Varonis Systems, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2014; this is an annual filing, not a standalone fourth-quarter report. Varonis sells software that helps enterprises analyze, govern, secure, search, and manage employee-created unstructured data. Sales are primarily through distributors and resellers. The company reported more than 3,300 customers in over 60 countries and introduced DatAnswers in 2014.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $101.3 million | $74.6 million |
| License revenue | $58.4 million | $43.5 million |
| Maintenance and services revenue | $42.9 million | $31.1 million |
| Gross margin | 90.2% | 91.3% |
| Operating loss | $17.3 million | $5.8 million |
| Net loss | $19.4 million | $7.5 million |
| Operating cash flow | $(7.1) million | $0.1 million |
- Revenue increased 35.8% year over year; license revenue grew 34.3% and maintenance and services revenue 37.9%. Maintenance and services rose to 42.4% of revenue from 41.7%.
- Operating expenses increased 47.0% to $108.7 million, led by sales and marketing, up 55.9%, as the company expanded headcount and selling capacity. Operating expenses exceeded revenue, widening the operating loss.
- Cash, cash equivalents, and short-term deposits totaled $111.7 million at year-end, compared with $14.0 million a year earlier. Working capital was $99.3 million; total assets were $156.8 million.
- Investing cash outflow was $32.8 million, primarily reflecting a $30.8 million increase in short-term deposits and $2.3 million of capital expenditures. Financing cash inflow was $106.9 million, primarily from the IPO.
- No borrowings were outstanding under the $7.0 million receivables-backed promissory note at year-end. Lease commitments totaled $31.4 million. The company reported no off-balance-sheet arrangements.
Fourth-quarter and other period comparisons
Fourth-quarter 2014 revenue was $33.7 million, versus $25.7 million in fourth-quarter 2013. Operating income was $0.3 million and net loss was $0.3 million, compared with operating income of $1.6 million and net income of $1.5 million in the prior-year quarter. Fourth-quarter license revenue is typically seasonally strong; the company cautions that first-quarter revenue often declines sequentially.
Annual net loss increased from $7.5 million in 2013 to $19.4 million in 2014, despite strong revenue growth. Gross margin declined 1.1 percentage points. Operating cash flow moved from a small inflow to an outflow, with year-end receivables increasing $9.6 million; management cited seasonal sales and collection patterns. The 2014 IPO raised approximately $106.1 million net proceeds and converted preferred stock to common stock.
Outlook, risks, contingencies, and unusual items
- Management expects continued investment in product development, sales and marketing, international expansion, and capital expenditures; it expects existing liquidity and operating cash flow to fund operations and capital expenditures for at least 12 months. No specific revenue or earnings guidance is provided in the filing.
- Management expects maintenance and services to become a larger share of revenue as the customer base grows. Maintenance renewal rates exceeded 90% in each of 2012–2014; about 42% of customers had purchased at least two products at year-end 2014.
- Risks include an emerging, unproven market; competition; dependence on channel partners; variable, quarter-end-concentrated sales; continued operating losses and negative operating cash flow; hiring and scaling challenges; product security, performance, and intellectual-property risks; international, currency, tax, and Israel-related risks.
- Foreign-exchange losses contributed to 2014 financial expense; the company used forward contracts to hedge forecast expenses. Management said a hypothetical 10% currency-rate change would not have materially affected historical consolidated financial statements.
- The company disclosed an Israeli tax assessment for 2009 of approximately $115, which it is contesting, and $0.6 million of unrecognized tax-benefit liabilities. It reported no material litigation. Management stated disclosure controls were effective; the 10-K did not include management’s internal-control assessment or auditor attestation because of the new-public-company transition period.
Important facts for investors to verify
- Whether revenue growth, customer additions, and maintenance renewals can continue while operating expenses grow faster than revenue.
- Cash conversion, receivables collection, deferred revenue, and the seasonal timing of fourth-quarter sales and first-quarter collections.
- Adoption and contribution of DatAnswers and other newer products, and expansion of sales to existing customers.
- Ongoing cash needs, planned 2015 capital expenditures, lease commitments, and whether operating cash flow improves.
- Progress on the contested Israeli tax assessment, tax-benefit eligibility, foreign-exchange exposure, and internal-control reporting as public-company requirements increase.