Varonis Systems, Inc. — Q3 2016 Form 10-Q
Period: Quarter and nine months ended September 30, 2016. Financial amounts are in U.S. dollars; tables below are in millions unless noted. Varonis sells software and related maintenance and services for analyzing, securing, managing and using enterprise unstructured data, primarily through distributors and resellers.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $40.9 | $31.2 | $110.0 | $83.4 |
| License revenue | $22.6 | $16.9 | $58.2 | $43.0 |
| Maintenance and services revenue | $18.3 | $14.4 | $51.9 | $40.3 |
| Gross profit / gross margin | $36.8 / 89.9% | $28.2 / 90.3% | $98.7 / 89.7% | $74.6 / 89.5% |
| Operating expenses | $40.8 | $32.7 | $119.0 | $97.3 |
| Operating loss | $(3.9) | $(4.5) | $(20.3) | $(22.6) |
| Net loss | $(4.4) | $(4.9) | $(21.2) | $(23.9) |
| Basic and diluted loss per share | $(0.17) | $(0.19) | $(0.81) | $(0.96) |
Q3 revenue grew 31.1% year over year; nine-month revenue grew 32.0%. License revenue grew faster than maintenance and services in both comparisons. Sales and marketing remained the largest expense category. Operating losses narrowed despite higher expenses, while Q3 gross margin was slightly lower year over year and nine-month gross margin edged higher.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $41.7 million and short-term deposits were $70.4 million, totaling $112.0 million. Total current assets were $146.1 million versus current liabilities of $69.6 million.
- For the first nine months, operating cash flow was positive $4.5 million, compared with negative $4.6 million in 2015. The company attributed much of the 2016 inflow to a $17.3 million reduction in receivables; cash flow also reflected the net loss and other working-capital movements.
- Investing cash outflow was $15.9 million, including $13.3 million placed in short-term deposits and $2.6 million of capital expenditures. Financing cash inflow was $3.8 million, primarily from employee stock plans. Cash and cash equivalents fell $7.6 million from year-end 2015.
- No balance was outstanding on the Bank Leumi facility, which permits borrowing up to $7.0 million subject to conditions and was available through May 15, 2017. The company reported no off-balance-sheet arrangements.
- Non-cancelable operating lease commitments totaled $32.7 million. The filing also reports $1.3 million of unrecognized tax-benefit liabilities, with payment timing not reliably estimable.
Material changes, outlook and risks
- Management cited demand from new and existing customers, expansion of the installed base, and product development as contributors to growth. Varonis added 732 new customers in the first nine months of 2016 versus 688 in the comparable period; maintenance renewal rates exceeded 90% in both periods.
- Sales and marketing expense increased 25% year over year for the nine-month period, primarily due to higher headcount, compensation and commissions. Research and development and general and administrative expenses also increased, largely with staffing and growth.
- Management expects expenses, including sales and marketing and research and development, to continue increasing as it expands its workforce, product development and geographic reach. It stated that cash, short-term deposits and operating cash flow should fund operations and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Sales are seasonal and concentrated near quarter-end, with historically higher sales in the fourth quarter. Large or delayed deals can materially affect quarterly results, while expenses are relatively fixed in the short term. Management also noted exposure to foreign-exchange movements and possible market volatility related to Brexit; it uses forward contracts to hedge some forecast foreign-currency expenses.
- Key disclosed risks include continued operating losses; uncertainty about market adoption and competition; dependence on channel partners, customer renewals and hiring productive sales and engineering staff; cybersecurity, software reliability, privacy and intellectual-property risks; international, tax and Israeli operating exposures; and stock-price volatility. Management said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting. The company reported no material litigation.
- The filing discusses pending accounting standards, including revenue recognition, stock compensation and leases; the company was evaluating their effects and had decided not to early-adopt the stock-compensation standard.
Investor verification points
- Check whether revenue growth and customer expansion are translating into improved operating leverage and eventual profitability, given continued losses and rising operating costs.
- Assess the quality and repeatability of operating cash flow: the nine-month improvement depended substantially on receivables collection, while cash was also shifted into short-term deposits.
- Review seasonality, quarter-end deal concentration, customer renewal rates and the pace of license growth versus recurring maintenance and services revenue.
- Monitor stock-based compensation, which was $9.5 million for the first nine months, and outstanding equity awards and dilution.
- Reconcile an apparent MD&A inconsistency: one operating-cash-flow passage says the net loss was $10.2 million, whereas the financial statements report a nine-month net loss of $21.2 million. The filing text does not clearly explain this difference.