Varonis Systems, Inc. — Q3 2014 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 30, 2014. Varonis sells software and related services for managing, analyzing, securing, and migrating enterprise unstructured data, primarily through distributors and resellers. Results are unaudited. The company completed its IPO on March 5, 2014.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $25.6 million | $18.5 million | $67.6 million | $48.9 million |
| Gross profit / margin | $23.0 million / 89.9% | $16.9 million / 91.1% | $60.5 million / 89.5% | $44.4 million / 90.8% |
| Operating loss | $5.1 million | $2.1 million | $17.6 million | $7.4 million |
| Net loss | $6.4 million | $2.6 million | $19.1 million | $9.0 million |
| Net loss per share, basic and diluted | $0.26 | $0.66 | $0.95 | $2.32 |
- Revenue mix: Q3 license revenue was $14.2 million, up 38.8%; maintenance and services revenue was $11.3 million, up 37.2%. For nine months, licenses were $36.7 million and maintenance and services were $30.9 million.
- Expenses and margins: Q3 operating expenses rose 47.9% to $28.1 million, faster than revenue growth of 38.1%. Sales and marketing was the largest expense, increasing 59.6% to $17.7 million. Gross margin declined 1.2 percentage points in Q3 and 1.3 points for the nine-month period.
- Cash flow: Operating cash flow was negative $4.6 million for the first nine months of 2014, versus positive $0.8 million in 2013. Investing activities provided $2.8 million; financing activities provided $107.5 million, principally IPO proceeds. Ending cash and cash equivalents were $115.2 million.
- Balance sheet and debt: Current assets were $138.0 million and current liabilities $43.5 million at September 30. There was no outstanding debt. A Bank Leumi facility permits borrowing up to $7 million against eligible receivables; none was drawn. Non-cancelable lease commitments totaled $31.3 million.
Material changes versus prior period
- Revenue increased 38.1% in Q3 and 38.2% for the first nine months, reflecting sales to new and existing customers and new products. The company added 223 new customers in Q3 and 587 in the nine-month period; total customers were approximately 3,000, up from over 2,100 a year earlier.
- Operating losses widened as hiring and related costs—especially sales and marketing—grew faster than revenue. The company reported 789 employees and independent contractors at September 30, 2014.
- The March IPO generated approximately $106.1 million in net proceeds. Preferred stock converted to common stock, and common shares outstanding rose to 24.6 million at September 30.
- Accounts receivable declined to $21.1 million from $28.3 million at December 31, 2013; management cited seasonal collections. Days sales outstanding were 75 days, compared with 67 days at September 30, 2013.
Outlook, commentary, and risks
- Management said available cash, short-term deposits, and operating cash flow should fund operations and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management expects personnel costs, research and development, sales and marketing, and public-company costs to increase in absolute dollars. It expects maintenance and services to become a larger share of revenue as the installed base grows and plans further international expansion, including in Latin America and Asia.
- Maintenance renewal rates exceeded 90% in both comparable periods. About 41% of customers had purchased two or more products at September 30, 2014; DatAdvantage was included in each such multi-product customer’s purchases.
- Management identified pronounced seasonality: sales are concentrated in the final three weeks of each quarter, and the fourth quarter is typically strongest; fixed costs can magnify the effect of revenue shortfalls. The filing cautions that interim results may not indicate full-year results.
- Foreign-exchange exposure includes expenses in New Israeli Shekels and revenue in other currencies. Forward contracts had a notional amount of $8.1 million and a fair-value liability of $0.5 million; the company recorded Q3 foreign-currency forward-contract losses of approximately $0.2 million. Management said a hypothetical 10% currency-rate change would not have materially affected historical statements.
- Key risks include a developing market, competition, reliance on channel partners, hiring and scaling challenges, quarterly sales variability, product/security and privacy risks, international and Israeli operating risks, tax uncertainty, and potential dilution or stock-price volatility. The company reported no material litigation and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and customer additions continue while operating expenses and losses rise.
- Whether operating cash flow improves, and how seasonal receivable collections, DSO, and deferred revenue affect cash conversion.
- Whether maintenance renewals remain above 90% and customers expand purchases across the product platform.
- How much of the IPO cash is deployed, and whether future capital needs or equity awards cause material dilution.
- Developments in foreign-exchange hedging, tax examinations and unrecognized tax benefits, and the company’s ability to sustain its Israeli tax benefits.