Cyren Ltd (NASDAQ:CYRN) Q2 2022 Earnings Conference Call August 15, 2022 4:30 PM ET
Company Participants
Brett Jackson – CEO & Director
Brian Dunn – General Counsel
Jason Parikh – Finance Consultant
Conference Call Participants
Operator
Greetings, and welcome to Cyren’s Second Quarter 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Dunn, General Counsel. Thank you. Please proceed.
Brian Dunn
Thank you, and welcome to Cyren’s Second Quarter 2022 Financial Results Conference Call. This call is being broadcast live and could 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 uncertainty that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors sections of our SEC filings, including our annual report on Form 10-K filed on March 24, 2022 and our quarterly report on Form 10-Q for the second quarter of 2022 filed today.
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 should be considered in addition to and not instead of GAAP measures.
Joining me on today’s call, we have Brett Jackson, Chief Executive Officer; and Jason Parikh, our Finance consultant. With that, I’ll now hand the call over to Brett.
Brett Jackson
Thanks, Brian. I’d like to welcome everyone to today’s call. We are pleased with the progress made in our second quarter, and I will discuss several key highlights.
In early June, we announced the divestment of our legacy Secure Email Gateways business for EUR 10 million in gross cash proceeds. The purchase price is subject to certain customary adjustments and as previously announced, the transaction was subsequently closed on August 1. The rationale for the divestment is straightforward. It’s very important that Cyren focuses on products with the best potential for revenue growth that are aligned with our strategy. In our opinion, the Secure Email Gateways market is commoditized and saturated with several large dominant vendors.
Based on our market assessment, we did not see a compelling growth opportunity for Cyren. As a result, we made the decision to pursue divestment of this legacy business and to focus instead on our enterprise and anti-phishing product which has proven to offer much higher revenue growth potential.
Let me summarize the benefits of this divestment. First, we sold the legacy product line that did not have the potential to contribute to revenue growth. Second, the proceeds from the sales strengthened our balance sheet. Third, the divestment has streamlined our product line, enabling more focus on product and market opportunities that have the best revenue growth potential for Cyren. And finally, as a result of the divestment, Cyren’s total headcount was reduced by approximately 20% as 37 research and development and customer support personnel were transferred to the acquirer.
Moving on to the second key highlight of Q2. Our enterprise anti-phishing product, Cyren Inbox Security, continued to perform well in the market with year-over-year annual recurring revenue growth of 87%. Strong demand continues from customers across multiple industries and geographies, and we have maintained our high win rate. We believe our continued ARR growth is a testament to the value that Cyren Inbox Security provides enterprise customers that rely on Microsoft 365 as their corporate e-mail platform and who need a more effective defense against the constant threat of phishing, business e-mail compromise, account takeover and ransomware.
Our anti-phishing solution continues to be highly differentiated, leveraging our many years of experience in threat detection and our unique automated incident response capability that saves IT and security teams valuable time identifying and removing e-mail-borne threats. Customer satisfaction with our — with the value our solution provides continues to remain high with gross dollar retention in the quarter of 100%.
Cyren Inbox Security is licensed based upon the number of mailboxes to be protected within an enterprise. While many of our customers immediately roll out our solution to their entire user population, others have chosen to roll out over time, which provides Cyren a land-and-expand opportunity. In the second quarter, we saw our largest quarterly expansion bookings since product launch with net dollar retention of 106%.
E-mail remains a top attack vector and e-mail-delivered threats will continue to challenge enterprises of all sizes across multiple industries around the world. Cyren Inbox Security is well positioned to help enterprise customers address today’s sophisticated e-mail threats, and we continue to believe in the market opportunity and the revenue growth potential for Cyren.
The third and final key highlight of our second quarter is that our Threat Detection business exceeded expectations for a second consecutive quarter. New and expansion annual recurring revenues grew more than 300% year-over-year largely driven by multiple replacements of competitive anti-malware products as a result of a replacement program that we announced to the market in April.
Cyren is a leading provider of embeddable malware detection products which are used by some of the world’s largest cloud providers and cybersecurity companies. Our solutions are proven to operate at scale with high accuracy and high performance. We expect our competitive replacement program to provide additional opportunities for Cyren in the second half of 2022.
Our customer success and engineering teams continue to provide a high quality of service and support to our threat detection OEM customers, and we are pleased to report that gross dollar retention in the second quarter was 99%.
In summary, I’m pleased with the progress Cyren made in Q2 and through our first half. Our enterprise anti-phishing solution continues to gain traction in the market, delivering more than 100% ARR growth year-over-year through the first 6 months of 2022. And our core threat detection business has exceeded expectations with the potential for a strong second half.
I will now turn the call over to Jason, who will review the second quarter financials.
Jason Parikh
Thank you, Brett, and good afternoon, everyone. I am pleased to present our second quarter 2022 financial results. For more detailed results, please refer to the earnings release at the second quarter 2022 Form 10-Q that was filed today and is posted on the Investor Relations section of our website. Please note that we present our financials under U.S. GAAP accounting standards, including nonoperating expenses, and that I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes those nonoperating items.
Cyren’s non-GAAP results may exclude a number of noncash items, including the effect of stock-based compensation, amortization of intangible assets, amortization of deferred tax assets and impairment of intangible assets and capitalization of technology costs. Please refer to the table in our press release for a reconciliation of selected GAAP to non-GAAP measures.
As discussed previously, on August 1, 2022, the company completed the divestment of its legacy Secure Email Gateways business. As such, and in accordance with GAAP, the second quarter continuing financial results are presented net of the divested business. GAAP revenue for the second quarter of 2022 was $5.8 million, a slight increase from $5.7 million reported during the second quarter of 2021. GAAP gross margins for the second quarter were 44% compared to 42% during Q2 2021. On a non-GAAP basis, gross margins for the second quarter were 55% compared to 53% during Q2 2021.
Non-GAAP gross margins exclude the effect of stock-based compensation and amortization of intangible assets. Both GAAP and non-GAAP cost of goods sold during the second quarter of 2022 were slightly lower compared to the same period a year ago primarily due to lower depreciation on assets resulting from reduced capital expenditures.
Second quarter GAAP net loss was $12.4 million compared to the $5.6 million net loss reported during the second quarter of 2021. The Q2 2022 GAAP net loss includes a charge of $6.7 million related to the divestment of the legacy Secure Email Gateways business. Excluding this charge, net loss from continuing operations was $5.8 million in Q2 2022 compared to $5.9 million in Q2 2021, an improvement of approximately $100,000.
On a per share basis, GAAP net loss from continuing operations was $0.75 per basic and diluted share compared to $1.55 per share during the second quarter of 2021. On a non-GAAP basis, Cyren’s second quarter 2022 net loss was $4.7 million or a loss of $0.61 per basic and diluted share as compared to a non-GAAP net loss of $4.8 million and $1.28 per share during the second quarter of 2021.
GAAP operating expenses for the quarter totaled $8.5 million, an increase from $8 million during Q2 2021. R&D expense increased to $3.8 million in Q2 2022 from $3.5 million in Q2 2021. Sales and marketing expenses increased to $2.5 million in Q2 2022 from $2.4 million in Q2 2021. General and administrative expenses increased to $2.3 million in Q2 2022 from $2.1 million in Q2 2021.
The dollar amount of increases in each operating expense category is primarily the result of annual staff salary adjustments compared to prior years. In addition, the increase in general and administrative expenses is largely due to legal expenses related to the divestment of the legacy Secure Email Gateways business.
Total reported headcount of the company at the end of Q2, which excludes employees from the divestment of the legacy Secure Email Gateways business, was 154 employees compared to 156 at the end of Q2 2021. During the quarter, we experienced cash used in operating activities of $8.1 million compared to $2.3 million during the second quarter of 2021. The increase in cash usage was impacted by changes in certain balance sheet accounts.
Significant changes that negatively impacted the cash include decreases in our deferred revenue balances of approximately $1.6 million during Q2 2022, primarily due to timing difference on a customer billing in which a large customer was billed in Q1 of 2022 versus being normally billed in Q2. For the 6 months ended June 30, 2022, the cash impact from deferred revenue was an increase of $5.7 million. Increases in our accounts receivable of approximately $779,000 related to the timing of certain customer payments which were subsequently paid at the start of Q3 2022. Decreases in our trade payable and accrued accounts, which resulted in a cash impact of $828,000 due to timing of payments of our trade payables and other accrued balances. For the 6 months ended June 30, 2022, the cash usage impact from our trade payables and accrued accounts was $100,000.
Overall, our operating cash usage was $8.1 million for the 3 months ended June 30, 2022. And for the 6 months ended June 30, 2022, our operating cash usage was $5.7 million. As previously mentioned, on August 1, 2022, the company completed the divestment of the legacy Secure Email Gateways business. The positive cash impact in Q3 2022 is approximately $7.9 million after the effect of customary working capital adjustments, transaction fees, holdbacks and the current euro to USD exchange rate.
I will now turn the call back over to Brett.
Brett Jackson
Thank you for joining our Q2 2022 earnings call today. We look forward to keeping you updated on Cyren’s progress over the coming quarters.
Operator
Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Question-and-Answer Session
End of Q&A
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