Varonis Systems, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Varonis provides software and services to manage, analyze and secure enterprise data. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $40.4 million, up 32.5% from $30.5 million in Q1 2016. License revenue rose 38.4% to $19.2 million; maintenance and services revenue rose 27.7% to $21.2 million.
- Profitability: Gross profit was $35.7 million and gross margin was 88.4%, versus $27.0 million and 88.5%. Operating loss was $11.0 million, compared with $10.8 million; net loss was $10.9 million, compared with $10.4 million. Basic and diluted loss per share were both $0.40 in each period.
- Expenses: Operating expenses increased 23.8% to $46.7 million. Sales and marketing remained the largest category at $30.8 million, up 26.5%; R&D rose 17.8% to $10.4 million and G&A rose 20.8% to $5.5 million.
- Cash flow: Operating activities provided $8.3 million, compared with $5.4 million. The quarter included a $26.4 million cash inflow from collections of receivables, reflecting seasonality. Investing activities used $6.4 million, including $4.8 million added to short-term deposits and $1.5 million of capital expenditures. Financing activities provided $0.9 million, primarily from employee stock plans.
- Liquidity and debt: Cash and cash equivalents were $51.1 million and short-term deposits were $70.3 million at March 31, totaling $121.3 million. Current assets were $156.6 million and current liabilities $77.7 million. No borrowings were outstanding under the $7.0 million Bank Leumi facility; the facility was available only through May 15, 2017. The filing states existing cash, deposits and operating cash flow should fund operations and capital expenditures for at least 12 months.
- Other metrics: Maintenance renewal rates exceeded 90%. The company reported more than 5,500 customers; 49% had purchased products in at least two families. U.S. revenue grew 39% and EMEA revenue 26% year over year.
Material changes versus Q1 2016
- Revenue growth reflected higher demand from new and existing customers. License sales increased despite fewer new customers reported in the quarter: 187 versus 223 in Q1 2016. A greater share of license and first-year maintenance and services revenue came from existing customers (47%, versus 37%).
- Operating expenses grew more slowly than revenue, improving operating margin to negative 27.3% from negative 35.4%. However, the operating loss and net loss increased slightly in dollar terms.
- Cash from operations improved, supported by receivables collections; days sales outstanding declined to 66 days from 80 days.
- Stock-based compensation rose to $4.4 million from $2.6 million. Adoption of ASU 2016-09 changed forfeiture accounting and increased accumulated deficit by $2.6 million as of January 1, 2017.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management expects personnel and operating costs to increase as it expands sales and marketing, R&D, customer support and international operations, and expects capital expenditures to increase in 2017.
- Management cites first-quarter seasonality: sales are concentrated late in quarters, with the largest sales volume typically in Q4, often followed by substantial receivables collections in Q1. Quarterly results may therefore fluctuate.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018 using the full retrospective method. Its preliminary assessment indicates the standard may materially affect the financial statements; implementation evaluation was not complete.
- Key disclosed risks include continued net losses; dependence on channel partners and a concentrated product platform; hiring, retaining and ramping sales and engineering staff; competition; security, privacy and software-performance issues; foreign-exchange volatility; international expansion and geopolitical exposure, including Brexit and Israel-related risks; and tax examinations, including an Israeli audit.
- The company reported no material litigation, no off-balance-sheet arrangements, and no material change in internal control over financial reporting during the quarter. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Assess whether revenue growth and renewals can continue while operating expenses rise and losses persist.
- Separate recurring operating cash generation from the seasonal receivables collection benefit; monitor receivables, deferred revenue and DSO.
- Track the effect of the planned 2018 revenue-recognition adoption, which management said may be material.
- Confirm renewal rates, customer expansion and channel-partner performance, alongside hiring and international expansion costs.
- Reconcile the filing’s lease commitment total: the commitments note reports $33.273 million, while the MD&A table reports $33.723 million. The filing text does not explain the difference.
- Monitor the Bank Leumi facility’s May 15, 2017 availability end date and the $1.8 million of unrecognized tax-benefit liabilities, whose payment timing is not estimated.