$CYRN>CYREN: Record Bookings For Cybersecurity Products

$CYRN>CYREN: Record Bookings For Cybersecurity Products Point To Upcoming Growth
Feb. 25, 2015 3:00 PM ET | About: CYREN Ltd. ($CYRN) Subscribers to SA PRO had an early look at this article. Learn more about PRO »

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary

Patient investors still have considerable upside.
New Products are rolling out.
Still undervalued versus its peers.

CYREN's (NASDAQ:CYRN) Q4 revenues and earnings, ex-one time items were almost exactly on target with our estimates. Non-GAAP revenues of $7.9 million were down 6% from last year, but up 1.4% sequentially. These revenues were impacted by currency as the company does 40% of its business in Euros and the Euro was down 11% in the quarter.

Non-GAAP gross margins were down to 77.4% versus 78.8% last year, but up from 76.7% in Q3 2014.

Non-GAAP operating expenses were up $1 million, but included $572,000 in one-time expenses. Taking those out, operating expenses were down $1.9 million versus last year. These one-time items were $300,000 for bad debt, $200,000 for litigation and an additional $72,000 for a provision for gross receipt taxes.

The company reported a non-GAAP loss of $0.04, short of our estimate of a loss of $0.03, but if the one-time charges are taken out, it is a loss of $0.03, which was target with our number.
Q1 2015

Revenues in Q1 are to be sequentially up from Q4 2014, but still down year over year. We are projecting non-GAAP revenues of $8 million, still below the $8.1 million reported in Q1 2014. Gross margins should be similar but expenses should be $0.5 million lower versus last year, but with slightly higher R&D spending. Despite the 18% higher share count, we expect non-GAAP EPS loss to be somewhat less than 2014.
2015

Quarterly revenues should increase sequentially through out 2015 as new product sales ramp. By Q3 the company should be reporting revenue growth and by Q4 we expect the company may breakeven for the quarter. Gross margins are expected to trend around 77% as there is heavy web hosting expenses for the cloud solutions versus the company's traditional line of business. Expenses should be relatively flat. While we know that bookings keep increasing we believe that the company will give more substantial metrics some time in 2015 as to how the new products are doing. At some point the company may release number of active seats and average price per seat. At that point we believe evidence of traction could move the stock in advance of actual revenue recognition. For the year we are looking for revenues of $34 million, up 10% and for the company to show a loss for the year.
Emerging Business Model

As the company continues rolling out its new products we see a variety of pricing plans emerging. The products are priced per user and the greater the number of seats that are bought, the less expensive per user. For the lowest tier, with a small number of users, a basic web security plan may cost $28 per year. For a customer with a large number of seats, say over 10,000, that price can go down to $10 per year. This is the end user price; distributors and resellers will get a 25-35% discount. Only when selling direct are these the revenues earned by CYREN. The company will eventually track both number of active users, as well as average revenue per user.

CWS Standard will cost $10-27 per user per year for greater than 5,000 users down to less than 50 users.
CWS Plus, which includes Standard plus mobility and SSL capability will have a range of $14-38 per user per year
CWS Cyber, which is Plus and the new cybersecurity module will be $24-48 per user per year. It will actually be sold as an upsell to Plus for an incremental $10-15 per user per year.

The new cybersecurity module (Advanced Threat Protection) is expected to be released in Q3. It will be a feature upgrade for current users of CWS.

In addition to these new products the company has also begun selling a new cyber intelligence service to its traditional OEM customers. The company has taken its access to billions of transactions a day and bundled that data into a product that its OEM customers can use to gain insight into threats and usable information around the globe.
2016

By 2016, the company will find its place in the market and we expect even a few successes could propel revenues 25% given the market growth of 50% and the huge global market in the billions. In Q1 we expect the company to launch its cybersecurity offering as a standalone application. Combined with the 2015 products, we are expecting revenues to reach $44 million in 2016 and for the company to come back to profitability, freeing up cash to pursue business. Since the major launch will be over, we believe margins can recover and move to 5% net margins untaxed. However the company may decide to continue to spend to grow market share like most of the competitors in the industry who are more interested in rapid growth at the expense of profits. Should the company take that route, investors may have an even better return.
Market Shifts are in CYREN's Favor

The cloud based cybersecurity space is exhibiting high growth because of the increase in threats as well as the inability for appliances to protect users outside of the office. As the workforce becomes more mobile it becomes impractical to protect users by keeping them in corporate locations. Once attached to the Internet outside the workplace, there is no protection. However if the protection function is in the cloud, users are protected everywhere, IT needs to do less work, appliances and other equipment do not need to be bought and economies of scale kick in. While the company considers ZScaler its closest competitor, it believes it has an advantage over that company just by the huge volume of data it already collects from its base business. So while some services can protect you from a threat, at your company, CYREN can protect you from a threat that was receive elsewhere on the globe by someone else. In that way it can provide protection from something that has yet to threaten you.
INVESTMENT THESIS

CYREN is moving from OEM sales that have generated $0.50- $1 per user per year, to end-user products that will generate $10-48 per user per year. If successful, this should accelerate revenues and earnings in 2015 and beyond which should translate to a higher valuation and higher multiples more in line with its public peers.

Versus public comparable companies in the Internet security business, CYREN is considerably undervalued on an enterprise value to sales basis. This sector is experiencing increased investor attention due to the increasing occurrences of cyber attacks and security breeches in the news. It is believed that companies will commit higher spending to avoid these breeches in the future and the market will grow faster than previously thought.

A number of high profile cyber security vendors such as ZScaler and Rapid7 are expecting to go public perhaps as soon as late 2015. ZScaler, its closest competitor, reported that in its last quarter revenues grew 56% and CYREN could start to show growth like that should it gain traction. These companies are much more highly valued than CYREN, and as a comparable, CYREN's stock could rise.

CYREN operates in a large, high growth market. The Global Cloud Security Software market is forecast to grow at 48.46% CAGR over the period 2014-2019 according to Tech Navio. The top three cloud security services that will contribute as the major markets are cloud IAM, email security and web security (WAF).

Web security vendors are at extremely high valuations, partially as a result of many high profile hackings in the news this year that have increased investor awareness of these providers. CYRN currently trades at a price of $2.86 that gives it a fully diluted market cap of $110 million, and an enterprise value of $103 million, or 3.0x estimated 2015 revenues. Were it to remain at that multiple by 2016, the stock would be worth $3.58 next year.

Its peers trade from a range of 10.8x for Palo Alto Networks, to 2.5x for Symantec. The difference is primarily that PANW is expected to grow revenues 48% this year while Symantec's revenues are expected to be slightly down. Were CYRN to regain revenue growth, we believe its valuation could move up closer to its peers. Taking the average enterprise value to sales of the group, we get an average of 7.4 times. At that valuation CYRN would be worth $7.38 per share today. At the point when sales growth returns, we could see the stock move up closer to its peers. If these valuations hold in 2016, the stock could be worth over $9 twelve months from now. Taking a blend of the $3.58 and the potential for $9, we believe $5 is a reasonable 12-month price target.

Web Security Companies



Ticker


Revenue


EBIDTA


Enterprise Value / Sales


Included


Company


2015E


LTM


Margin


2015E


LTM


In Average?


Barracuda Networks


CUDA


$322


$266


3%


5.3x


6.4x


Y


Checkpoint Software


CHKP


$1,620


$1,500


54%


8.4x


9.0x


Y


FireEye


FEYE


$620


$426


-89%


9.4x


13.7x


Y


Imperva


IMPV


$199


$164


-32%


5.1x


6.2x


Y


Palo Alto Networks


PANW


$978


$662


-13%


10.8x


16.0x


Y


Proofpoint


PFPT


$249


$196


-19%


8.5x


10.8x


Y


Qualys


QLYS


$168


$134


33%


8.8x


11.0x


Y


Symantec


SYMC


$6,500


$6,620


29%


2.5x


2.5x


Y



Average


-4%


7.4x


9.5x





Revenue


EBITDA


Enterprise Value / Sales


Valuation Range


2015E


LTM


Margin


2015E


LTM


Low


High

CYREN


$34


$32


-5%


7.4x


9.5x


$250


$304



Conclusion of Enterprise Value


$276,939,475


Market Value


$283,102,475


Fully Diluted Shares Outstanding


38,338,000



Price per Share


$7.38


Gartner Magic Quadrant Secure Web Gateways

RISKS

The company operates in a highly competitive industry. There are larger well-funded players with greater traction that could be difficult to take market share from.

Customers may find the new products to be uncompetitive versus other more established offerings.

The company may have difficulty penetrating new markets and reaching a new group of customers through the reseller channel or direct sales.

Product rollouts and on-boarding of the new sales channel may take longer than expected and continue to push back financial estimates.

The stock has doubled since November due in part to the increased publicity of cybersecurity threats. This publicity could end or investors could consider the group already fairly valued.

INCOME STATEMENT

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