Varonis Systems, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the same 2015 periods. Amounts below are in U.S. dollars unless stated otherwise. The company sells software for analyzing, securing, managing and using enterprise unstructured data, primarily through distributors and resellers.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $38.6m | $29.2m | $69.1m | $52.1m |
| License revenue | $21.7m | $16.0m | $35.6m | $26.2m |
| Maintenance and services revenue | $16.9m | $13.1m | $33.5m | $26.0m |
| Gross profit / margin | $34.9m / 90.4% | $26.3m / 90.2% | $61.9m / 89.6% | $46.4m / 89.1% |
| Operating loss | $(5.6)m | $(6.5)m | $(16.4)m | $(18.1)m |
| Net loss | $(6.5)m | $(6.3)m | $(16.8)m | $(19.0)m |
| Net loss per share | $(0.25) | $(0.25) | $(0.64) | $(0.77) |
- Q2 revenue grew 32.6% year over year: licenses increased 35.8% and maintenance and services 28.6%. First-half revenue also grew 32.6%.
- Q2 operating loss narrowed despite higher operating expenses; net loss increased slightly, reflecting a swing from $0.4m financial income in Q2 2015 to $0.6m of net financial expense in Q2 2016, primarily from foreign-exchange losses. First-half net loss narrowed, aided in part by improved financial results.
- Operating expenses rose 23.4% in Q2 and 21.3% in the first half, led by sales and marketing, reflecting increased headcount, commissions and growth investments. Stock-based compensation was $6.0m for the first half, versus $3.6m a year earlier.
Cash flow, liquidity and obligations
- First-half operating cash flow was $2.3m, compared with cash use of $5.4m in 2015. The company cited a $13.9m reduction in receivables as a major cash source; deferred revenue declined $1.1m. The cash-flow improvement therefore included working-capital effects, alongside continued net losses.
- Cash and cash equivalents were $56.1m at June 30, 2016, and short-term deposits were $52.4m, totaling $108.5m. Cash increased $6.9m from year-end 2015. Current assets were $144.6m and current liabilities $69.7m.
- The company reported no amount outstanding under its Bank Leumi promissory note, which permits borrowing of up to $7.0m subject to conditions. The filing describes no other outstanding debt balance.
- Non-cancelable operating lease commitments totaled $33.6m, including $2.3m for the remainder of 2016. Unrecognized tax-benefit liabilities were $1.1m; timing of payment was not estimable. No off-balance-sheet arrangements were reported.
Management outlook, risks and other matters
- No specific revenue or earnings guidance was provided. Management expected operating expenses to rise as it expands sales and marketing, research and development, and international operations; it also planned higher 2016 capital expenditures. Management believed cash, short-term deposits and operating cash flow would fund operations and capital expenditures for at least 12 months.
- Management reported maintenance renewal rates above 90% for the periods discussed, approximately 4,800 customers, and 508 new customers in the first half versus 447 in first-half 2015. About 46% of customers had purchased products in two or more families.
- Key risks include an evolving market and uncertain demand, quarterly sales concentration and deal timing, dependence on channel partners, execution and hiring risks from rapid growth, competition, continued operating losses, and security, privacy, intellectual-property and product-performance risks.
- International revenue exposes the company to foreign-exchange and economic conditions. Management cited Brexit-related market and currency volatility; foreign-exchange forwards hedge a portion of forecast expenses. The filing stated a hypothetical 10% currency-rate change would not have materially affected historical financial statements.
- The company reported no material litigation. Disclosure controls were deemed effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter. The company was evaluating the impact of new accounting standards, including revenue recognition and leases.
Most important facts for investors to verify
- Whether strong reported revenue growth converts into sustained operating leverage and profitability as sales and R&D spending increase.
- Whether operating cash generation persists after considering seasonal collections, receivables, deferred revenue and other working-capital movements.
- Whether customer additions, multi-product adoption and renewal rates remain strong, and how much growth comes from new versus existing customers.
- The precise availability and conditions of the $7.0m borrowing facility, and the timing and effect of lease and tax obligations.
- How currency movements, Brexit-related uncertainty, channel-partner dependence and sales timing affect subsequent results; the filing provides no quantified forward guidance.