Cyren Ltd (NASDAQ:CYRN) Q3 2022 Results Conference Call November 14, 2022 4:30 PM ET
Company Participants
Brian Dunn – General Counsel
Brett Jackson – CEO and Director
Jason Parikh – Finance Consultant
Operator
Greetings, and welcome to Cyren’s Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. [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, Brian. You may begin.
Brian Dunn
Thank you, and welcome to Cyren’s third quarter 2022 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 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 third 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 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, CEO; 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 we made in our third quarter, and I’ll discuss several key highlights. Q3 revenues grew 4% year-over-year, driven by growth in both our core OEM threat detection business as well as our enterprise anti-fishing business. Additionally, the divestment of our legacy secure e-mail gateway business, which was closed this past August, eliminated a declining revenue stream, which historically was a drag on revenue. Re-establishing revenue growth has been our top priority since we implemented our new strategy in 2020. After several consecutive quarters of declining revenues, I believe we have turned the corner.
During the third quarter, we also experienced an increase in customer demand across several of our key products. As a result, we entered the fourth quarter with a very strong opportunity pipeline, and we fully expect year-over-year revenue growth to continue in the fourth quarter. Cyren Inbox Security, our enterprise anti-fishing solution, continued to perform well in the market with annual recurring revenue growth of 74% year-over-year. Despite the fact that Q3 is traditionally our slowest bookings quarter in our fiscal year, Cyren Inbox Security customer transactions increased 12% from Q2, and we won multiple competitive evaluations. It’s important to note that our win rate from customer evaluations has increased to approximately 80% year-to-date through September. This is an exceptionally high win rate and potentially not sustainable, but we believe it is reflective of the value our products provide to customers.
As a reminder, e-mail remains a top attack vector and e-mail delivered threats such as fishing, business e-mail compromise and ransomware, continue to pose a major challenge for enterprises. These threats regularly evade traditional e-mail security defenses such as secure e-mail gateways. An increasing number of enterprises are turning to Cyren Inbox Security to provide a more effective solution against today’s most challenging e-mail-borne threats.
In Q3, we experienced an increase in demand from customers who had an urgent need to address phishing and business e-mail compromise threats which have resulted in a very strong Q4 pipeline, including several large enterprise opportunities. Cyren Inbox Security customer satisfaction continues to remain high with Q3 gross dollar retention of 99%. Our automated threat detection and response capabilities not only identify fishing and BEC threats that bypass other e-mail security defenses but we go a step further and automatically eliminate these threats from our customers’ e-mail systems, significantly reducing risk and saving their IT and security teams a significant amount of time and effort.
Cyren Inbox Security is licensed based on 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 roll out over time, which provides Cyren a land-and-expand opportunity. We continue to see a steady stream of add-on expansion bookings. As a result, our net dollar retention was 102% in Q3 and 111% year-to-date.
Turning to our OEM threat detection business. The key third quarter highlight was the September launch of a new advanced malware analysis product, Cyren Hybrid Analyzer. For organizations protecting large networks, the volume of suspicious files that require deeper inspection for possible malware threats is too large to handle with existing file analysis tools. This new product performs detailed file analysis and provides real-time risk scoring without the cost, speed and scalability constraints of sandboxes and other malware file and analysis technologies. Cyren’s Hybrid Analyzer closes the gap between traditional malware detection and sandbox detonation by producing relevant analysis of file structure and behaviors at high speed and high volumes, operating 100 times faster than a malware sandbox.
This new offering leverages Cyren’s years of anti-malware experience and allows cybersecurity companies, service providers and enterprises to more effectively lower the risk of undetected malware. It is also important to note that in the third quarter, we experienced almost 0 churn. 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 third quarter gross dollar retention of 99% and 91% year-to-date. With Q3 behind us, we are focused on supporting our customers and maximizing new and expansion bookings in the fourth quarter, which is historically the strongest bookings quarter in our fiscal year.
I will now turn the call over to Jason Parikh, who will review the third quarter financials.
Jason Parikh
Thank you, Brett, and good afternoon, everyone. I am pleased to present our third quarter 2022 financial results. For more detailed results, please refer to the earnings press release and the third 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 e-mail gateway business. As such, and in accordance with GAAP, the third quarter continuing financial results are presented net of the divested business. GAAP revenues for the third quarter of 2022 were $5.8 million, a 4% increase from $5.6 million reported during the third quarter of 2021. GAAP gross margins for the third quarter were 48% compared to 41% during Q3 2021. On a non-GAAP basis, gross margins for the third quarter were 59% compared to 53% during Q3 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 third 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 and favorable FX impacts.
Third quarter GAAP net loss was $6.1 million compared to the $5.8 million net loss reported during the third quarter of 2021. The Q3 2022 GAAP net loss includes a charge of $600,000 related to the divestment of the legacy secure e-mail gateway business. Excluding this charge, net loss from continuing operations was $5.5 million in Q3 2022 compared to $6.1 million in Q3 2021, an improvement of approximately $600,000. On a per share basis, GAAP net loss from continuing operations was $0.71 per basic and diluted share compared to $1.57 per share during the third quarter of 2021.
On a non-GAAP basis, Cyren’s third quarter 2022 net loss was $5.5 million or a net loss of $0.70 per basic and diluted share as compared to a non-GAAP net loss of $4.7 million or $1.21 per share during the third quarter of 2021. GAAP operating expenses for the quarter totaled $8.3 million, an increase from $8.1 million during Q3 of 2021.
R&D expenses and general and administrative expenses were relatively flat for both the 3 months ended September 30, 2021 and 2022. Sales and marketing expenses increased to $2.7 million in Q3 2022 from $2.4 million in Q3 2021, mainly due to increased investment in sales and marketing to support the growth of our enterprise anti-fishing business. Total reported headcount in the company at the end of Q3, which excludes employees from the divestment of the legacy secure e-mail gateway business was 157 employees compared to 159 at the end of Q3 2021.
During the quarter, we experienced cash used in continuing operating activities of $4 million compared to $5.2 million during the third quarter of 2021. The decrease in cash usage of $1.2 million was primarily due to a lower loss from continuing operations of $600,000 and favorable timing differences in our collections of accounts receivable balances. As previously mentioned, on August 1, 2022, the company completed the divestment of the legacy secure email gateway business. The positive cash impact in Q3 2022 is approximately $8.1 million after the effect of customer working capital adjustments, transaction fees and holdbacks.
I will now turn the call back over to Brett.
Question-and-Answer Session
A – Brett Jackson
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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