Varonis Systems, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014. Varonis sells software and related services for mapping, analyzing, managing, and migrating enterprise unstructured data, primarily through distributors and resellers.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $23.0 million | $17.5 million | +31.7% |
| License revenue | $10.2 million | $8.1 million | +26.1% |
| Maintenance and services revenue | $12.8 million | $9.4 million | +36.4% |
| Gross profit / margin | $20.2 million / 87.7% | $15.4 million / 88.3% | Margin down 0.6 percentage points |
| Operating expenses | $31.7 million | $23.3 million | +35.8% |
| Operating loss | $(11.6) million | $(7.9) million | Loss widened |
| Net loss | $(12.7) million | $(8.1) million | Loss widened |
| Net loss per share, basic and diluted | $(0.51) | $(0.73) | Per-share loss narrowed |
| Operating cash flow | $1.2 million | $4.3 million | Down $3.1 million |
Net loss per share comparisons reflect substantially different weighted-average shares: 24.7 million in Q1 2015 versus 11.1 million in Q1 2014, following the 2014 IPO.
Liquidity and balance sheet
- At March 31, 2015, cash and cash equivalents were $77.9 million and short-term deposits were $35.1 million, totaling approximately $113.0 million. Total assets were $141.8 million.
- Current assets were $136.0 million versus current liabilities of $48.5 million. The resulting current ratio was approximately 2.8.
- No borrowings were outstanding under the $7.0 million Bank Leumi promissory note. The note was available, subject to conditions, through May 15, 2015 and was secured by certain personal property.
- Non-cancelable operating lease commitments totaled $30.8 million. The filing reports no off-balance-sheet arrangements.
- Cash increased $1.3 million during the quarter. Investing activities used $0.5 million, mainly for capital expenditures; financing provided $0.5 million, primarily from employee stock-option exercises.
Changes, outlook, and risks
- Revenue growth reflected sales to new and existing customers and a larger installed base. The company added 189 new customers in Q1 2015 versus 158 a year earlier; it reported approximately 3,500 customers at quarter-end, up from approximately 2,550.
- Maintenance and services increased to 55.8% of revenue from 53.9%; the maintenance renewal rate exceeded 90% in both periods. About 43% of customers had purchased two or more products, compared with 40% a year earlier.
- Operating expenses grew faster than revenue, led by sales and marketing, which rose 41.8% as the company expanded its sales force and incurred higher compensation, commissions, training, and marketing costs. Management expects personnel and operating expenses to continue increasing as it invests in sales, marketing, research, development, and international expansion.
- Management said EMEA performance was weaker than expected, citing a difficult selling environment in some countries and UK sales-execution challenges. It warned this weakness may negatively affect results over the next several quarters.
- The first quarter is seasonally affected by lower revenue and relatively fixed expenses; sales are typically concentrated in the final weeks of each quarter, with the strongest sales in Q4. Q1 operating cash flow benefited from a $17.2 million reduction in receivables, reflecting seasonal collections; DSO was 89 days, versus 80 days a year earlier.
- Management stated existing cash, short-term deposits, and operating cash flow should fund operations and capital expenditures for at least the next 12 months. No specific revenue, earnings, or margin guidance was provided.
- Financial expenses, net rose to $1.0 million from $38,000, primarily due to foreign-currency losses. The company uses forward contracts to hedge some forecast foreign-currency expenses; the contracts had a $446,000 liability fair value at quarter-end.
- Key risks include an unproven and competitive market, continued operating losses, dependence on channel partners and successful sales-force expansion, international and currency exposure, product/security risks, and execution of growth plans. The company reported no material litigation and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether EMEA sales execution improves and how the identified weakness affects subsequent-quarter growth.
- Whether expense growth moderates relative to revenue and whether the company can narrow operating losses while continuing to invest.
- The sustainability and quality of operating cash flow, including seasonal receivables collections, deferred-revenue movements, and DSO.
- Foreign-exchange exposure and hedge performance, including the effect of currency movements on expenses and reported results.
- Liquidity after planned 2015 capital expenditures, lease commitments, and the May 15, 2015 maturity date of the undrawn credit facility.