Varonis(VRNS) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company presents its unaudited condensed consolidated financial statements for the period ended June 30, 2024 Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet Data (in thousands) | | June 30, 2024 (unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $816,144 | $767,157 | | Total Assets | $1,094,815 | $1,103,910 | | Total Current Liabilities | $334,453 | $306,778 | | Total Liabilities | $636,209 | $614,262 | | Total Stockholders' Equity | $458,606 | $489,648 | | Total Liabilities and Stockholders' Equity | $1,094,815 | $1,103,910 | Condensed Consolidated Statements of Operations Data (in thousands) | | Three Months Ended June 30 | Six Months Ended June 30 | | :--- | :--- | :--- | | | 2024 | 2023 | 2024 | 2023 | | Total Revenues | $130,346 | $115,418 | $244,368 | $222,753 | | Gross Profit | $107,910 | $98,032 | $200,583 | $187,730 | | Operating Loss | $(28,826) | $(39,716) | $(76,459) | $(82,832) | | Net Loss | $(23,948) | $(38,697) | $(64,438) | $(77,001) | | Net Loss Per Share (basic and diluted) | $(0.21) | $(0.35) | $(0.58) | $(0.71) | Condensed Consolidated Statements of Cash Flows Data (in thousands) | | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $68,447 | $42,636 | | Net cash provided by (used in) investing activities | $(116,968) | $9,909 | | Net cash used in financing activities | $(26,816) | $(21,149) | | Increase (decrease) in cash and cash equivalents | $(75,337) | $31,396 | Notes to Unaudited Condensed Consolidated Financial Statements This section details significant accounting policies, including revenue recognition, fair value measurements, and specifics on debt and equity - The company's Varonis Data Security Platform enables enterprises to protect data against cyberattacks[109][110] - Revenue recognition policies differ by product type: SaaS revenue is recognized ratably over the contract period, while on-premises term licenses are recognized at the point of delivery[112][113][114] - As of June 30, 2024, remaining performance obligations (RPO) totaled $514,669 thousand, with approximately 53% expected to be recognized as revenue over the next 12 months[116] - The company has $253.0 million in aggregate principal of 1.25% Convertible Senior Notes due 2025, with a net carrying amount of $251.2 million as of June 30, 2024[57][181][186] Revenues by Geographic Location (in thousands) | Region | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | North America | $95,566 | $181,722 | | EMEA | $29,070 | $53,223 | | Rest of World | $5,710 | $9,423 | | Total | $130,346 | $244,368 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the strategic transition to a SaaS model, which drives ARR growth but creates near-term revenue headwinds Business Overview and SaaS Transition - The company is strategically transitioning to a predominantly SaaS delivery model to offer quicker deployment, faster time-to-value, and enhanced automation[217][239] - This transition is expected to negatively impact reported revenues in the short term due to the ratable revenue recognition for SaaS contracts[218] Key Performance Indicators Annual Recurring Revenues (ARR) Growth | Date | ARR | Growth YoY | | :--- | :--- | :--- | | June 30, 2023 | $497.0 million | - | | June 30, 2024 | $584.2 million | 18% | - As of June 30, 2024, SaaS constituted approximately 36% of total ARR, and this percentage is expected to increase as the transition to a SaaS model continues[273] - Remaining Performance Obligations (RPO) were $514.7 million as of June 30, 2024, and are expected to increase as the company transitions to a predominantly SaaS-based model[225] Results of Operations Revenue Comparison for Three Months Ended June 30 (in thousands) | Revenue Type | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Term license subscriptions | $62,729 | $85,437 | (26.6)% | | SaaS | $44,785 | $5,653 | 692.2% | | Maintenance and services | $22,832 | $24,328 | (6.1)% | | Total revenues | $130,346 | $115,418 | 12.9% | Revenue Comparison for Six Months Ended June 30 (in thousands) | Revenue Type | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Term license subscriptions | $118,709 | $166,343 | (28.6)% | | SaaS | $78,770 | $7,721 | 920.2% | | Maintenance and services | $46,889 | $48,689 | (3.7)% | | Total revenues | $244,368 | $222,753 | 9.7% | - The increase in cost of revenues for Q2 2024 was primarily due to a $3.1 million increase in salaries and a $1.9 million increase in third-party hosting costs associated with the SaaS transition[259] Liquidity and Capital Resources - As of June 30, 2024, the company held $627.3 million in cash, cash equivalents, and short-term securities, which management believes is sufficient to fund operations for at least 12 months[328] Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $68,447 | $42,636 | | Net cash provided by (used in) investing activities | $(116,968) | $9,909 | | Net cash used in financing activities | $(26,816) | $(21,149) | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from foreign currency exchange rate fluctuations and interest rate changes - The company is exposed to foreign currency risk as revenues and expenses are denominated in currencies like the Euro, Pound Sterling, and New Israeli Shekel[339][367] - The company has interest rate risk related to its cash portfolio and the fair value of its $253.0 million in fixed-rate convertible notes[315][341] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[317] - There were no material changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[343] PART II. OTHER INFORMATION Risk Factors The company identifies significant risks related to its SaaS transition, competition, cybersecurity, international operations, and stock volatility Risks Related to the Industry and Operations - The business depends on the continued growth of the data security market and is vulnerable to prolonged economic downturns that could reduce customer IT spending[345][375] - The strategic shift to a SaaS delivery model introduces risks, including potential revenue fluctuations and higher-than-forecasted hosting and sales costs[361][362][420] - The company faces increasing competition and could face significant pressure if a more established company were to target its market[349][381][382] - As a cybersecurity company, it is an attractive target for cyberattacks, and a security breach could expose the company to significant liability and reputational harm[357][358][387] Risks Related to Technology and Human Capital - The company's success depends on its ability to continually innovate and improve its complex technology in a rapidly evolving market[1][474] - The business relies heavily on customer satisfaction and renewals, with the renewal rate continuing to be over 90% for the six months ended June 30, 2024[3] - The company is dependent on its co-founder and CEO and faces intense competition for attracting and retaining highly skilled personnel, especially in Israel[9][472][473] - The use of open-source software and generative AI exposes the company to risks such as license compliance issues, litigation, and potential release of proprietary code[47][48][84] Risks Related to International Operations and Tax - The company's principal R&D facility in Israel exposes it to significant risks from regional armed conflicts and political instability, including the ongoing war[20][496] - The company's ability to utilize its $103.8 million in federal Net Operating Loss (NOL) carryforwards could be limited by ownership change rules or failure to generate future taxable income[23][24] - The TCJA requirement to capitalize and amortize R&E expenses could significantly increase tax expenses and decrease cash flows once NOLs are fully utilized[16][28] Risks Related to Debt and Stock Ownership - The company has approximately $253.0 million in outstanding 2025 Convertible Senior Notes, which constitutes substantial indebtedness that may decrease business flexibility[56][57] - In connection with the notes, the company entered into Capped Call Transactions to reduce potential dilution, which exposes it to counterparty credit risk[36][38] - The company's stock price has been and is likely to continue to be volatile, subject to fluctuations from operating results and market conditions[22][40][485] - Anti-takeover provisions in the company's charter documents and Delaware law could discourage or prevent an acquisition[42][462][501] Exhibits This section lists key exhibits filed with the report, including the 2023 Omnibus Equity Incentive Plan and CEO/CFO certifications - Key exhibits filed with this report include the Amended and Restated Varonis Systems, Inc. 2023 Omnibus Equity Incentive Plan[495] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are included as exhibits[34][53]