Varonis Systems, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial amounts below are in U.S. dollars; “$m” means millions. The company sells software and related maintenance and services for managing, analyzing, securing and migrating enterprise unstructured data, primarily through distributors and resellers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $31.2m | $25.6m | $83.4m | $67.6m |
| License revenue | $16.9m | $14.2m | $43.0m | $36.7m |
| Maintenance and services revenue | $14.4m | $11.3m | $40.3m | $30.9m |
| Gross profit / margin | $28.2m / 90.3% | $23.0m / 89.9% | $74.6m / 89.5% | $60.5m / 89.5% |
| Operating loss | $(4.5)m | $(5.1)m | $(22.6)m | $(17.6)m |
| Net loss | $(4.9)m | $(6.4)m | $(23.9)m | $(19.1)m |
| Net loss per share, diluted | $(0.19) | $(0.26) | $(0.96) | $(0.95) |
- Q3 revenue rose 22.2% year over year; nine-month revenue rose 23.3%. Maintenance and services grew faster than licenses, increasing to 48.4% of nine-month revenue from 45.7%.
- Q3 operating and net losses narrowed year over year, while nine-month losses widened. Nine-month operating expenses increased 24.5% to $97.3m, faster than revenue; sales and marketing was the largest expense category at $62.1m.
- Q3 operating loss was 14.5% of revenue versus 20.0% a year earlier; nine-month operating loss was 27.1% versus 26.0%. Nine-month net loss margin was 28.7% versus 28.2%.
- Stock-based compensation was $5.7m for the first nine months, up from $2.8m a year earlier.
Cash, liquidity and commitments
- At September 30, cash and cash equivalents were $69.9m and short-term deposits were $35.1m, or $105.0m combined. Total current assets were $136.3m and current liabilities were $56.2m.
- Operating cash outflow for the first nine months was $4.6m, broadly unchanged from 2014. Investing used $3.7m, principally for capital expenditures; financing provided $1.6m from employee option exercises. Cash declined $6.7m from year-end 2014.
- The company reported no outstanding borrowings under its Bank Leumi facility, which permits borrowing up to $7.0m subject to conditions and was available through March 31, 2016. No other debt balance is reported.
- Non-cancelable operating lease commitments totaled $33.4m. The company also disclosed $0.7m of unrecognized tax-benefit liabilities, for which payment timing could not be reliably estimated.
Changes, outlook and risks
- Management attributed revenue growth to new and existing customers, product sales and a growing installed base. It reported approximately 4,000 customers, 688 new customers in the first nine months, and maintenance renewal rates above 90%. Approximately 44% of customers had purchased two or more products, versus 41% a year earlier.
- Spending increased to expand sales and marketing and research and development teams and develop products. Management said it expects these expenses to continue increasing, and plans higher capital expenditures for the rest of 2015.
- Management said existing cash, short-term deposits and operating cash flow should be sufficient to fund operations and capital expenditures for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Results are subject to seasonality: sales are concentrated in the final three weeks of each quarter, with the highest sales historically in Q4. Management cautioned that quarterly results may fluctuate and that operating results in the interim period do not necessarily indicate full-year performance.
- Key disclosed risks include an emerging and uncertain market, competition, dependence on channel partners, hiring and retaining sales and engineering talent, continued operating losses, international and foreign-currency exposure, cybersecurity and product-quality concerns, tax examinations and Israeli operating risks. The company hedges some forecast foreign-currency expenses; it reported no material litigation and no off-balance-sheet arrangements.
- The company said disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter. It was still evaluating the impact of the forthcoming revenue-recognition standard.
Important facts for investors to verify
- Whether revenue growth, particularly maintenance and services growth and customer renewals, continues to translate into improved operating leverage.
- Whether rising sales, marketing, research and development costs and stock-based compensation remain proportionate to revenue growth.
- Cash conversion, receivables collection and seasonality: reported DSO was 80 days for Q3 2015 and 85 days for the first nine months.
- Capital spending plans, lease obligations and the continued adequacy of liquidity as cash declined during the period.
- Potential effects of foreign exchange, tax matters and the stated operational, competitive and international risks.