Varonis Systems, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Financial amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context and reporting period
Varonis sells software and related services that help enterprises map, analyze, manage and migrate unstructured, employee-generated data. It primarily sells through distributors and value-added resellers. The company reported one operating segment and approximately 2,750 customers in more than 55 countries at June 30, 2014.
Varonis completed its IPO on March 5, 2014, selling 5.30 million shares and receiving approximately $106.1 million in net proceeds. Outstanding preferred stock converted to common stock at the IPO closing.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $24.6 | $17.8 | $42.1 | $30.4 |
| Gross profit / margin | $22.1 / 89.9% | $16.3 / 91.6% | $37.5 / 89.2% | $27.6 / 90.6% |
| Operating loss | $(4.6) | $(1.3) | $(12.5) | $(5.3) |
| Net loss | $(4.6) | $(1.6) | $(12.7) | $(6.4) |
| Basic and diluted loss per share | $(0.19) | $(0.42) | $(0.71) | $(1.66) |
- Q2 revenue grew 38.0% year over year; six-month revenue grew 38.3%. License revenue rose 37.4% in Q2 and 37.2% for the half; maintenance and services rose 38.9% and 39.6%, respectively.
- Revenue mix was approximately 59% licenses and 41% maintenance and services in Q2. Management expects maintenance and services to become a larger share as the installed customer base grows. Maintenance renewal rates exceeded 90% in both comparative periods.
- Operating expenses grew 51.7% in Q2 and 52.2% for the half, outpacing revenue growth. Sales and marketing was the largest expense category and rose 63.7% in Q2 and 59.5% for the half, primarily reflecting hiring, commissions and sales expansion.
- At June 30, cash and cash equivalents were $120.1 million, short-term deposits $0.1 million, and total current assets $140.4 million. Current liabilities were $41.1 million. Total assets were $143.3 million and stockholders’ equity was $98.7 million.
- Six-month operating cash flow was negative $0.6 million, versus positive $0.03 million in 2013. Investing cash flow was positive $3.3 million, mainly from deposits and restricted cash declining, partly offset by $1.3 million of capital expenditures. Financing cash flow was positive $107.8 million, primarily from IPO proceeds. Ending cash increased $110.5 million to $120.1 million.
- There was no debt outstanding at June 30. A receivables-backed facility permits borrowing up to $7.0 million, subject to conditions; none was drawn. Non-cancelable operating lease commitments totaled $32.2 million.
Material changes, outlook and risks
- Compared with Q2 2013, operating loss widened from $1.3 million to $4.6 million, while net loss widened from $1.6 million to $4.6 million. Gross margin declined 1.7 percentage points in Q2 and 1.4 points for the first half, largely as service-delivery costs increased.
- Management attributed revenue growth to demand from new and existing customers, new products and a larger installed base. It added 206 new customers in Q2 and 364 in the first half, compared with 149 and 270, respectively, in 2013. Approximately 40% of customers had purchased at least two products, up from 37% a year earlier.
- Management expects personnel, research and development, sales and marketing, and public-company costs to increase. It plans continued investment in product development, sales capacity, international expansion and capital expenditures. It stated current cash, 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.
- Seasonality is significant: sales are concentrated in the final three weeks of each quarter, and the fourth quarter is typically strongest. Management noted that first-half 2014 operating cash use reflected losses, lower deferred revenue and seasonal collections; receivables fell $9.4 million, and days sales outstanding was 74 days.
- Key disclosed risks include quarterly sales volatility and long sales cycles; continued losses and expense growth; reliance on channel partners and a developing market; hiring and scaling execution; product performance, cybersecurity and privacy; international, foreign-exchange and Israel-related risks; tax examinations and tax-benefit eligibility; and share-price volatility, insider ownership and potential sales of locked-up shares.
- The New York headquarters lease was amended to add two floors and extend its initial term to February 2026, with an option for a further five years. The company reported no material litigation and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether revenue growth can continue while operating expenses rise faster than revenue, and whether losses and gross-margin pressure improve.
- Whether high maintenance renewals, customer additions and multi-product adoption translate into durable recurring revenue and cash generation.
- How quarterly seasonality, receivable collections and deferred revenue affect operating cash flow; monitor DSO, reported at 74 days.
- The impact of sales-force expansion, international growth, new products and the added headquarters lease on costs and execution.
- Potential dilution and market supply: the filing said approximately 18.7 million shares could become eligible for public sale after lock-ups expired in late August 2014; also verify outstanding options and registration rights.
- Any developments in tax audits, the $0.4 million of unrecognized tax-benefit liabilities, foreign-exchange exposure and the future effect of the new revenue-recognition standard, which the company was still evaluating.