Varonis Systems, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2014, Varonis sold software and related maintenance and services that help enterprises manage, secure, analyze and migrate unstructured data. It sells primarily through distributors and resellers. The filing compares Q1 2014 with Q1 2013; balance-sheet figures compare March 31, 2014 with December 31, 2013. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $17.455 million | $12.580 million; up 38.8% |
| License revenue | $8.053 million | $5.879 million; up 37.0% |
| Maintenance and services revenue | $9.402 million | $6.701 million; up 40.3% |
| Gross profit and margin | $15.413 million; 88.3% | $11.231 million; 89.3% |
| Operating expenses | $23.345 million | $15.266 million; up 52.9% |
| Operating loss | $7.932 million | $4.035 million |
| Net loss | $8.074 million | $4.791 million |
| Basic and diluted loss per share | $0.73 | $1.24 |
| Cash from operating activities | $4.337 million | $3.307 million |
| Cash and cash equivalents at period end | $125.496 million | $9.633 million at Dec. 31, 2013 |
| Cash, cash equivalents and short-term deposits | $125.853 million | — |
At March 31, 2014, current assets were $141.916 million and current liabilities were $38.720 million. Total liabilities were $42.239 million; the company reported no outstanding borrowings under either of its credit arrangements. Its $15 million TriplePoint facility and up-to-$7 million Bank Leumi receivables-based facility were undrawn.
Material changes versus the prior comparable period
- Revenue growth reflected increased demand from new and existing customers, including 158 new customers in Q1 2014 versus 121 in Q1 2013. The company reported approximately 2,550 customers, up from more than 1,850.
- Maintenance and services grew faster than licenses; they represented 53.9% of revenue versus 53.3%. The reported maintenance renewal rate exceeded 90% in both periods.
- Gross margin declined one percentage point to 88.3%. Cost of revenue rose 51.4%, primarily with increased staffing for support and professional services.
- Operating expenses increased 52.9%, outpacing revenue growth. Sales and marketing remained the largest expense, rising 54.7%, while research and development rose 42.5% and general and administrative rose 73.2%. The filing attributes increases primarily to hiring and expansion, with public-company costs also contributing to G&A.
- Net loss widened, although loss per share decreased because the weighted-average share count increased substantially. The company completed its IPO on March 5, 2014, issuing 5,300,436 shares for approximately $106.1 million net proceeds. Preferred stock converted into common stock, and stockholders’ equity moved from a $43.008 million deficiency at year-end to $102.267 million.
- Operating cash flow increased to $4.337 million, supported substantially by a $14.014 million decrease in trade receivables. Investing cash flow was positive mainly because short-term deposits declined; financing cash flow primarily reflected IPO proceeds.
Outlook, management commentary, risks and unusual items
- Management said cash, short-term deposits and operating cash flow should be sufficient for operations and capital expenditures for at least the next 12 months. It expects higher capital expenditure in 2014 and continued increases in personnel, R&D, sales and marketing, and public-company costs. The filing provides no specific revenue or earnings guidance.
- Management cited seasonal patterns: sales are concentrated in the final three weeks of each quarter, while Q4 is typically the strongest sales quarter. Q1 has historically brought substantial collections; DSO was 80 days versus 77 days in Q1 2013. Management cautioned that interim results may not predict full-year results.
- International expansion, including Latin America and Asia, is a stated growth priority. The company also introduced DatAnswers in May 2014, after the quarter-end.
- Key disclosed risks include the developing market for the company’s products; quarter-to-quarter sales variability; reliance on channel partners and major distributors; competition; hiring and scaling challenges; product reliability, security and privacy risks; international, currency and Israeli operating risks; and potential limits on use of tax attributes. CDW Logistics generated 11.7% of Q1 revenue and EMC 5.5%.
- Foreign-exchange forward contracts had a $6.190 million notional amount and a $22,000 fair-value liability at quarter-end. Management stated a hypothetical 10% currency-rate change would not have materially affected historical consolidated financial statements. No material litigation or off-balance-sheet arrangements were reported.
- The company disclosed $0.3 million of unrecognized tax-benefit liabilities, excluded from its contractual-obligations table because payment timing could not be reliably estimated. Tax audits were ongoing in Florida, New York and Israel. The filing also describes operating lease commitments of $3.307 million.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivables convert to cash as expected, given the seasonal collection benefit and 80-day DSO.
- Whether revenue growth and customer additions can continue while operating expenses are growing faster than revenue and losses are widening.
- The durability of maintenance renewals above 90%, and continued sales through channel partners; monitor the reported concentration in CDW Logistics and EMC.
- The intended deployment and investment performance of IPO proceeds, and the potential effect of shares becoming eligible for sale after lock-up expirations; the filing identified approximately 18.6 million shares expected to become eligible in late August 2014.
- Developments in tax audits and unrecognized tax benefits, foreign-currency exposure, and the company’s ability to expand internationally while managing hiring, compliance and operating costs.