CYREN Ltd. (NASDAQ:CYRN) Q1 2016 Earnings Conference Call May 17, 2016 10:00 AM ET
Garth Russell - IR, KCSA Strategic Communications
Lior Samuelson - Chairman & CEO
Mike Myshrall - CFO
Chad Bennett - Craig-Hallum
Reuben Gaz - Opus Fund
Good day, and welcome to the CYREN Limited First Quarter 2016 Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Garth Russell with KCSA Strategic Communications. Please go ahead sir.
Thank you, and welcome to our conference call to discuss CYREN's first quarter 2016 financial results. This conference call is being broadcast live and can be accessed on the Investor Relations section of the CYREN website.
Before we begin, let me 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 Annual Report on Form 20-F issued on March 31, 2016.
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 press release issued earlier today that is 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 now hand the call over to Lior.
Thank you, Garth, and thank you for joining us today, as we discuss CYREN's first quarter 2016 results and provide an operational and business update.
We started out the year with a strong first quarter, one of the strongest quarters on our history in terms of contract renewals, customer expansions, and operating cash flow. In fact, several large customer renewed and expanded their relation with us through a new multi-year, multi-million dollar engagement. The sequential revenue growth that we have experienced over the past few quarters reflects the increased demand of CYREN WebSecurity and our Embedded Security Solution as we strengthen our business.
To elaborate on this point, at the RSA Security Conference in March, of this year, we saw numerous security companies talking about their cloud solution. In reality, few companies in the world today have fewer cloud web security solution and CYREN is one of those company. Our platform is designed to deliver true Cloud Cyber security solutions including protection for the mail and web channels, no other company can deliver this today. These advancements are being noticed in the market where at RSA CYREN WebSecurity was named Best Antimalware Solution by Cyber Defense Magazine.
CWS received recognition for its continued security protection from the latest malware threats including the Locky Ransomeware virus which rose to epidemic levels during the quarter. The rate to remove cyber threats continues to grow at a blistering pace and it reminds us that no enterprise whether large or small is immune from the technical and financial impacts of malware including .NET, ransomeware zero-day, and phishing attacks.
In March, CYREN WebSecurity 3.0 was released to general availability. CWS 3.0 integrates CYREN’s new cloud sandbox and capabilities as part of a new Advanced Threat Protection module to stop zero-day threats, targeted attacks, advanced precision threat, and evasive malware. This new module combines an array of virtual and physical sandboxes with advanced reputation analysis leveraging CYREN’s massive global security cloud which provides visibility across 17 billion email, web, and DNS transactions every day. This unsurpassed visibility enables CYREN to identify a new malware with high accuracy and deliver superior threat protection to customers.
CYREN filed a provisional patent application for this cloud sandbox array technology during the quarter. As part of this product launch, we also introduced a new higher pricing cleared that overtime should bring the average selling price of CWS higher. The early feedback on CWS 3.0 from customers has been very positive.
We are the only security vendor on the market using a cloud sandbox array approach to isolate zero-day malware threats. Furthermore CYREN WebSecurity 3.0 is being offered as the SaaS offering making the cyber threat mitigation software easy to deploy in any environment. The market responsibility and its capability has been so strong, we have also began to offer it as a service to our embedded solution customers. We have seen an increasing number of companies shift greater portion of their security spend at their cloud based security solutions from appliances as the market gains greater understanding of the clear advantages this architecture provide. This market shift, as well as greater awareness of CWS, as a best-in-class solution is helping our sales team gain traction.
In the first quarter, we signed CYREN WebSecurity customers to both enterprise and service providers utilizing CWS for proxy and DNS capability. In some of these cases, CWS displaced incumbent vendors such as Websense/Forcepoint and OpenDNS. The ability to offer an integrated solution that it includes both proxy and DNS based security capability is proving to be compelling particularly for organization that need to provide safe Internet access for guest Wi-Fi networks, retail stores, and shared services like point of sale terminals and combo. While the SaaS web security contracts, we are closely represent positive trend for CYREN, we feel these are just the tip of the demand that now exists in the market and will emerge over the next few quarters.
As I mentioned during the quarter, several large customer renewed their contracts for multi-year, multi-million dollar extensions for our embedded security products. In particular we expanded our relation with one of the largest publicly traded security technology companies of the world extending our agreement to include several CYREN security technology products and cyber intelligence solution for use within their UTM appliances and cloud-based security services.
In recent months, we have also made a series of strategic hires to improve our sales, marketing and product management team. As an example, Mickey DiPietro, joined us from Zscaler to lead our North American middle market enterprise sales efforts. Mickey successfully built and managed cloud web security sales at Zscaler and before that email security sales at Postini and Google.
The sales team expansion also include a new office in Austin, Texas in order to tapping to one of the hottest technology recruiting markets in the country. With this growth, CYREN joins the ranks of other Austin security technology employers such as Dell, IBM and Forcepoint. We are making good progress in building the high velocity sales team to work with Mickey.
Other key hires include industry veterans from Zscaler, Check Point, and Radware, who bring to CYREN decades of combined expertise in the security sector.
We are continuing to build the world class management team that can bring CYREN’s WebSecurity Solutions to customers around the world. We have seen a dramatic increase in strategic business development discussions driven by the difficulty appliance based security companies are having in building out their own cloud-based solution. We are currently engaged in some significant discussions which is the only way to valuable partnerships in the coming quarters. These discussions are the results of our increased visibility as the leader in cloud security and our innovative cyber security solutions.
We have spent a significant amount of our attention focused on providing the most innovative solutions in cybersecurity clearly. Recently we were awarded a cybersecurity grant from Israel’s National Authority for Technological Innovation, formerly known as the Office of the Chief Scientist, OCS. CYREN is unique in the Israeli security industry, having been recognized by OCS for developing innovative cybersecurity technology several years in a row. This grant will offset R&D expenses by approximately $850,000 through 2016 and allow us to further innovate our cyber capabilities for use across our web and email security product line.
I would like to emphasize that for the last three years, we have been continuously building security technology and solution that are aimed at the future demand of the market. The market needs superior prevention and detection and delivery of the solution via cloud as opposed to appliance. We believe that today organization are increasingly frustrated with a high cost and functional limitations of appliance based solutions, we’re on the verge of the virtuous cycle where we will increasingly see the fruits of our cloud security development effort.
With that I would like to hand the call over to Mike to further elaborate on the results. Mike?
Thank you, Lior, and good morning everyone. I will now provide you with a summary of our first quarter 2016 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 first quarter of 2016 was up $0.3 million to $7.4 million compared to $7.1 million in the fourth quarter of 2015 and $7 million a year ago. Non-GAAP revenues for the first quarter totaled $7.5 million compared with $7.2 million last quarter and $7 million during the first quarter of 2015.
The quarterly revenue growth was due to our largest quarterly amount of CWS revenue recognition to-date as well as growth in the embedded business, thanks to several significant contract renewals and extensions during late 2015 and the first quarter of 2016.
Our GAAP gross margin for the quarter rose to 74% compared with 72% for the previous quarter and 70% for the first quarter of 2015. Non-GAAP gross margin for the quarter increased to 77% compared with 75% during the previous quarter and 74% a year ago.
The increase in gross margin can be explained by the revenue growth outpacing our investment in data center infrastructure along with some key cost cutting initiatives that were started in previous quarters.
GAAP operating expenses for the first quarter were $6.9 million compared to $6.2 million last quarter and $6.4 million in the first quarter of 2015. For the quarter, R&D expenses of $2.3 million increased slightly due to the fact that there was no provision for the Israeli government grant which was not officially awarded until the second quarter of 2016. We expected R&D expenses may decline slightly during the second quarter when the accounting for the 2016 grant will be reflected in the numbers.
Sales and marketing expenses for the quarter totaled $2.8 million compared to $2.2 million in the fourth quarter 2015 and $2.7 million during the first quarter of 2015. As Lior discussed, we hired several new employees in sales and marketing during the fourth quarter and first quarter of 2016 to generate demand for CWS and our cyber security solutions.
The increase in sales and marketing expense is related to the full quarter effect of these additional employees as well as our successful participation in the Annual RSA Security Conference.
G&A expense for the quarter totaled $1.7 million compared to $1.7 million last quarter and $1.4 million a year ago. These expenses were in line with our expectations and do not include any unusual items.
Non-GAAP operating expenses for the quarter were $7.4 million compared with $6.5 million last quarter and $5.9 million a year ago. Non-GAAP expenses excludes stock-based compensation and amortization of intangible assets, and also excludes the offset to expenses due to R&D capitalization and grants received, as detailed in the non-GAAP reconciliation in our press release.
First quarter GAAP net loss was $1.5 million or a loss of $0.04 per basic and diluted share compared to a net loss of $1.2 million or $0.03 per share in the fourth quarter of 2015 and a net loss of $1.7 million or $0.05 per share a year ago. Our first quarter non-GAAP net loss was $1.9 million or a loss of $0.05 per basic and diluted share compared to a non-GAAP net loss of $1.4 million or $0.03 per share last quarter and our non-GAAP net loss of $1 million or $0.03 per share a year ago. A reconciliation between GAAP and non-GAAP net income is included in our press release.
As previously discussed, we made some dramatic improvements to the balance sheet during the quarter. Our cash balance at the end of the quarter stood at $14 million compared to $16.4 million as of December 31, 2015, and only $8.5 million a year ago. Operating cash flow for the quarter was the highest we spend in recent memory generating $2.9 million compared to cash usage of $0.6 million in Q4 2015. As Lior mentioned, during the quarter several large contracts were renewed and expanded and the quarter also included our large customer prepayment for services. The positive operating cash flow enabled CYREN to paydown and retire its line of credit and the company ended the quarter with no debt.
Looking forward, we anticipate continued growth in both CWS and our embedded security technology business as our investments in sales and marketing become more productive.
With that I would like to open up the lines for Q&A. Operator?
And we will take our first question from Chad Bennett with Craig-Hallum.
Hey guys, good morning. Nice job on the quarter again.
Thanks Chad, good morning.
Yes, so may be a couple of questions for you guys. Lior, can you talk about the -- I mean bookings generally speaking sounded very strong in the quarter and I’m just wondering on the embedded side or the OEM side, can you give us a little bit more color as to kind of how you’re growing those contracts in terms of added functionality and kind of what you’re seeing there in terms of increase in that business. And then following up on that, you have a different idea of may be what the growth profile would be of the embedded business looking out now or may be an improved growth profile than you did may be a year ago about that business and I have a couple more follow-ups.
I’m sure you do. Let me try to answer you this way. So I think in general, I think we’re doing I mean the business as a whole is doing relatively well. The one thing that I would like to emphasize is that I think that what -- that our platform is that we are marching very quickly towards delivering a lot of what we do out of the same platform. So that the distinction which between sort of kind of the embedded and the non-embedded side of the business is so that will, it’s going to blow when we can provide web security, cyber mail of the same cloud platform. Remember everything we do comes out of the same cloud platform. We don’t certainly don’t have two platforms.
I think in general what we’re seeing is that the business financially in relative to recent history is looking pretty good and any, any let’s say concern to that, we used to have that kind of the degradation of the business with our clients that have been with us for a while, those are kind of issues been eliminated, we feel very -- we feel very comfortable, we feel comfortable about that business with the big clients.
As we mentioned in other calls before, I mean it’s true that well if the industry is changing and changing relatively rapidly, people they were heroes few years ago are no longer heroes and I think that we will continue to see massive changes in the industry in displacement of the current industry leaders and I think we’re targeting some of our small clients either being bought or disappearing but our bigger clients, those relationships are getting stronger and I think as people recognize what we’ve done technologically both in terms of pure detection prevention technology and also as a platform is getting more robust, we see increasing demand for what we’re doing. So I think in general, it looks very good.
Okay. And then on the CWS side, can you comment on kind of where you’re seeing adoption there, is it still the web security functionality there or you’re seeing some cyber threat traction and can you comment on kind of whether or not pricing is holding relative to your previous expectations there? Thanks.
So I don’t think there are any pricing issues. I do want to say that -- I think we’re in the early stages of a shift which we believe will be massive from appliances to cloud. And as you know, Chad very well, I mean the several years ago nobody everyone had their mail in appliances and now it’s not unusual for people to have mail in the cloud whether it’s Gmail or Microsoft 365 or other vendors including ourselves. And we think that that shift will occur and it’s beginning to occur in other functionalities. I mean if you listen to some of the largest companies in the space who are appliance companies, they all begin to started talking about the cloud and that’s in response to basically what customers are beginning to demand. But I think we’re in the early stages of this shift because most of the solutions today are primarily for web and cyber, what we call cyber are all appliance-based, all the companies, all the big companies they use appliances.
And so we think that as -- so I think our job is really to ride the wave and help the market in base of shifting from appliances to web primarily because the detection is superior, the cost of ownership is a lot lower, provisioning is a lot simple and as we’ve been saying now for quite a while it’s been you cannot repeat cannot protect mobile workforce with appliances, it’s virtually impossible.
So I think we don’t see -- I think what we’re doing is in anticipation that most things will be moving to the cloud, we’ve been building the solution that we believe the market is beginning to demand now or -- and will demand in much greater demand in the mid-near and mid-term future.
Okay. Then last one from me, may be for Mike deferred revs were up pretty strongly sequentially Mike, is that just a function of kind of the renewal provision that we talked about in the call and the press releases. Is there any kind of color into how much CWS drove that versus embedded?
So yes, you’re right, the primary driver for that was basically the customer prepayment related to do with some of our renewal business on the embedded side. And in an order of magnitude, I would say that that activity is much larger than CWS. And so the LION’s share of that growth in deferred revenue was related to those renewals both in the fourth quarter and in the first quarter. But over time, what you’ll see as we shift our business model away from the embedded business more into additional SaaS based model and CWS, most of those drivers obtain 12-month subscriptions upfront in the traditional SaaS environment.
So what you will see is that CWS revenue become a bigger piece of the overall pie, you will see that the deferred revenue component is increased because of those upfront payment. But by and large for the quarter, the majority of that came out of the embedded business.
We will take our next question from Hamid [indiscernible] with Jupiter Capital Markets.
Yes. Thank you for the calling. And I see that your revenues for the third quarter of 2016 were 7.4 million USD. And I see that in your balance sheet of 2015 and 2014 your gross profit is negative -- is positive I’m sorry, your gross profit is positive but your net income is negative year-after-year. And I have two questions; the first question is what this company is planning to do to that net income will be positive and not negative like now. And the second question is how you’re planning to increase your revenue, 7 million USD for quarter that for a company that is operating in the cyber and security industry is very, very low. Thank you.
So let me answer it this way. So as I said earlier there is a major shift in the market in two ways. One is the shift to the cloud and two is shift to new technologies. While we’ve been doing over the past three years is investing heavily in developing both our infrastructure and our new technologies.
Now I will tell you that most of the companies in this area today in the cyber field today are private and not public, most of them are venture backed and most of them are lot smaller than we are. And but you don’t know about them or you don’t see they are not because they are private. So relative to the vast majority of the cyber security companies out there, we have some size over most of these companies. So that’s one part of the answer.
The second part of the answer is that we believe that through the investment that we’ve made over the past three years that we are in very good position and the investments that we’re making now in sales and marketing that we’re in very good position to take advantage of the shifting wins in the market and that we will see quarter-after-quarter we will see increased revenue growth and so that’s basically what we’re going to do. So fundamentally, I will repeat what I said earlier there are very few companies or any that can match the quality, breadth, and technology of our products.
And we will take our next question from Reuben Gaz with Opus Fund.
Thank you for taking my questions. When would you start to breaking out in your revenues, your subscription model CWS at which level well you could do 10% of revenue?
You know and it’s a very good question but I think that I don’t know when we’re going to do it and if we’re going to do it because things change so rapidly. So what I mean is that I think that the delineation will be -- is almost it doesn’t it may not make sense for us and it’s almost artificial because as I said earlier it all comes out of the same platform, so I felt cyber out of the same cloud platform and now that we launched the sandbox array and the cloud which is a cyber product, it’s out of the same platform, something goes with, something goes without CWS, a lot of the things, a lot of our clients that we’ve had for years are beginning to consume some of our newer products like an example like for example what we call zero-day or zero-hour malware outbreak and these are all basically cyber security and basically kind of next generation products.
So the -- so it’s kind of it’s very difficult for us to make to breakout what we’re doing into things that kind of will make sense to investor community and in fact even to us because we are moving relatively quickly and delivering everything out of the same platform and I think that’s part of what we plan on doing and now it’s almost informed limitation, everything out of the same platform.
Okay. Just a quick follow-up on my first question in your first quarter financial highlights you do emphasize that CWS revenues was the highest since it was launched. So if I understand correctly this is the best of your growth for the increased revenues and eventual profitability. So what the investor community has to like in some way to see the milestone or indications, how this part of your revenues grow, how you would address if you don’t break it as deferred revenues or how we could understand the break if you grow in this segment?
I think the best thing to do that we just my suggestion, I think your question is very good, I think we wrestled with it today. If we were to take a look at our revenue base and divide it by product or by -- divide it by whether kind of let’s call it like a cyber product, non-cyber product in the sense it would be off the cyber portion whatever will be -- will be relatively large, it will be quite large. I think the best thing to do was to basically watch our revenue growth and also watch our announcements although sometimes I mean people our clients are not willing to allow us to tell the world who they are and they bought products from us.
I think we will do the best -- we will do our best as we got a little bit more visibility and try to convince people to basically we may be able to give you greater visibility in our coming quarters as it becomes a little bit clear. We anticipate -- I anticipate that we will see in the next coming quarters we will see -- we will see clearly an increase in customer traction and on new platform business but I will say that I think that in the mid-term, it’s all going to be one type of revenue all basically because everything is moving towards cyber.
Okay. And one more question the last question, as you mentioned the most of the cloud even in probably basic services email and especially through the support mobile workforce in the enterprise is more and more rely on the cloud-based securities versus the appliance such dominant players in this segment enterprise model as MobileIron and major competition companies there. What they do now as I understand they are not your customers, so how they support their cyber security cloud for model for their internal development or they partner with somebody else?
So let me answer it this way. So we talk about cloud in a sense so email cloud is been around for quite a while, I mean was started by a company called Postini in 1999 all that started getting traction in the mid basically 2000 to 2003, it was around 2007 or 2008 I recall they were acquired by Google and so email cloud has been around not for a while, Gmail has email cloud, probably Gmail is -- Gmail is cloud. Microsoft 365 is cloud; there is a bunch of other companies who forms probably the most prominent providing cloud email security. It is a very, very big difference between providing email security in a cloud and web and cyber security in cloud and I won’t get into a lot of technical details but no saw email companies all are not in web security and cloud because it requires a very different cloud architecture, requires something we call a proxy, it’s much more complicated, much more pervasive and requires a greater amount of expertise.
So I think that that there is really other than what we do today in the cloud and one other company that happens to be private and subpart of Cisco in web security and no one else doesn’t. I mean you can call it web but again I’m not trying to get into security but people use things like VPNs to hold that traffic and so on and so forth but that’s not true, that’s not true web security. So the number of players in the cloud will provide web and cyber security is very, very, very, very small.
Okay. So you feel you have an incremental value to whatever is now and so you have enterprise mobile security in million users for the large corporations as if they had, is so what they’re saying is that their security, web security is not as advanced as what you bring to the table right that’s about what you just mentioned right?
When you talk about mobile, talk about laptops, talk about iPads not just basically a cell phone. If you take your laptop, if you get an appliance and you take laptop, you know audio office and you take it home or just Starbucks or whatever and you do whatever you do in the Internet and you’re totally unprotected unless you use a VPN to go back into your premises which most people do not do, so because it’s very expensive and very slow solution. So yes the answer is absolutely yes.
And ladies and gentlemen that does conclude today’s question-and-answer session. Mr. Samuelson, at this time I will turn the conference back to you for any additional or closing remarks.
Okay. Well thank you. So in summary, I would like to say that I think we had a really good quarter. We’re getting traction in all technologies, we’re continuing to invest in R&D, we’re continuing to invest especially in sales and marketing and we expect to see nice results in the coming quarters. So thank you for joining us today.
Thank you for participation. This does conclude today’s call.
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