CYREN Ltd. (NASDAQ:CYRN) Q1 2019 Earnings Conference Call May 15, 2019 10:00 AM ET
Eric Spindel - General Counsel and Corporate Secretary
Lior Samuelson - Chairman
Brett Jackson - CEO
Michael Myshrall - CFO
Conference Call Participants
Chad Bennett - Craig-Hallum
Greetings, and welcome to CYREN's First Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to Eric Spindel. Thank you, please go ahead.
Thank you and welcome to CYREN's first quarter 2019 financial results conference call. This call is being broadcast live and can be accessed on the Investor Relations section of the CYREN website.
Before we begin, please 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 10-K, filed on March 29, 2019. Any forward-looking statements should be considered in light of these risk 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 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.
Also on the call today we have Mr. Lior Samuelson, CYREN's Chairman of the Board; Mr. Brett Jackson, Chief Executive Officer; and Mr. Mike Myshrall, Chief Financial Officer. With that, I would now like to hand the call over to Lior.
Thank you Eric and good morning and thank everyone for joining us today to discuss CYREN's first quarter 2019 results. Joining me today on the call is Brett Jackson, CYREN's newly appointed CEO who starred in the position just a few days ago. I would first like to make some comments on the quarter before introducing Brett.
CYREN turned in a solid quarter finishing with 9.7 million in revenue which was up 26% year-over-year when compared to Q1 2018. Once again this represents the highest quarterly revenue total in CYREN's history and it is a great start to the year. During the first quarter we continue to see positive traction in our enterprise business where annual recurring revenues rose to 6.8 million from around 4.8 million a year ago representing our 41% annual increase. During the quarter we added over 40 new enterprise logos and also renewed and expanded several meaningful customers including a six figure expansion of a large enterprise customer utilizing CYREN's email security. We continue to see positive growth from our largest enterprise email security account which now stands at over 120,000 corporate email users.
From a renewal standpoint gross retention rates in both our enterprise and our threat intelligence businesses were in excess of 92% while net retention rates including up sell finished at 103%. Some of these renewals include multiyear expansions and we also collected over 4.7 million cash in the quarter from one of our largest threat intelligence customer who signed a multiyear renewal contract with CYREN during the fourth quarter.
Our engineering and product development efforts continued to progress. On the last cal in February we discussed our plans to develop and launch a next generation enterprise class anti-phishing solution which we call CYREN Inbox Security. We believe this service will offer significant advantages for enterprises who are struggling to deal with the ongoing problem of phishing attacks. Unlike traditionally most security solutions in the market we expect the CYREN Inbox Security will be able to proactively remediate and remove phishing emails after they have been delivered to users mailbox even if the company is doing a separate provider as their primary level of email protection. We believe that this capability will be unique in the industry and will be complementary to CYREN's other email security offerings [indiscernible] allow CYREN to penetrate larger enterprise email accounts who continued to experience issue with phishing attacks despite using solutions from well known cloud and appliance based email security providers. We intend to demonstrate this product that the upcoming Infra Security Conference in London in June.
In January we announced our partnership with Microsoft to integrate CYREN's web security technology directly into the Windows Defender, advanced threat protection platform. As we described previously the Windows Defender ATP platform is a premium paid service that is targeted at large enterprise customers and Microsoft is developing an ecosystem of security vendors to deliver enhanced security solutions. We are working with Microsoft on an integrated offering which will initially be made available as a private preview with a select set of enterprise customer due in the second quarter of 2019 and if successful this product will be made generally available for all of Microsoft's Windows Defender ATP customers later in the year. We look forward to future announcements from CYREN and Microsoft on the progress of this collaboration.
On a personal note I've been involved with CYREN since 2010 first as Executive Chairman and then taking over Dave today as Dave Davis [ph] CEO in 2013. During my tenure in CYREN we've accomplished a great deal. We have transitioned the company from a pure OEM technology provider to an enterprise focused cloud security solutions provider. We have developed a multi-tenant, multi-tiered, multiservice cloud access platform that includes email security, web security, DMS [ph] security and clouds inboxing. We have changed the go to market capabilities of the company from OEM focused sales model to a combination of channel and direct enterprise sales capabilities. We have created a new enterprise subscription revenue stream and more than doubled the company's revenues. I feel we have built a great foundation fitting to growth and are ready to take the company to new heights.
As most of you know in February CYREN announced a CEO transition plan. Through a comprehensive search and recruiting process we were fortunate to identify and select a great candidate to serve as our next CEO and guide the company through its future growth. In late April we announced that Brett Jackson who took over as CYREN's CEO and that I would once again step back into the Chairman role. Brett comes to CYREN as a well established and well respected leader in the security industry and has served as CEO and COO in numerous technology and security companies for over three decades. He's particularly known as a strong operator and a growth oriented leader and I think he brings the perfect mix of experience to help take CYREN to the next level.
Brett has only been in the role for a few days now but he's ramping up quickly and I expect that he will make a big impact on the company in a very short period. On behalf of CYREN's Board of Directors I'm very excited to introduce you to Brett Jackson and I look forward to working with him over the coming months. Brett.
Thanks Lior and hello everyone. It's my pleasure to join you this morning and I look forward to getting to know CYREN shareholders and the analysts who cover us. As we all mentioned although I've only been on Board since last week I'm already very excited about the potential that I see within CYREN. I've been working in the technology and security space for more than 30 years but up until a few months ago I've not had any personal experience with CYREN. Throughout the recruitment process the more I learned the more I felt that CYREN was in a great position to capitalize on the unique assets and the team the company has assembled.
CYREN's underlying technology and cloud security platform are truly remarkable. In addition the company's detection capabilities and intelligence from billions of security transactions set it apart from the competition. The customer base includes proven industry leaders like Microsoft, Google, and Checkpoint who've been relying on CYREN's technology for many, many years which I think is a great validation for CYREN's solutions. And Lior has assembled a team that's very talented, who I think are poised to take the company and its new products to the next level. Overall I'm very impressed with what I've learned about CYREN and I'm excited about the future for the company. I'd like to thank Lior for his many years of service as CEO and also thank the CYREN Board for having the confidence in me to serve as the company's next CEO. I look forward to keeping all of you informed on CYREN's progress on future earnings calls and investor meetings. And with that I'll turn the call over to Mike.
Thank you Brett and good morning everyone. I am pleased to present our first quarter 2019 financial results. For more details please refer to the earnings press release which was issued earlier this morning and is posted on the Investor Relations section of our website. Please note that we state our financials under U.S. GAAP Accounting Standards including on operating expenses and then I will discuss certain financial metrics on a non-GAAP or adjusted basis which excludes those non operating items. Please refer to the table in today's earnings release for a full reconciliation of our GAAP to non-GAAP results.
GAAP revenue for the first quarter of 2019 was $9.7 million compared to $7.7 million reported during the first quarter of 2018, an increase of $2 million or 26%. On a sequential basis quarterly revenues increased $0.2 million from $9.5 million reported during the fourth quarter of 2018. The year-over-year increase was primarily driven by contract expansions with threat intelligence customers announced last year as well as new and up sell contracts in the enterprise business during the second half of 2018.
GAAP gross margins for the first quarter were 59% compared to 56% for the same period a year ago. During the first quarter there was a slight decrease in amortization of capital development expenses to $0.8 million from $0.9 million a year ago. On a non-GAAP basis gross margins were 68% compared to 67% during the first quarter of 2018. First quarter GAAP net loss was $4.6 million or a loss of $0.08 per basic and diluted share compared to $5.2 million net loss and $0.10 per share reported during the first quarter of 2018.
GAAP operating expenses for the quarter totaled $10.5 million compared to $9.5 million during Q1 2018 and $11 million last quarter. The increase in GAAP operating expenses is related to an increase in R&D expense which came in at $4.2 million in the quarter representing 43% of revenues compared to $3.4 million a year ago when it was 44% of revenue. The increase is a result of lower R&D capitalization of technology compared to Q1 2018 and increased R&D headcount compared to the same quarter a year ago.
Sales and marketing expense for the quarter finished at $3.9 million or 40% of revenue down from $4.1 million a year ago when it represented 54% of revenues. A decrease is due to lower sales and marketing headcount in the period and a reduction of marketing spend during Q1 2019 compared to Q1 2018. G&A expense for the period finished at $2.4 million or 25% of revenue compared to $2 million and 27% of revenue during the first quarter of 2018. Overall company headcount totaled 272 employees at the end of the first quarter 2019 compared to 247 employees at the end of the first quarter 2018.
On a non-GAAP basis CYREN's first quarter 2019 net loss was $4.4 million or a loss of $0.08 per basic and diluted share compared to non-GAAP net loss of $4.8 million during Q1 2018 or $0.09 per basic and diluted share. CYREN's non-GAAP net loss excludes a number of non-cash items including the effect of stock based compensation and amortization of intangible assets, capitalization of technology, and adjustments to earn out liabilities which are included in the GAAP results. Please refer to the table in our press release for more details on the reconciliation of our GAAP to non-GAAP results.
During the quarter we had negative operating cash flow of $1.3 million compared to negative operating cash flow of $4.2 million in the first quarter of 2018 and negative operating cash flow of $5.6 million last quarter. The improvement in operating cash flow was primarily attributed to the prepayment of a multi-year agreement which from one of our largest threat intelligence customers where we collected over $4.7 million in the quarter. This prepayment is also reflected in the increase in long-term and short-term deferred revenue on the company's balance sheet.
During the first quarter CYREN paid out approximately $2.7 million to settle an ongoing legal dispute with the former shareholders of [indiscernible] a company that CYREN acquired in Germany during 2012. The dispute was related to the amount and timing of earn out consideration related to the acquisition and was previously represented as a liability on CYREN's balance sheet. Because the final legal settlement required a smaller payout than had previously been accrued, this resulted in other income of approximately $256,000 as represented in the quarterly P&L and cash flow statements. This one time settlement is excluded from CYREN's non-GAAP results and is included in the GAAP to non-GAAP reconciliation table in this press release.
Overall net cash flow for the first quarter finished at negative $5.1 million for Q1 2019 compared to negative $5.7 million during the first quarter 2018. We began the quarter with approximately $17.6 million in cash and ended the quarter with $12.4 million in cash. We also maintained $10 million of long-term debt on the balance sheet representing the convertible notes that closed in December 2018 and have a maturity date of December 2021.
We anticipate that the second quarter will be seasonally lighter in terms of cash usage as the second quarter generally represents a good quarter for cash collections including when we expect to collect a multimillion dollar cash payment from CYREN's largest customer. That concludes our prepared remarks. I will now ask the operator to open up the lines for questions.
[Operator Instructions]. Our first question is from the line of Chad Bennett with Craig-Hallum.
Hey, great thanks for taking my questions. I guess first of all welcome Brett to the company. You know love to I guess get your take into the due diligence process and I know you gave a little bit of a preview coming in but kind of what -- how you view I guess more importantly the competitive landscape that CYREN plays in and how you expect to kind of accelerate if that's the right word, kind of their market presence in that space?
Thanks for the question. Well look I've been in the security business for many years and the good news is there is a lot of demand, great strong market but there's a lot of players. And from my perspective it's always about looking for opportunities where there's a favorable competitive landscape. So as I join the company I am focused on trying to understand the business and where the company sees new opportunities, where CYREN can compete and establish a leadership position. That's the simple answer. I'm still learning, I've got a lot of time, I have got to spend a lot more time with the business before I can give you more insight than that.
Okay, and then Mike maybe if -- can you disclose what the Microsoft contribution in the quarter was from a revenue standpoint?
Sure, so in the 10-Q that we filed we disclosed that it's approximately 20% of revenues for the quarter. So, you can run a number on that but it comes right in around 20.
Okay, so the expansion that we saw this quarter free email security product I think this customer -- large customer has expanded multiple times in the last year. With 66 figure expansions what I guess, how -- what's transpired there, what's been so successful there for you guys and in really expanding that ACV with that customer?
No, I think a couple of things. Number one is when they started testing our technology last summer they realized that it was -- the detection rates for the email security were very good and if they could protect a lot of their employees by migrating their existing employee email security onto our platform. So initially the contract was set up at around 80,000 users that's migrated onto the platform during Q3. And then during Q3 and Q4 what they realized was that the protection that they were getting from their email security was better than in previous periods and so they decided to migrate additional enterprise users on to the platform. So over the course of Q3 to Q4 to Q1 we're now up to over 120,000 email accounts that we're protecting for that enterprise user.
And are you the primary email security vendor there or are you working with someone else Mike?
We are the primary in there in that case.
Got it, okay. Then maybe last one for you Mike. Are there any over the next few quarters here second half however you want to frame it, are there any material kind of renewal opportunities either -- well opportunity or risk potential over the next six, seven months here? More on the OEM side of your business.
So our threat intelligence customers their renewal rates are very good and as Lior mentioned in his remarks we had a 92% renewal rates in first quarter. We renewed several of our larger accounts last year to multi-year deals and therefore they're not up for renewal this year. They're always on a quarterly basis, they're always material accounts that are between $0.5 million and $1 million or so that are up for renewal. But we don't anticipate any hurdles to renewing in any of those larger customers.
Got it, thanks guys. And just lastly Lior it's been great working with you for a number of years now and I wish you best of luck in whatever you choose to do next.
Appreciate it Chad, thank you very much.
[Operator Instructions]. And it seems we have no further questions. I would like to turn the floor back to management for any closing comments.
So, it is Lior again. I want to thank you again for your participation in today's call and the interest in CYREN over the past several years. This will be my last conference call as CYREN's CEO. But I feel that I am leaving you in great hands with Brett as CEO. I look forward to seeing the company blossom under Brett's leadership. Thank you and have a great day.
Thank you, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.