Varonis Systems, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 7, 2015. The company sells software and related maintenance and services for managing, analyzing, securing and migrating enterprise unstructured data.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $29.2 | $24.6 | $52.1 | $42.1 |
| License revenue | $16.0 | $14.4 | $26.2 | $22.5 |
| Maintenance and services revenue | $13.1 | $10.2 | $26.0 | $19.6 |
| Gross profit / margin | $26.3 / 90.2% | $22.1 / 89.9% | $46.4 / 89.1% | $37.5 / 89.2% |
| Operating loss | $(6.5) | $(4.6) | $(18.1) | $(12.5) |
| Net loss | $(6.3) | $(4.6) | $(19.0) | $(12.7) |
| Net loss per share, basic and diluted | $(0.25) | $(0.19) | $(0.77) | $(0.71) |
- Q2 revenue increased 18.4% year over year; first-half revenue rose 23.9%. Maintenance and services grew faster than licenses, increasing to 49.8% of first-half revenue from 46.6% in the prior-year period.
- Operating expenses rose 23% in Q2 and 29% in the first half, led by sales and marketing investment. First-half sales and marketing expense increased 31.9%; research and development increased 17.0%; general and administrative increased 41.5%.
- Cash used in operating activities was $5.4 million in the first half, compared with $0.6 million used in the first half of 2014. Investing activities used $2.0 million, primarily for capital expenditures; financing provided $0.6 million from employee stock-option exercises.
- At June 30, cash and cash equivalents were $69.8 million and short-term deposits were $35.1 million, or $104.9 million combined. Current assets were $136.6 million and current liabilities $53.0 million. The company reported no borrowings under its $7.0 million receivables-based promissory note.
- Total assets were $143.6 million, down from $156.8 million at year-end 2014. Stockholders’ equity was $81.2 million, versus $95.0 million. Deferred revenue totaled $36.6 million, including current and long-term balances.
Changes, outlook and risks
- Management attributed revenue growth to new and existing customers, product sales and a larger installed base. The company added 447 customers in the first half, compared with 364 in the first half of 2014; customer count was approximately 3,750 versus 2,750 a year earlier. Maintenance renewal rates exceeded 90% in both periods.
- Management said EMEA performance in the first half was weaker than expected, citing difficult selling conditions in some countries and UK sales-execution challenges. It warned this weakness could negatively affect results in the next several quarters.
- No specific revenue or earnings guidance was provided. Management expected operating expenses and capital expenditures to increase as the company expands sales, marketing, product development and international operations. It believed existing cash, short-term deposits and operating cash flow would fund operations and capital expenditures for at least 12 months.
- Business seasonality is material: sales are concentrated in the final weeks of quarters, fourth-quarter sales are typically highest, and the first quarter generally has lower revenue. Large or delayed transactions may therefore cause quarterly results to fluctuate, while expenses are relatively fixed in the short term.
- Key risks include continued losses, expense growth outpacing revenue, sales-force hiring and productivity, channel-partner dependence, uncertain demand and competition, foreign-exchange exposure, and international execution. The company uses currency forwards to hedge forecast expenses, primarily in Israeli shekels; the first-half financial results included net foreign-currency losses.
- Non-cancelable operating lease commitments totaled $34.1 million. The company also disclosed $0.6 million of unrecognized tax-benefit liabilities, with payment timing not reliably estimable. It reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether EMEA sales execution improves and whether management’s warning about possible effects over the next several quarters is reflected in subsequent results.
- Whether revenue growth, particularly maintenance and services growth and renewal rates above 90%, continues to offset rising operating expenses.
- Whether operating cash use improves; first-half operating cash outflow widened to $5.4 million, while management’s liquidity assessment includes expected operating cash flow.
- How cash and short-term deposits evolve relative to the company’s expansion plans, capital expenditures and $34.1 million of lease commitments.
- The effects of foreign-exchange movements and hedging, and any material developments in tax examinations or the disclosed unrecognized tax benefits.