Varonis Systems, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Varonis sells enterprise-data management, governance, search and security software, primarily through channel partners. Figures below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $164.5 | $127.2 | +29.3% |
| License revenue | $92.9 | $71.3 | +30.3% |
| Maintenance and services revenue | $71.6 | $55.9 | +28.0% |
| Gross profit / gross margin | $148.6 / 90.4% | $115.2 / 90.6% | Margin down 0.2 percentage points |
| Operating expenses | $164.3 | $134.3 | +22.4% |
| Operating loss | $(15.7) | $(19.1) | Loss narrowed |
| Net loss / diluted loss per share | $(17.7) / $(0.67) | $(21.3) / $(0.84) | Loss narrowed |
| Cash from operating activities | $7.3 | $(2.7) | Improved |
Q4 2016 revenue was $54.4 million, up 24.1% from $43.8 million in Q4 2015. Q4 operating income was $4.6 million versus $3.6 million; net income was $3.5 million versus $2.6 million. Q4 gross margin was 91.7%, compared with 92.5% a year earlier. The fourth quarter was the only profitable quarter of 2016; the company reported a full-year net loss.
At December 31, 2016, cash, cash equivalents and short-term deposits totaled $113.8 million, compared with $106.3 million a year earlier. Working capital was $83.1 million (2015: $85.1 million); total assets were $181.8 million. No amount was outstanding under the $7.0 million receivables-backed promissory note. The filing reports no off-balance-sheet arrangements. Operating cash flow was $7.3 million, investing cash flow $(12.3) million and financing cash flow $4.1 million. Capital expenditures were $3.8 million.
Maintenance renewals exceeded 90% in each of 2014–2016. The customer base grew to approximately 5,350 from approximately 4,350; 48% of customers had bought two or more product families. Stock-based compensation increased to $12.9 million from $7.8 million.
Material changes versus the prior comparable period
- Revenue growth accelerated to 29.3% in 2016 from 25.5% in 2015. Both license and maintenance/services revenue grew; license revenue represented 56.5% of total revenue.
- Operating expenses rose 22.4%, below revenue growth, and the operating loss narrowed by $3.4 million. Sales and marketing remained the largest expense category at $107.8 million.
- Operating cash flow turned positive, aided in part by a $13.3 million increase in deferred revenue and other working-capital movements. Receivables increased $6.4 million; year-end DSO was 74 days versus 80 days in Q4 2015.
- U.S. revenue rose 37% for the year; EMEA revenue rose 16%. Management said EMEA, particularly Europe, had been weaker than expected in recent quarters; Q4 EMEA growth was 4% year over year.
Outlook, management commentary and risks
- The filing provides no numerical revenue or earnings guidance. Management expects to continue investing in sales and marketing, research and development, international expansion and 2017 capital expenditures. It believes cash, short-term deposits and operating cash flow will fund operations and capital expenditures for at least the next 12 months.
- Management highlighted product enhancements in 2016, including Office 365 support and expanded DatAlert behavioral analytics and threat models. The company intends to grow through new customer acquisition, broader sales to existing customers and continued product development.
- Results are seasonal: license sales historically peak in Q4, while Q1 is typically the slowest quarter. Sales are concentrated late in each quarter, making results sensitive to deal timing; expenses are comparatively fixed in the short term.
- Key risks include continued annual losses and uncertain profitability; reliance on channel partners for substantially all sales; competition and market adoption; hiring and scaling sales and engineering teams; cybersecurity, software defects and privacy regulation; and international, currency and geopolitical exposure, including operations in Israel and uncertainty related to Brexit.
- Tax matters include a 2017 Israeli tax audit covering 2013–2015 and $2.1 million of gross unrecognized tax benefits at year-end 2016. The company also relies on Israeli tax incentives subject to conditions. Forward foreign-exchange contracts had a $0.5 million liability fair value at year-end.
- Lease commitments totaled $33.4 million, including $4.7 million due in 2017. The company reported no material litigation. Management concluded disclosure controls and internal control over financial reporting were effective; the independent auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether revenue growth and the Q4 profit pattern are sustainable given seasonality, late-quarter deal concentration and weaker recent EMEA performance.
- How much of operating cash flow depends on deferred revenue and other working-capital changes, and whether receivables and DSO remain controlled.
- Whether rising stock-based compensation and planned hiring and investment can be absorbed while narrowing or eliminating annual losses.
- The outcome and potential financial effect of the Israeli tax audit, tax-benefit conditions and other uncertain tax positions.
- The complete debt and liquidity picture, including the unused $7.0 million facility’s May 2017 maturity, lease commitments and the distinction between cash equivalents and short-term deposits.