CYREN's (CYRN) CEO Lior Samuelson on Q4 2015 Results - Earnings Call Transcript

| About: CYREN Ltd. (CYRN)

CYREN Ltd. (NASDAQ:CYRN)

Q4 2015 Earnings Conference Call

February 17, 2016, 10:00 AM ET

Executives

Garth Russell - Investor Relations, KCSA Strategic Communications

Lior Samuelson - Chairman of the Board and Chief Executive Officer

Michael Myshrall - Chief Financial Officer

Analysts

Chad Bennett - Craig Hallum

Scott Billeadeau - Walrus Partners

Operator

Good day, and welcome to the CYREN Limited fourth quarter and full year 2015 results conference call. Today's conference is being recorded.

At this time, I'd like to turn the call over to Garth Russell with KCSA Strategic Communications. Please go ahead.

Garth Russell

Thank you, and welcome to our conference call to discuss CYREN's fourth quarter and full year 2015 financial results. This call is being broadcast live and can be accessed on the Investor Relations section of CYREN's website.

Before we begin, let me please remind you that during the course of this conference call, CYREN's 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 in the Risk Factors section of our SEC filings, including our prospectus filed on August 12, 2015.

Any forward-looking statement should be considered in light of these factors. Please also note as a Safe Harbor, any outlook we present is as of today and management does not undertake any obligation to revise any forward looking statements in 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 in the earnings release issued earlier today, 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.

With me on today's call are Mr. Lior Samuelson, CYREN's Chairman and Chief Executive Officer; and Mr. Mike Myshrall, Chief Financial Officer.

With that, I would now like to turn the call over to Lior. Lior, the floor is yours.

Lior Samuelson

Thank you, Garth, and thank you for joining me today, as we discuss CYREN's fourth quarter and full year 2015 results and provide an operational and business update.

During the fourth quarter 2015 we increased the speed of our progress for becoming a significant player in next-generation internet security. We recently announced CYREN WebSecurity 3.0, introducing a next-generation Advanced Threat Protection module that identifies and block zero-day malware and malicious websites, including the latest evasive cyber threats.

The new Advanced Threat Protection applies cloud-scale advanced malware analysis, including new multi-sandbox array technology, global threat correlation, reputation service and adaptive analysis to analyze unknown malware. It also leverages big data analytics across the 17 billion transactions that we process every day to correlate relationships among files, URL, host, IPs and domains to identify malicious objects.

We also continued to acquire CWS customers at a very good pace, as market reception of our services improves. Overall, we are building momentum in CWS adding more seats and increasing the average seat size per deal, as each quarter progresses. We expect the pace to quicken in the coming quarters.

We also expect to get traction through our sales and marketing initiatives. As you may recall, in August 2015 we raised gross proceeds of $12.6 million in a secondary offering to accelerate R&D and higher additional sales professionals to meet the increased demand for CWS. Since that time, we have been putting that capital to work. During the quarter, we added over 10 new people in sales and marketing. We also enhanced our management team with senior marketing and product professionals, who have previously held management positions at Zscaler, Check Point and Radware.

We are seeing increased opportunities on the email security channel. In recent bake-offs against leading email security providers, our detection and prevention abilities were judged to be much superior to the competition. Our detection engines, reputation service, zero-day malware and phishing provides unparallel security. This is especially relevant in terms of sophistication and speed of the new attacks. We expect the email cross-security vector to play a continued role in our future growth.

We continued to see the embedded business perform well in the fourth quarter, as our largest customer serve more users with our technology than in the past and it has translated into higher revenue and higher royalties. This has offset the loss of revenue from small customers that have either been acquired, reduced in size or are no longer in business. As a result of these overall positive customer shifts, we expect the embedded business to continue to maintain its current revenue run rate at a minimum with potential upside opportunity.

At the end of the quarter we won two significant renewals with Check Point and Google, each of which will result in an increased revenue run rate going forward. The latter would result in a substantial upfront payment, which will be reflected in our balance sheet at the end of the first quarter. We also had a number of other notable OEM wins, including an expansion of our contract with FireEye.

We're excited about the company's performance, as we head into the rest of the year. Our strong balance sheet allows us to make strategic investments in sales, marketing and R&D, while honing our message to make sure customer understands the benefit of partnering with us. We are incredibly excited about our sales pipeline and the opportunities it holds.

With that, I'd like to hand the call over to Mike to further elaborate on the results. Mike?

Michael Myshrall

Thank you, and good morning, everyone. I will now provide you with the summary of our fourth quarter 2015 results. For the more detailed results, please refer to the press release we issued earlier today, which is posted on our website.

In addition, please note that we compile our financials under U.S. GAAP including non-operating expenses. In order to better analyze our business performance, I will also discuss certain financial metrics on a non-GAAP basis, which excludes those non-operating items. You can refer to today's press release for a full reconciliation of our GAAP and non-GAAP results.

GAAP revenue for the fourth quarter of 2015 was up $0.2 million to $7.1 million compared to $6.9 million in the third quarter of 2015 and $7.8 million a year ago. Full year 2015 revenues totaled $27.8 million compared to $31.9 million in 2014.

Non-GAAP revenues for the fourth quarter totaled $7.2 million compared with $7 million last quarter and $7.9 million during the fourth quarter of 2014. Non-GAAP full year 2015 revenues totaled $27.9 million as compared to $32.1 million in 2014.

The quarterly revenue growth rate was due to increased CWS revenue recognition as well as the stabilization of the embedded OEM business, as we discussed in previous quarters. The year-over-year revenue decline was impacted by approximately $2.2 million, due to currency fluctuations against the U.S. dollar.

Our GAAP gross margin for the quarter was 72% compared with 69% for the previous quarter and 75% for the fourth quarter of 2014. Non-GAAP gross margin for the quarter was 75% compared with 72% during the previous quarter and 77% a year ago.

For the full year GAAP gross margin was 70% compared to 75% in 2014. Non-GAAP gross margin for the year was 73% compared to 78% in 2014. The reduction in gross margins year-over-year is primarily due to the reduced revenue compared to the same period a year ago, while the cost of revenues, primarily our datacenters, increased slightly as we invested in building out cloud infrastructure.

GAAP operating expenses for the fourth quarter was $6.2 million compared to $6.2 million last quarter and $7.9 million in the fourth quarter of 2014. Full year operating expenses were $23.9 million as compared to $30.3 million in 2014. GAAP operating expenses are comprised of three components, research and development or R&D expenses, sales and marketing expenses and general and administrative or G&A expenses.

R&D expenses for the quarter totaled $2.3 million compared to $2.2 million in the third quarter of 2015 and $2.8 million during the fourth quarter of 2014. R&D expenses for the year were $8.9 million compared to $11.2 million in 2014. R&D expenses for the year declined due to the capitalization of some R&D activities as well as the financial grant from the Israeli Office of the Chief Scientist, which offset expenses by approximately $1.9 million.

Sales and marketing expenses for the quarter were up slightly on a sequential basis, but down year-over-year to $2.2 million for the quarter. For the full year sales and marketing expense was $8.7 million compared to $11.8 million in 2014. Part of the use of proceeds from our third quarter capital raise was to increase investment in sales and marketing, as Lior previously discussed. We believe these investments will help meet the increased demand for our CWS and cyber security offerings during 2016.

G&A expense for the quarter totaled $1.7 million compared to $1.9 million last quarter and $2.3 million a year ago. G&A expenses for the full year were $6.3 million compared to $8 million in 2014. G&A expenses for the fourth quarter were reduced slightly by a one-time adjustment for gross receipt tax in the amount of $0.2 million.

Non-GAAP operating expenses for the quarter were $6.5 million compared with $6.3 million last quarter and $7.4 million a year ago. For the full year, non-GAAP operating expenses were $24.7 million compared to $28.6 million during the full year of 2014. Non-GAAP expenses excludes stock-based compensation and amortization of intangible assets, and also excludes the offset to expenses due to the capitalization of technology and grants received, as detailed in the non-GAAP reconciliation in our press release.

Fourth quarter GAAP net loss was $1.2 million or a loss of $0.03 per basic and diluted share compared to a net loss of $2.2 million or $0.07 per basic and diluted share in the fourth quarter of 2014. For the full year GAAP net loss was $4.8 million or a loss of $0.14 per basic and diluted share as compared to a net loss of $7 million or a loss of $0.25 per basic and diluted share in 2014.

Our fourth quarter non-GAAP net loss was $1.4 million or a loss of $0.03 per basic and diluted share compared to a non-GAAP net loss of $1.4 million or $0.04 per diluted share in the fourth quarter of 2014. For the full year, non-GAAP net loss was $4.9 million or $0.14 per diluted share as compared to a net loss of $4.5 million or a loss of $0.16 per diluted share. The reconciliation between GAAP and non-GAAP net income is included in our press release.

Now, turning to the balance sheet. Our cash balance at the end of the quarter stood at $16.4 million compared to $18.7 million as of September 30, 2015. Cash used in operations for the fourth quarter was $0.6 million, as compared to cash flow provided by operations of $0.6 million in the third quarter and cash usage of $1.5 million in the fourth quarter of 2014.

The cash balance at the end of the year does not reflect the recent multi-million payment that was received from a CYREN customer in early 2016. This payment is the result of a multi-year renewal with one of our largest customers and will have a positive impact on operating cash flow and our closing cash balance at the end of the first quarter 2016.

We continue to see increased revenues and commitments from our largest customers, including Check Point, McAfee, Google and FireEye all of which increased current usage of CYREN services during the fourth quarter.

At this point, I would like to open up the lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] I will go first to Chad Bennett with Craig Hallum.

Chad Bennett

Nice job on the quarter, renewals and CWS wins. Can you give us an update on where you are with CWS from maybe exit rate, from a revenue run rate standpoint where you exited the year or maybe how bookings trended in the fourth quarter sequentially? Any kind of metrics you can give on CWS, I think, would be helpful?

Michael Myshrall

So first of all the install base of CWS has been growing quarter-over-quarter. We recognized more revenue in the fourth quarter than we had in the previous three quarters as well, so I think we exited the year very nicely with some upward trajectory on both customer growth and revenue growth.

That being said, it's still a relatively small piece of the overall revenue recognition, accounted for less than 5% of the revenue for the quarter. However, as a SaaS-based service, you would expect that it will continue to build quarter-over-quarter and I think it will become more material during 2016.

So in terms of bookings, the third quarter and fourth quarter were substantially better than Q1 and Q2, and the pipeline that we have right now has never been bigger. So I think the opportunity for increased bookings quarter-over-quarter in Q1 and Q2 is very good, so I think things are looking very good on the sales and marketing front for CWS.

Chad Bennett

I think, I recall, some of your, especially with your Wi-Fi service CWS customers, I don't know how you want to characterize it, but it was more about a pay-as-you-go model, so as they give more people on their network, maybe requesting or not even requesting your web security solution, you get paid more. So again, can you refresh me on kind of some of those deals and maybe kind of how those deals could ramp? I assume we're in early stages, how those deals could ramp in '16?

Michael Myshrall

Yes, we do have a couple of Wi-Fi operators throughout Europe, and they're utilizing our DNS security enforcement capabilities. And in those contracts there are two components to it, there is kind of a guaranteed revenue rate associated with a base set of wireless access points that have been already installed on the network, but then as they roll out the CWS security to increase number of access points or other enterprise networks, we would expect that those accounts would grow.

So I think the install base that we achieved in third and fourth quarter now accounts for several thousand access points throughout Europe, including both public and corporate enterprise environments and they are continuing to ramp. The total opportunity in the DNS space I think is very, very large, as we've seen from OpenDNS last year. We're seeing that there is plenty of interest in our DNS enforcement capability and Wi-Fi operators have good opportunities to sell that security solution.

Chad Bennett

Maybe the last one from me and I'll jump off. So the embedded or the OEM business, it sounds like at a minimum, you expect to maintain that revenue level, again could you remind us or everybody again kind of what that revenue level is for '16, and then you talked about cross-sell, up-sell or increases, I think, with FireEye maybe even Check Point, I am not sure. Can you talk about how those contracts are increasing and what additional functionality are they using from you, and then I'll jump off.

Michael Myshrall

So let me take the second question first. So the cross-sell opportunities with many of our largest customers have licensed one or more technologies from aside our Antispam or Antivirus or URL Filtering SDK. And what we're seeing is that there is an increased interest level in also licensing our cyber intelligence solutions, which include our phishing-based solution and our Malware Attack Detection or Virus Outbreak Detection.

So in the case of FireEye it was an upsell opportunity or an expansion opportunity, where they've taken one of our engines and deployed it into multiple solutions that they have launched or are in the process of lunching to their customer base. And we see similar opportunities with some of our other larger customers, like McAfee and Microsoft who have looked at other opportunities in the path. Could you just repeat the first part of your question as well, so I can address that?

Chad Bennett

Yes, the run rate. You talked about stable -- expect at a minimum to maintain the embedded run rate from a revenue standpoint. Kind of remind us kind of where that is?

Michael Myshrall

Sure. So I think on the last call or perhaps in the call before that we basically said that we anticipate that the revenues from the embedded OEM business would be in the $6.5 million to $7.5 million on a quarterly basis for the foreseeable future. And we are continuing to maintain that guidance for the embedded OEM business. If anything we're on the upper end of that range and there is an opportunity for some revenue growth in the embedded OEM business during 2016.

Operator

We'll go to Scott Billeadeau with Walrus Partners.

Scott Billeadeau

Looking at CWS product in terms of stepping out, I know you've talked about in previous calls, a couple of holes in that product you need to fill to kind of really solve all the solutions for the customers, where are you on that front in terms of moving the ball forward to have that all the little pieces you need for that product?

Lior Samuelson

Let me answer it in two ways. One, the one thing I want to say is that our detection capabilities in CWS and in the platform we think are as good or better that exist in the industry. So we don't have detection shortcomings at all, and in fact we just announced, what we call CWS 3.0, where in fact we're taking we believe prevention and detection to a whole new level in the industry through utilization of some developments that we've been working on for a while.

What we referred to last time is, I thought we referred mostly to reporting, and I think reporting is pretty much done. For the very large enterprises, I think we're still missing, for example, like items that will allow us to integrate into a large company, what is called theme, which is kind of read the reporting module that we're working on. But I think that we're in pretty good shape and the market right now is large for what we offer. So I think in general, so we are missing some feature, but nothing that would prevent us from -- let's say, a [ph] slow start that will prevent us from selling the product.

Scott Billeadeau

So kind of detection in really good shape, prevention in good shape, working on reporting and that's kind of as you have more robust --

Lior Samuelson

Reporting is in pretty good shape, but some integration module that we have to work on and a few other kind of things that we have to work on. But I think, as mentioned earlier, from a detection standpoint, I think we're really superior.

Scott Billeadeau

And then a quick question just on the expansion of the sales force especially from the embedded to selling CWS and do you got the resources you need? How was that sales process developing? Are you still got a little bit of training or work to do to get those guys up to full efficiency? Where are you in terms of learning how to [Multiple Speakers] CWS?

Lior Samuelson

So fundamentally it takes, in just sort of the average, it takes when you get somebody from a new to make them productive in selling something that is, let's say, if this is a technical sale, takes about six months. So overtime we get someone to be able to become fully productive, it's about six months. So we're in the process.

The other thing that we've done that is that we've developed some we think are very interesting and unique tools to show our potential clients our detection capabilities and the superiority of what we offer. And in fact, anyone who'll be at our, say, in about a week-and-a-half will be able to see these things.

So I can walk into your office and connect to your network, to your Wi-Fi, and show you all the stuff that your current solution is not blocking and show you what I see and what I can block. So we've developed a variety of tools to help our sales force and we continue to train them. And as the sales force get bigger; we'll continue to train them. But as I said earlier, it takes about six months from the time we get somebody new until they're fully utilized.

Scott Billeadeau

And then what's the game plan? I mean, maybe if you give us a little, how many sales guys do you have now, how many are beyond the six months, and kind of what's the game plan for '16?

Michael Myshrall

So the sales and marketing organization in total is approximately 40 people. And its split, basically about 85% of the effort is focused on selling CWS and cyber security solutions. The team is basically a mix of industry veterans that have been with us for a few years, as well as some new people that we hired in the third and fourth quarter of last year.

I would say that some of the guys that have been with us are very productive. They have a good rolodexes and good contacts and are very engaged with new opportunities right now. And the new people that we brought on board have gone through the training process and they are ramping up quickly. And we would expect it by the end of the second quarter the full sales force will be 100% productive.

Operator

And at this time, there are no other questions in queue. I will turn it back over to Lior Samuelson for any closing remarks.

End of Q&A

Lior Samuelson

Thank you very much. So what I'd like to say in closing remarks that we truly believe that we're well in our way to establish CYERN as one of the innovators and leaders in the cyber security landscape. We look forward to keeping you up to date as we reach new milestones in the journey. Thank you very much.

Operator

And that does conclude today's conference call. We appreciate your participation.

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