Varonis Systems, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Amounts are in U.S. dollars. Varonis sells software and related services for analyzing, securing, managing and using enterprise unstructured data, primarily through distributors and resellers.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $30.47 million | $22.99 million | +32.6% |
| License revenue | $13.84 million | $10.16 million | +36.3% |
| Maintenance and services revenue | $16.63 million | $12.83 million | +29.6% |
| Gross profit / margin | $26.97 million / 88.5% | $20.15 million / 87.7% | Margin +0.8 percentage points |
| Operating expenses | $37.76 million | $31.70 million | +19.1% |
| Operating loss | $(10.79) million | $(11.55) million | Loss narrowed |
| Net loss | $(10.35) million | $(12.67) million | Loss narrowed |
| Basic and diluted loss per share | $(0.40) | $(0.51) | |
| Cash from operating activities | $5.44 million | $1.25 million |
Revenue growth reflected demand from new and existing customers. The company added 223 new customers, compared with 189 in Q1 2015, and reported more than 4,550 customers overall. Maintenance renewal rates exceeded 90% in both periods. Approximately 45% of customers had purchased products in at least two product families.
Sales and marketing remained the largest operating expense at $24.36 million, up 20.7%, principally reflecting added sales headcount and commissions. Research and development rose 14.3% to $8.84 million; general and administrative expense rose 20.7% to $4.56 million. Financial income was $0.65 million, versus net financial expense of $1.04 million a year earlier, primarily reflecting foreign-exchange gains rather than losses.
Liquidity, cash flow and obligations
- At March 31, cash and cash equivalents were $54.46 million and short-term deposits were $57.35 million, totaling $111.81 million. Current assets were $140.83 million and current liabilities were $62.02 million.
- Operating cash flow of $5.44 million was driven substantially by a $23.04 million reduction in trade receivables, which management attributed to seasonal collections. It was partly offset by decreases in accrued liabilities and deferred revenue. DSO was 80 days, versus 89 days a year earlier.
- Investing cash outflow was $0.99 million, including $0.72 million of capital expenditures; financing cash inflow was $0.76 million, primarily from employee stock plans. Cash and cash equivalents increased $5.21 million during the quarter.
- The company reported no outstanding borrowing under its Bank Leumi promissory note at March 31. The borrowing availability under that note ended March 31, 2016. The filing identifies no other debt balance.
- Non-cancelable operating lease commitments totaled $34.92 million, including $3.45 million for the remainder of 2016. The company also disclosed $1.0 million of unrecognized tax-benefit liabilities, for which payment timing could not be reliably estimated.
Changes, outlook and risks
Revenue increased 32.6%, while operating expenses grew more slowly at 19.1%; gross margin improved modestly and operating and net losses narrowed. The improvement in operating cash flow also reflects seasonal receivables collection and should not be viewed apart from working-capital movements. Total cash and short-term deposits declined from $106.34 million at year-end 2015 to $111.81 million at quarter-end only when viewed as combined balances; cash alone increased, while deposits were nearly unchanged.
Management gave no specific revenue or earnings guidance. It stated that cash, short-term deposits and operating cash flow should fund operations and capital expenditures for at least the next 12 months, and expects capital expenditures to increase in 2016. Management expects personnel, research and development, and sales and marketing costs to rise as the business expands. It also noted first-quarter seasonality: sales are concentrated in the final weeks of quarters, with the highest sales historically in Q4, while collections are often strongest in Q1.
Principal disclosed risks include an unproven and competitive market; quarterly revenue volatility and long, unpredictable sales cycles; dependence on channel partners and continued maintenance renewals; hiring and retaining sales and engineering staff while managing rapid growth; product quality, security, privacy and intellectual-property risks; international and foreign-exchange exposure; and tax uncertainty, including reliance on Israeli tax benefits. Forward currency contracts hedge forecast non-U.S.-dollar operating costs; their March 31 fair value was a $0.89 million asset. The company reported no material litigation, no off-balance-sheet arrangements, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and customer additions continue, and how much is attributable to license sales versus recurring maintenance and services.
- Whether renewal rates remain above 90% and customer adoption of multiple product families increases.
- How much operating cash generation depends on seasonal receivables collection, and whether DSO and deferred revenue trends remain favorable.
- Whether rising hiring and investment costs translate into sustained margin improvement and a path to profitability; the company has a history of annual losses.
- Whether the Bank Leumi facility was replaced or other borrowing arrangements were obtained after the note’s March 31, 2016 availability ended.
- The future impact of lease obligations, tax examinations and Israeli tax-benefit eligibility, and adoption of new accounting standards.