Cyren Ltd. (NASDAQ:CYRN) Q4 2021 Earnings Conference Call March 24, 2022 4:30 PM ET
Company Participants
Brian Dunn – General Counsel
Brett Jackson – Chief Executive Officer
Kenneth Tarpey – Chief Financial Officer
Operator
Greetings. Welcome to Cyren’s Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
At this time, I’ll turn the conference over to Brian Dunn, General Counsel. Mr. Dunn, you may begin.
Brian Dunn
Thank you, and welcome to Cyren’s Fourth Quarter and Full Year 2021 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 24, 2021. Any forward-looking statements should be considered in light of these risk factors. Please also note, as the safe harbor and the 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 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 we 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.
Joining me on today’s call, we have Brett Jackson, Chief Executive Officer; and Ken Tarpey, Chief Financial Officer.
With that, I will now hand the call over to Brett.
Brett Jackson
Thanks, Brian. I’d like to welcome everybody to today’s call. Cyren continues to focus on establishing revenue growth, with continued execution of our strategy to build an exciting new revenue stream in the enterprise anti-phishing market. While Cyren’s Q4 and 2021 overall revenues declined year-over-year, this was largely due to previously reported churn and downsell from prior quarters related to our legacy business, which constitutes the majority of our current revenues.
We continue to believe that our anti-phishing solution, Cyren Inbox Security, will be a key driver of future revenue growth for Cyren and become a larger part of our revenue mix over time. While our anti-phishing business has not yet been material to overall results, and it’s not expected to be for a number of quarters, I believe we have the potential to maintain a high-growth rate throughout 2022 and beyond with the potential to materially contribute to future revenues. As we have mentioned in past calls, this is a journey that will span multiple quarters and has the potential to provide Cyren the growth that our shareholders are looking for.
2021 was our first full year in market with Cyren Inbox Security and we are pleased to report year-over-year ARR growth of approximately 87% and quarter-on-quarter growth of approximately 13%. In addition to strong ARR growth, our customer base almost doubled in 2021 and total licensed users grew 80%, with demand from customers across multiple industries and geographies and approximately 50% of our business coming through channel partners.
Customer satisfaction with our solution was very high, with 2021 gross dollar retention of 99%. We believe our results are indicative of the compelling value Cyren Inbox Security provides customers who have been struggling to effectively deal with phishing, business email compromise, and the constant threat of ransomware. These threats are faced by companies of all sizes across multiple industries on a global basis. Multiple studies and research reports suggest that 2021 was a record year for cyber attacks and data compromise and email remains a top attack vector. We believe these threats and attacks will continue to proliferate.
Traditional defenses like security email gateways and even Microsoft ATP are simply not effective enough to deal with these threats as they are both highly dynamic and evasive. Many customers have implemented security awareness training solutions to help better educate users in the fight against phishing. This is an important component of an anti-phishing strategy. But in our opinion, security awareness training should be complemented with Cyren Inbox Security, which provides automated detection and remediation of phishing emails.
Customers have turned to Cyren Inbox Security as a specific solution focused on phishing and business email compromise that is implemented on top of or in addition to existing traditional email security defenses and security awareness training solutions.
As previously reported, we have integrated Cyren Inbox Security with no befores market-leading security awareness training solution, and have received very positive feedback from customers who feel that the integration between our products provides a more effective solution against phishing and business email compromise, including reinforcing security awareness training.
We believe Cyren’s approach to addressing phishing is highly differentiated, and follows a completely different paradigm than traditional email security products. Our approach leverages Cyren’s core strength and threat detection, along with automated incident response. We don’t just identify phishing and business email compromised threats, we automatically remove them from a customer’s email system, eliminating the threat and saving IT and security staff valuable time and effort as they no longer must manually investigate and remove suspicious emails on a regular basis.
This saves customers time and effort and provides a tangible return on investment. As we execute our plan to continue to grow our anti-phishing business in 2022, we believe we have a compelling differentiated and easy to implement solution for customers who need to address phishing and business email compromise. The market opportunity is real and large and we maintain a greater – we maintained a greater than 70% close rate throughout 2021.
The clear key to continued ARR growth is to get our solution in front of more customers by investing in expansion of our go-to-market efforts, including continuing to grow our channel.
Let me move to our threat detection and intelligence business. Cyren has been in this business for more than 15 years, providing solutions to help OEM customers protect themselves and their customers from threats in email, files and from the web. Our customers, most of whom have longstanding relationships with Cyren, are leading email providers, cybersecurity vendors, and managed services providers who typically embed our solutions into their products.
Quarterly results for this part of our business were dominated by a number of high-value renewals. We closed approximately 15 renewals, with annual contract values greater than $100,000. The highlight was a multimillion dollar renewal with one of our largest customers, who happens to be one of the largest most valuable brands in the world. They have been a Cyren customer for over a decade, and we’re grateful for their continued confidence in our service.
Our customer success and engineering teams are focused on maintaining a high-quality of service and maximizing customer satisfaction among our OEM customers, and we are pleased to report fourth quarter gross dollar retention of 97%. With 2021 well behind us, we are concentrating on improving results in 2022 and focused on a strong close to Q1.
I will now turn the call over to our CFO, Ken Tarpey, who will review the fourth quarter financials.
Kenneth Tarpey
Thank you, Brett, and good afternoon, everyone. I will now present our fourth quarter and full year 2021 financial results. For more detailed results, please refer to the earnings press release that was issued shortly after markets closed today and is posted on the Investor Relations section of our website. The results released today are in line with our preliminary results, which were filed on Form 8-K on February 10.
Please note that we present our financials under U.S. GAAP accounting standards, including non-operating expenses, and that I will discuss certain financial metrics on a non-GAAP or adjusted basis, which excludes these non-operating items.
Cyren’s non-GAAP results exclude a number of non-cash items, including the effect of stock-based compensation, amortization of intangible assets, amortization of deferred tax assets and then an impairment of tangible assets and capitalization of technology costs. Please refer to the table in our press release for reconciliation of selected GAAP to non-GAAP measures.
GAAP revenue for the fourth quarter 2021 was $7.4 million, compared to $8.4 million reported during fourth quarter 2020. Full year 2021 revenues were $31.2 million compared to $36.4 million for the full year 2020. The decrease in Q4 2021 and 2021 full year revenues were mainly driven by a contract reduction from our largest customer, which was first disclosed in Q3 2020 Form 10-Q, which was effective Q2 2021.
The revenue impact of this contract reduction was $800,000 decrease for Q4 2021 and $2.5 million decrease for full year 2021. This customer remains our largest customer, representing 17% of Q4 2021 revenue and 19% of 2021 revenue.
Additionally, going to 2021, revenues have decreased due to customer contract renewals at lower values and customer churn, coupled with the end-of-life of several legacy products.
GAAP gross margins for the fourth quarter 2021 were 46% compared to 57% for the fourth quarter 2020. Full year 2021 gross margins were 51% compared to 59% for the full year 2020.
On a non-GAAP basis, gross margins were 57% compared to 65% during the fourth quarter of 2020. And for the full year 2021, non-GAAP gross margins were 60% compared to 66% a year ago. GAAP and non-GAAP cost of goods sold during the quarter was roughly in line with the same period as a year ago. So the reduction in gross margin is a function of lower revenue.
Fourth quarter GAAP net loss was $7.5 million or a loss of $1.65 per basic and diluted share compared to $5 million GAAP net loss and $1.64 per share during the fourth quarter of 2020. For the full year, GAAP net loss was $23 million, an increase from the net loss of $17.3 million during 2020. This translated to $5.90 per basic and diluted share in 2021 versus $5.72 per share in 2020.
On a non-GAAP basis, Cyren’s fourth quarter 2021 net loss was $5.4 million or a loss of $1.19 per basic and diluted share, compared to a non-GAAP net loss of $4.2 million and $1.37 per share during the fourth quarter of 2020.
For the full year, Cyren’s non-GAAP net loss was $17.4 million, or $4.45 per share, compared to $13.8 million or $4.56 per share in 2020.
GAAP operating expenses for the fourth quarter 2021 totaled $10.3 million as compared to $9 million for the fourth quarter 2020. This change was going Q4 2020, mainly driven by a $1.3 million increase in R&D expense. On a non-GAAP basis, total operating expenses for the quarter totaled $9 million as compared to $8.8 million in the fourth quarter of 2020.
During the recent quarter, GAAP R&D expense was $5.2 million, compared to $3.8 million in the fourth quarter of 2020. The reason for the increase of GAAP R&D expense during the fourth quarter 2021 was we decided to write-off certain older technology development on the books from R&D projects that did not result in release products. GAAP R&D expense during the fourth quarter 2021 also includes a one-time non-recurring adjustment of approximately $600,000 for those terminated projects.
During the fourth quarter 2021, we capitalize a lower amount of R&D expense than prior quarters, since certain new products launched in 2020 are now fully in market. As a result, GAAP R&D expense for the quarter was higher than in prior quarters. The capitalization of these R&D costs reduces expenses. Hence as capitalization decreases, expenses will increase.
Also, R&D headcount was lower during Q4 2021 as compared to Q4 2020, so R&D headcount, which resulted in lower salary and related costs. On a non-GAAP basis, which excludes the effect of R&D capitalization, R&D expense for the period increased from $4.1 million in 2020 to $4.5 million in 2021.
GAAP sales and marketing expenses for Q4 2021 was $2.7 million, compared to $2.6 million during fourth quarter 2020. Non-GAAP sales and marketing expenses were $2.4 million during the fourth quarter of 2021, consistent with the fourth quarter of 2020.
G&A expense for the fourth quarter of 2021 was $2.5 million, as compared to $2.6 million during the fourth quarter of 2020. On a non-GAAP basis, G&A expense decreased to $2 million compared to $2.2 million a year ago. Employee headcount at the end of Q4 2021 was 200 full-time and part-time employees, down from 221 employees at the end of Q4 2020.
During the quarter, we had a negative operating cash flow of $3.6 million, compared to negative operating cash flow of $3.0 million during the fourth quarter of 2020. This increase was largely driven by an increase in net loss, offset by improved trade receivable receipts, as a large customer payment of $2.1 million was received during October 2021.
Overall net cash flow for the fourth quarter 2021 was negative $13.6 million, primarily due to the $10 million repayment of convertible notes, which matured in December 2021. The cash balance was $4.3 million at December 31, 2021.
To comply with the minimum NASDAQ closing bid requirements, on February 8, 2022, we announced a one-for-twenty reverse stock share split. And on February 9, 2022, our common ordinary shares began trading on a split-adjusted basis under the existing trading symbol, well capitalized CYRN.. This action was previously approved by shareholder vote.
On February 25, 2021, we regained compliance with NASDAQ Listing Requirements after the bid price of our ordinary shares closed above $1 per share for a minimum of 10 consecutive business days, and we are no longer subject to delisting procedures. As previously reported, on February 14, 2022, we executed a private placement and issued ordinary shares and warrants to several institutional investors. We received approximately $12 million of gross proceeds, which will be used for working capital and general corporate purposes.
I will now ask the operator to open the lines for questions. Thank you.
Operator
Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. [Operator Instructions] At this time, we do not have any questions. I’ll turn the floor to management for further remarks.
Brett Jackson
No further remarks. Thank you for joining us all on the call today and your interest in Cyren. We look forward to keeping you updated on our progress in the future. Thank you.
Operator
This will conclude today’s conference. 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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