy-Renker is pretty substantial. It covers all of that we need when it comes to radio and TV.

William Thompson – Colo Banker

Very good. Thank you.

Operator

Thank you. Our next question comes from the line of James Ragan with Crowell, Weedon & Co. Please go ahead.

James Ragan – Crowell, Weedon & Co.

Yes, hello. Thanks, guys. I had a question looking at the gross receipts at $6.3 million and relating that to the advertising expenditure for the quarter, which is $3.5 million, because looking back a quarter ago, you did $3.4 million in advertising and generated $5.5 million in gross receipts. So obviously there is more efficiency there. Is it that simple or maybe you could talk about that a little bit?

Gary Guseinov

Yes. I mean that we have seen improvements in our ability to generate profit from each dollar that we spend on advertising. What’s compounding in there as well is the new licenses that are sold through our renewal process. So you are going to see some additional improvements just based on the fact that we don’t have to spend a dollar on media to generate the sale of those new licenses to those repeat customers.

James Ragan – Crowell, Weedon & Co.

Okay. And then as you budget for your advertising expense going forward, are you – is there something that you make a decision just kind of on a weekly, monthly basis or are you planning certain expenses out for a quarter or two quarters in advance?

Gary Guseinov

I’d say for television or radio, we make decisions on a weekly basis in terms of what our next week’s budget is going to be. So we are very careful in terms of how we spend money in TV and radio because the timeline there is a little bit different. On the Internet, we can make a decision to terminate a campaign within an hour or within 15 minutes. On TV and radio, we don’t have that luxury. So we’re extremely careful. But because we have this relationship with Guthy-Renker, there is a lot of effort on their side that goes into planning and (inaudible) media.

Now, CyberDefender as just our general operations, we manage the business in a way where we are looking for in-month return. In other words, if we spend $1 this month, we’d like to make $2 back so that we are profitable in month. Now, if we wanted to build the business just based on a customer acquisition and go for lifetime value, we can do – we can double or triple our revenue by simply focusing on lifetime value. But we are not doing that. We are doing everything based on profits.

We are also watching our infrastructure to make sure that we can maintain good ratings where our customers have high customer satisfaction ratio, keep our chargebacks low and our refunds low. And we’ve done that successfully. So our growth is controlled and we like it this way. We think that we can add incremental growth quarter-over-quarter, month-over-month while maintaining high satisfaction rates across the board. So that’s the overall goal here. Media is managed very well. We have probably 25 to 30 people internally and externally dedicated to marketing, and everything is watched very carefully. Guthy-Renker is very much involved on day-to-day basis and all the decisions we make. So we think that it’s a well controlled spending environment when it comes to media.

Kevin Harris

That said, we do provide budgets and we do do budgets for media on a monthly and quarterly basis. And obviously those are managed down to a weekly basis. But we do have overall goals that are put forward on monthly, quarterly and annual basis that we use as a guideline in making those decisions.

James Ragan – Crowell, Weedon & Co.

Okay. Great. And then when you – as you get ready to roll out the For Dummies product at the end of the quarter, what type of media are you going to be using to acquire the customers?

Gary Guseinov

We will be using some of the existing channels. We have a different marketing approach with that product, a little bit different than how we are marketing our product now. And – but the channels would be the same. We believe that that product – the For Dummies brand should at least outperform CyberDefender because it’s just a more widely recognized brand. It does do [ph] that and we’ll roll it out across other channels, the retail and additional channels that we have not yet discussed. And so we are – it’s early stage. We are at early stages of developing this new brand and at the marketing channel. So we will report our next year probably with more color on data.

Kevin Harris

We will initially go out with our – using our online marketing channel as we cut conversion and then scale from there.

James Ragan – Crowell, Weedon & Co.

Okay, great. And then finally, I did see the 10-Q. I haven’t really got a chance to go through it too much yet, but I did see that on one of the pages, and I think, Kevin, you had mentioned that the total number of licenses in the quarter was 158,000, up from 97,000 in the June quarter and a pretty impressive 62% growth. Are you starting to measure the licenses differently or is that done on the same basis?

Gary Guseinov

No, it’s done on the same basis. It’s the gross – some of the gross – you can see a 62% increase in the cash sales. And a lot of that’s related to the way that we market. We are offering some bundled products, the matter of how you market to bring the customer in. So we are selling multiple licenses at a lower cost as a better solution to our customer, as well as you will see licenses that are sold through renewals that are coming in as well. So it’s kind of a combination once you (inaudible) those who account for such a dramatic increase in the number of licenses that have been sold.

James Ragan – Crowell, Weedon & Co.

Okay, great. Thank you. Good quarter.

Gary Guseinov

Great, thank you.

Operator

Thank you. Our next question comes from the line of Brian Jacobrali [ph] with The Rivers Consulting [ph]. Please go ahead.

Brian Jacobrali – The Rivers Consulting

Hey, Kevin. I guess Jim kind of covered all my questions here. But I just wanted to kind of get the feeling, like, if you guys wanted to slow down your spending, you probably could become profitable pretty instantly.

Kevin Harris

Yes. The interesting thing with GAAP profitability in a company – a subscription-based company like ours is while we are still in this ramp of acquiring customers, the loss from operations or the EBITDA suffers because of the deferral of the revenue. For instance, if I were to turn off the advertising spend, we could generate positive EBITDA immediately based on the revenue that’s already booked. So it’s a combination of – do you want to see positive operations but no growth in sales or do you want to see the growth in sales and grow a long-term business? From what we are looking to do here is grow a long-term business, grow our user base, grow our subscriber base, and we are confident that positive EBITDA will follow shortly after a quarter or two after cash flow positive operations just based on the natural process of deferring the GAAP revenues.

Brian Jacobrali – The Rivers Consulting

All right. Thanks, guys.

Gary Guseinov

Great. Thanks, Brian.

Operator

(Operator instructions) And our next question comes from the line of Terry Rettig with G2, Inc. Please go ahead.

Terry Rettig – G2, Inc.

Hi, guys, congratulations on a good quarter.

Gary Guseinov

Thank you, Terry.

Terry Rettig – G2, Inc.

My question is about the call-in [ph] centers. Are you guys satisfied with how fast they are ramping up or getting up to speed? And I know that with some – and I believe at one point of domestic call center, I just wanted to hear the status of how that is moving along.

Gary Guseinov

Sure. We have to go around that [ph]. So our call center has (inaudible) significantly. We now have close to about 600-plus agents and growing. We are adding about 20 to 50 agents a month. And what we’ve done is we diversified our call centers. We now have a small call center here in Los Angeles at our office. We have approximately 50 to 60 people here. We have a small call center in Philippines. We have a big call center in India and another big call center in New York. And so between all the call centers, we are well diversified in our handle rate on our calls right now that’s averaging about 90% to 95%, which means we are picking up every single call.

So we have done a pretty good job in managing the growth. We are adding technologies to better route phone calls with more efficiency. And we believe that by doing so, we’ll be able to achieve higher conversion rates and higher retention rates for our customers. And we are adding better training programs so that agents are trained quickly and get up to speed with new technologies after and bring in partners that have capability to scale since we anticipate this being a significant component of our business. Now, keep in mind that a lot of these relationships are on our revenue share basis. In other words, we are not incurring hourly rate with these agents. We are actually paying them only when they make a sale. Majority of our agents are based – are dealt or structured this way. So we are keeping our cost low and our revenue and conversions are very high, and believe that this business of selling software and services is really the way to go in the future.

Terry Rettig – G2, Inc.

Very good, thank you.

Gary Guseinov

Thank you.

Operator

We have no further questions in queue at this time. I’d like to turn the floor back over to management for any closing comments.

Gary Guseinov

All right. Great. Well, thank you everybody for attending the call. And we look forward to speaking to you soon after we report our earnings for the 12 months ended December 31, 2009. We are expecting exciting times for CyberDefender. Thank you.

Kevin Harris

Thank you, everyone.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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