CYREN Ltd. (NASDAQ:CYRN) Q2 2016 Earnings Conference Call August 10, 2016 10:00 AM ET
Dan Maier - VP, Marketing
Lior Samuelson - Chairman & CEO
Mike Myshrall - CFO
Chad Bennett - Craig-Hallum
Good day and welcome to the CYREN Limited Second Quarter 2016 Results Webcast Conference. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Dan Maier, CYREN's Vice President, Marketing. Please go ahead sir.
Thank you and welcome to our conference call to discuss CYREN's second quarter 2016 financial results. This 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 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 today 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 today and available on the Investor Relations section of our website. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures.
With me on the call today are Mr. Lior Samuelson, CYREN's Chairman and Chief Executive Officer; and Mr. Mike Myshrall, Chief Financial Officer.
With that, I would like to now hand this over to Lior.
Thank you, Dan, and thank you for joining us today as we discuss CYREN's second quarter 2016 results. This is the first time that Dan has joined us on a quarterly earnings call since he joined CYREN as Vice President of Marketing last year from Zscaler. We welcome Dan to the call and thanking for his efforts thus far in helping to transform CYREN's marketing and sales organizations.
During the second quarter of 2016, we continued the progress made over the past several quarters as revenues reached $7.6 million, up 12% year-over-year. This is the fourth straight quarter of revenue growth and a good indication our efforts to transform the business are working. The growth can be attributed to the increasing demand for CYREN's cyber security solutions and superior security detection technologies. We signed a number of new customer into the CYREN WebSecurity platform while continuing to renew and expand our relationships with customers using our cyber intelligence and in better technology solutions.
We also came in ahead of expectation on the cost side of the business where we finished with a GAAP net loss of $0.8 million and only $0.2 million loss on a non-GAAP basis. While we continued to invest to accelerate top-line revenue growth, we are doing so with a measured approach in order to maximize our return on investments. Mike will go into the financial details a little later on the call.
First let me set the stage with some observations of the industry. One of the biggest problems affecting businesses over the past two quarters is the use of Ransomeware where hackers have released millions of unique pieces of malware that can take hold of a computer's data, encrypting the content, and preventing access unless the owner base, high ransome piece. CYREN security labs detect and block billions of copies of such malware during the quarter and our GlobalView infrastructure enables CYREN to prevent infection from millions of end users undoubtedly saving millions of dollars in unpaid rents.
CYREN's superior detection capability and that we were among the first companies in the industry to detect and prevent infection from the Locky Ransomeware including the millions of strains of the virus were at its peak we indentify blocks over one half million variance in a single day.
The problem with Ransomeware is not going away; is only intensifying as hackers are able to monetize their efforts with increasing success. These results are also being echoed by the team at Osterman Research who recently released their 2016 Benchmarking Study that follow over 300 IT organizations from small, medium-sized enterprises ranging in size from 100 to 3,000 employees. There is also the survey was dramatic, revenue 1% of respondents indicated they have been impacted by a malware related breach while 43% of companies acknowledged they were the victim of a successful phishing attack. At the same time, the survey indicated the businesses still feel they are vulnerable less than half of the respondents tell that they were adequately protected to prevent future attacks and 29% of companies are beginning to look at cloud-based web security solutions to improve their protection. The full Osterman Benchmarking Report can be reviewed on the CYREN website and I encourage you all to check it out.
As we detailed on the last call, the CWS platform continued to evolve into an industry leading cloud-based Cyber Security Solution which protects user from Ransomeware, phishing, and other advanced malware attacks.
Q2 represents the first full quarter of our ability of CWS 3.0 release, which improves cloud sandboxing capability as part of a new Advanced Threat Protection module to stop zero-day threats, targeted attacks, advanced precision threats, and evasive malware. It also includes Incident Management Capability that allow customers to identify and isolate any potential threat that may have affected the organization to drilldown in detail to trace incidents on a case-by-case basis. These capabilities are businesses large and small to protect themselves from the latest security threat and maintain a robust security posture.
The initial customer response with CWS 3.0 has been very positive. We have engaged with a number of new customers and are in various stages of evaluation and deployment. CYREN's embedded technology and CYREN intelligence customers also grew during the second quarter.
We expand our significant contracts in Europe, which utilize CYREN's email security and web filtering embedded solutions and added customers for IP Reputation and Virus Outbreak Detection Cyber Intelligence Solutions. For each of these contract wins there was one common theme. CYREN was selected for a breadth of intelligence data and our superior detection capabilities in identifying the blocking, previously, unknown malware and phishing attacks.
For example, we were the first to identify the bitcoin phishing attack and received public credit from one of our competitors in an industry that is very stingy in giving credit to others. We continue to believe that our embedded security customer base, intelligent analytics, and global threat visibility are key asset to differentiate CYREN from any other security vendor.
We have currently integrated our email and WebSecurity platforms. In early 2017, we anticipate offering both web and EmailSecurity from the same cloud platform in Industry First. We continue to see increase demand for EmailSecurity due to the growing number of phishing and Ransomeware attacks. As you know, our EmailSecurity technology and products are at the forefront of the industry and currently protect major enterprise on ISPs.
On the organizational front our efforts to refocus the sales force on selling direct to enterprisers have continued to progress and we made a number of key hires during the quarter to support those initiatives. Our sales office in Austin, Texas are now fully operational and the team is ramping up quickly.
We recently announced Atif Ahmed as our new Head of Sales for Europe, Middle-East, and Africa. Atif joined CYREN to oversee sales services, strategic channels, and alliances with the EMEA region, and previously held senior sales leadership positions at AppSense, Websense, and Check Point.
Operationally, we also made some key strategic hires to help CYREN expand and improve our global infrastructure in order to support our growing customer base. In June, we were pleased to announce the appointment of Hesham Eassa who joined CYREN as Vice President of Global Cloud Operations. Hesh joined CYREN with over 25 years of expertise in building world class SaaS based company. Most recently, Hesh was VP of Cloud Operations in Zscaler, where he built to manage a global infrastructure of over 100 data centers to support the company's cloud security solutions.
At this time, I'd like to hand the call over to Mike to further elaborate on the financial results for the second quarter. Mike, please proceed.
Thank you, Lior, and good morning everyone. I will now provide with a summary of CYREN's second quarter 2016 results. For the more detailed results, please refer to the press release we issued earlier today which is posted in our website. As always, please note that we state our financials under U.S. GAAP Accounting Standards, including non-operating expenses. But please also note that I will 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 second quarter of 2016 was $7.6 million compared to $6.7 million during the second quarter of 2015 and $7.4 million last quarter. Non-GAAP revenues for the second quarter also totaled $7.6 million compared with $6.8 million a year ago and $7.5 million in the first quarter of 2016.
As Lior mentioned, this quarter represents the fourth straight quarter of revenue growth and quarterly GAAP revenue were up 12% year-over-year compared to the second quarter of 2015.
It should also be noted that since our two acquisitions closed in late 2012, CYREN has been distinguishing between GAAP revenue and non-GAAP revenue, which is derived from the fact that deferred revenues consolidated from acquired companies, are recorded based on sale value rather than book value for GAAP purposes. This quarter represents that last quarter investors will see a difference between CYREN'S GAAP and non-GAAP revenues as a result of these two acquisitions. The deferred revenues associated with these transactions have been completely exhausted.
Our GAAP gross margin for the second quarter felled at 68% from 69% a year ago and 74% last quarter. The primary reason for the sequential decline in GAAP gross margin is related to the accounting standards associated with capitalization of R&D projects. The second quarter of 2016 along with the release of CWS 3.0, represents the first quarter in which CYREN recognized significant amortization of previously capitalized R&D projects. And accounting standards require that this expense to be recognized as part of cost of sales. This has an accounting effect of reducing the GAAP gross margin compared to prior periods where no significant technology amortization has been recorded. Conversely, on a non-GAAP basis, non-GAAP gross margin for the second quarter increased to 77% compared to 72% during Q2 2015, but remaining in line with our last quarter when we reported 77%.
GAAP operating expenses for the second quarter totaled $6.0 million compared to $6.9 million last quarter and $5.2 million in the second quarter of 2015.
R&D expenses during the second quarter decline in part due to the receipt of an R&D grant which was awarded by Israel's National Authority for Technology Innovation, formally known as the Office of the Chief Scientist. As we mentioned on the first quarter earnings call and in the previous press release, this grant will offset CYREN's 2016 R&D expenses for the year by approximately $850,000.
Sales and marketing expenses also declined during the quarter to $2.1 million compared to $2.8 million last quarter and $2.2 million during the second quarter of 2015. The decline in sales and marketing expense is attributed to higher expenses during Q1 associated with the RSA Security Conference, as well as timing related to some of the new hires brought into sales and marketing during the second quarter. With the addition of the team in Austin and the staffing of some key positions in EMEA, we expect that sales and marketing expenses will increase during the second half of 2016.
G&A expense for the quarter totaled $1.7 million compared to $1.7 million last quarter and $1.3 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 second quarter were $5.9 million compared with $7.4 million last quarter and $6.0 million a year ago. Non-GAAP expenses exclude stock-based compensation, executive termination expenses, amortization of intangible assets, and also exclude the offset to expenses due to R&D capitalization, as detailed in the non-GAAP reconciliation of our press release.
Second quarter GAAP net loss was $0.8 million or a loss of $0.02 per basic and diluted share compared to a net loss of $1.4 million or $0.04 per share in the first quarter and a net loss of $0.6 million or $0.02 per share during second quarter 2015.
Our second quarter non-GAAP net loss was reduced to $0.2 million, which rounds to a loss of $0.00 per basic and diluted share compared to a non-GAAP net loss of $1.9 million or a loss of $0.05 per share during the first quarter and a non-GAAP net loss of $1.2 million or $0.04 per share during the second quarter of 2015. The reconciliation between GAAP and non-GAAP net income is included in our press release.
As Lior mentioned, the GAAP and non-GAAP net loss for the quarter was better than we expected and can be largely attributed to the timing of sales and marketing expenses between Q1 and Q2, as well as the approval of the R&D grant from the Israeli government, which was received during the second quarter. This resulted in a dramatic drop in second quarter net loss, which we consider more of a one quarter event, and we expect that in future quarter sales and marketing and R&D expenses will return to level similar to the most recent two quarters. These anticipated increases reflect our continued investment in executing the growth plan for our CWS and cyber security initiatives.
Cash used in operating activities during the second quarter was $0.2 million compared to cash generated of $0.3 million during the second quarter of 2015. Net cash spent for the quarter was $1.1 million compared to $0.6 million during Q2 2015. Year-to-date CYREN has generated $2.8 million in operating cash flow and used a total of $3.4 million on a net cash basis including the repayment of our line of credit during the first quarter of this year.
The cash balance at the end of the second quarter stood at $13 million, down from $14 million at the end of last quarter, but up from $7.9 million a year ago. We continue to have no debt on the balance sheet.
A year ago, we stated that the embedded business will generate the majority of revenues for CYREN and then revenues from this business would stabilize in the $6.5 million to $7.5 million per quarter range for the foreseeable future. This guidance has proven to be accurate and we are now seeing the total revenues are growing above $7.5 million per quarter including revenues from our CWS and cyber. We expect that quarterly revenue growth will continue during the second half of 2016 and into 2017 but are not yet prepared to give specific guidance.
With that, I would like to open up the lines for Q&A. Operator?
Yes sir. Thank you. [Operator Instructions].
We will go ahead and take our first question from Chad Bennett with Craig-Hallum.
So nice job on the quarter and it sounds like CWS momentum is continuing here. So I guess Mike what you're implying is embedded business is kind of running where you thought it would be and may be the upside so to speak is you're seeing some additional traction in CWS? So I guess can you give us a sense for kind of how we should think about CWS growth going forward, obviously a lot of ramping but fairly modest pace. And kind of what's kind of a deal volume and deal ASP every quarter for CWS as much as you can a number of deals in ASPs and so forth. Any additional color would be great?
Hi Chad, it's Lior. Let me try to answer that. So let me answer it that way. What we're doing is we're building and to a large extent have to build marketing and sales operations that is designed to create a lot of opportunity and also lot of deal for us. So and that machine is sort of -- our office in Austin, Texas where as an example of North American sales are based has been really in full operation now for about a month and a half. And so we expect that as it gets more experienced and as we volume goes up, we expect that the number of deals will accelerate and at accelerated rate in mathematics referred to a second derivative positive. And so I expect that it will grow every quarter and it will have an increasing rate every quarter.
I'm not really sort of -- we're not really in a position right now to give you any more specifics. I will say that I'm very optimistic about what we're seeing. I can just give you an example of what we will call; if you call like a touch point with just how many sort of potential clients we touched that has increased by orders of magnitude.
Now, so that's what -- so that's kind of really what's happening, it's -- for us it's -- so we feel or I feel very comfortable about what's going on and very optimistic. But we're not as Mike said, we are not really to give you anymore guidance but I think when we are and hopefully in the near future may be in a couple of quarters or more then we will give you a -- we will be happy to do that. But again as I've said before I don't want to say anything that is not going to be proved to be correct.
Okay. So another question, so number of your competitors in the last whether it's June quarter or even to some extent the March quarter have talked about cloud based security solutions and introducing them and it's still very early for them but they're talking about the transition so to speak more and more, how do you guys view that both from an opportunity and/or a potential competitive standpoint?
So I think this is really, I think from my perspective this is really very good, it just confirms the fact that that everyone recognize this that the cloud is where everything is going to, is going to, is what we've been saying. Now I will, so I think from a competitive standpoint it's very positive because I think that we are for the most part, I had or everyone else now you have to and clearly on the website on the WebSecurity and our opinion is only one other competitor which is Zscaler and also, so, as you know, the mail market has been somewhat penetrated on the cloud but not the web channel and not the cyber and not cyber security.
So we see it as very positive, I think almost everybody; almost everyone is way, way behind us. I think a lot of people are claiming to be in the cloud they're not. We see that and also I think a lot of people are underestimating what it takes not to build the cloud infrastructure which also I think is challenging but building cloud worthy product and not only just sort of taking a bunch of servers and putting M&A in a rack space but actually having a cloud infrastructure with proxy and so on, so forth.
So as an example if you surf through the web, and you're in Japan, you get the Japanese experience your data gets stored in the origin. So we but in general we feel very good about the fact that everybody talks about the cloud.
And with no further questions at this time, I would like to turn the conference back over to management for closing remarks.
No questions, okay. Okay well thank you for joining us. What I would like to say is that we're pleased with the second quarter results and truly believe that the second half of the year holds even greater promise for CYREN. We continue to push our technology forward and expect our investment in technology, sales and marketing will pay greater dividend as we begin to see the fruits of our labor. We look forward to updating you in future quarters. Thank you very much.
Ladies and gentleman that does conclude today's conference. We thank you for your participation and you may now disconnect. Have a great rest of your day.
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