Varonis Systems, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Business context
Varonis sells software for analyzing, securing, managing, and finding enterprise unstructured data. It sells substantially all products and services through distributors and resellers. At year-end it reported approximately 4,350 customers in more than 65 countries; about 45% had purchased at least two products.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $127.2 million | $101.3 million |
| License revenue | $71.3 million | $58.4 million |
| Maintenance and services revenue | $55.9 million | $42.9 million |
| Gross profit / gross margin | $115.2 million / 90.6% | $91.4 million / 90.2% |
| Operating loss | $19.1 million | $17.3 million |
| Net loss | $21.3 million | $19.4 million |
| Operating cash flow | $(2.7) million | $(7.1) million |
| Cash, cash equivalents and short-term deposits at year-end | $106.3 million | $111.7 million |
| Working capital at year-end | $85.1 million | $99.3 million |
Revenue grew 25.5% year over year, with license revenue up 22.0% and maintenance and services up 30.3%. Operating expenses rose 23.5% to $134.3 million, led by sales and marketing at $86.4 million. The company reported $4.5 million of capital expenditures; investing cash outflow was $26.7 million, primarily reflecting a $22.0 million increase in short-term deposits.
At December 31, 2015, current assets were $156.4 million and current liabilities were $71.3 million. Deferred revenue totaled $48.8 million. The company had no balance outstanding on its borrowing facility; it could borrow up to $7.0 million against eligible receivables under a note available through March 31, 2016. Operating lease commitments totaled $32.5 million.
Material changes and Q4 results
- FY2015 revenue growth slowed to 25.5% from 35.8% in FY2014. Net loss increased to $21.3 million from $19.4 million, although net loss as a share of revenue improved to 16.7% from 19.2%.
- Gross margin edged up to 90.6% from 90.2%. Sales and marketing expense increased 25.6%; research and development increased 13.2%; general and administrative increased 35.7%.
- Maintenance renewals exceeded 90% in each of 2013–2015. Maintenance and services rose to 44.0% of revenue from 42.4%.
- Q4 2015 revenue was $43.8 million versus $33.7 million in Q4 2014. Q4 net income was $2.6 million versus a net loss of $0.3 million. Management attributes typical fourth-quarter strength to seasonality; Q1 is generally the slowest quarter.
- Operating cash outflow narrowed from $7.1 million to $2.7 million, but remained negative. Working-capital movements included increases in deferred revenue and accrued liabilities, partly offset by higher receivables.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects continued investment in sales and marketing, research and development, international expansion, and capital expenditures; it believes available liquidity and operating cash flow will fund operations and capital expenditures for at least 12 months.
- Key risks include an emerging, unproven market; dependence on channel partners and a core product platform; quarterly revenue volatility and year-end sales concentration; competition; continued operating losses; hiring and scaling challenges; foreign-exchange exposure; and operating risks related to Israel and international markets.
- Approximately 58% of FY2015 revenue came from the United States, 35% from EMEA, and 7% from the rest of the world. Foreign-exchange losses were a significant component of financial expenses, net.
- FY2015 stock-based compensation was $7.8 million. The company reported non-GAAP quarterly measures that exclude stock compensation and related payroll taxes; these are not GAAP results. The filing reports no material litigation and no off-balance-sheet arrangements.
- Management concluded internal control over financial reporting was effective at year-end; the independent auditor did not express an opinion on internal controls. The auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether revenue growth, new-customer additions, and cross-selling can offset slowing growth and ongoing GAAP losses.
- Whether maintenance renewals remain above 90% and deferred revenue converts into revenue and cash as expected.
- How seasonality, receivables and collection performance affect quarterly cash flow; FY2015 year-end DSO was 84 days.
- How much future expense growth and stock-based compensation will weigh on operating leverage and dilution.
- The status and terms of the receivables-backed borrowing note after its March 31, 2016 availability date, and the adequacy of liquidity for planned investment.
- Potential effects of foreign-exchange movements, Israeli tax-benefit eligibility, and tax examinations; the filing reports $0.9 million of unrecognized tax benefits.