Varonis(VRNS) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Varonis Systems, Inc. as of June 30, 2019, show an increase in total assets to $304.0 million, with a widened net loss of $47.1 million due to increased operating expenses Consolidated Balance Sheets As of June 30, 2019, total assets increased to $304.0 million from $285.0 million, primarily due to the adoption of ASU 2016-02, while total liabilities rose to $203.8 million and stockholders' equity decreased to $100.2 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $207,130 | $259,090 | | Total Assets | $304,020 | $284,978 | | Total Current Liabilities | $135,171 | $146,340 | | Total Liabilities | $203,826 | $159,608 | | Total Stockholders' Equity | $100,194 | $125,370 | - The company adopted the new lease accounting standard (ASU 2016-02) effective January 1, 2019, resulting in the recognition of a $59.4 million operating lease right-of-use asset and a corresponding $59.8 million operating lease liability[9][46] Consolidated Statements of Operations Q2 2019 total revenues decreased to $59.6 million, driven by a sharp decline in perpetual license revenue offset by a significant increase in subscription revenue, leading to a widened net loss of $24.5 million Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $59,621 | $62,190 | $115,981 | $115,718 | | Perpetual licenses | $11,514 | $32,270 | $27,035 | $56,356 | | Subscriptions | $14,837 | $1,291 | $21,842 | $2,362 | | Maintenance and services | $33,270 | $28,629 | $67,104 | $57,000 | | Gross Profit | $51,223 | $55,750 | $99,257 | $102,836 | | Operating Loss | $(24,006) | $(11,305) | $(46,007) | $(26,802) | | Net Loss | $(24,488) | $(12,683) | $(47,127) | $(27,729) | | Net Loss Per Share (basic and diluted) | $(0.81) | $(0.44) | $(1.57) | $(0.97) | Consolidated Statements of Cash Flows For H1 2019, net cash provided by operating activities significantly decreased to $3.0 million, while investing activities provided $23.2 million, and financing activities used $5.7 million Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,953 | $20,383 | | Net cash provided by (used in) investing activities | $23,196 | $(7,554) | | Net cash provided (used in) by financing activities | $(5,697) | $4,091 | | Increase in cash, cash equivalents and restricted cash | $20,452 | $16,920 | | Cash, cash equivalents and restricted cash at end of period | $69,159 | $74,156 | Notes to Unaudited Consolidated Financial Statements The notes detail accounting policies, including the adoption of ASC 842 and revenue recognition under ASC 606, with North America contributing 67% of H1 2019 revenues - The company generates revenue from perpetual licenses, subscriptions, and maintenance/services, with perpetual and subscription revenues recognized at delivery and maintenance revenue ratably over the contract term[24][26] - Effective January 1, 2019, the company adopted the new lease standard ASU 2016-02 (ASC 842) using the modified retrospective approach, recognizing significant right-of-use assets and lease liabilities[23][45][46] - As of June 30, 2019, there was $117.9 million of total unrecognized compensation cost related to unvested restricted stock units and stock options, expected to be recognized over approximately 2.8 years[68] Revenues by Geographic Area (in thousands) | Region | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | North America | $39,984 | $38,441 | $77,833 | $70,061 | | EMEA | $17,553 | $21,481 | $33,952 | $41,828 | | Rest of World | $2,084 | $2,268 | $4,196 | $3,829 | | Total Revenues | $59,621 | $62,190 | $115,981 | $115,718 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the transition to a subscription model, which increased subscription revenues but impacted short-term total revenue and profitability, while Annual Recurring Revenues (ARR) grew 39% year-over-year Overview Varonis, a data security and analytics company, is transitioning to a subscription-based model, serving approximately 6,800 customers with a maintenance renewal rate over 90% - Varonis specializes in data protection, threat detection, and compliance, enabling enterprises to protect data on-premises and in the cloud[78] - As of June 30, 2019, the company had approximately 6,800 customers, with 74% purchasing products from two or more families and 42% from three or more[85][87] - The company's maintenance renewal rate was over 90% for the three months ended June 30, 2019[85] Results of Operations Q2 2019 total revenues decreased 4.1% due to a perpetual license decline, while operating expenses rose 12.2%, leading to an operating loss of $24.0 million, more than double the prior year Revenue Comparison - Three Months Ended June 30 (in thousands) | Revenue Type | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Perpetual licenses | $11,514 | $32,270 | (64.3)% | | Subscriptions | $14,837 | $1,291 | 1,049.3% | | Maintenance and services | $33,270 | $28,629 | 16.2% | | Total revenues | $59,621 | $62,190 | (4.1)% | Operating Expenses Comparison - Three Months Ended June 30 (in thousands) | Expense Category | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Research and development | $19,722 | $17,717 | 11.3% | | Sales and marketing | $41,656 | $41,349 | 0.7% | | General and administrative | $13,851 | $7,989 | 73.4% | | Total operating expenses | $75,229 | $67,055 | 12.2% | - The increase in G&A expenses was primarily due to a $5.4 million increase in stock-based compensation related to changes in the CEO's equity compensation structure in June 2019[125] - Annual Recurring Revenues (ARR) grew to $155.2 million as of June 30, 2019, a 39% increase from $111.9 million as of June 30, 2018[95][121] Liquidity and Capital Resources As of June 30, 2019, the company held $146.3 million in cash and equivalents, with net cash from operations at $3.0 million for H1 2019, sufficient to fund operations for at least 12 months - Cash, cash equivalents, marketable securities, and short-term deposits totaled $146.3 million as of June 30, 2019[141] Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Source | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,953 | $20,383 | | Net cash provided by (used in) investing activities | $23,196 | $(7,554) | | Net cash provided by (used in) financing activities | $(5,697) | $4,091 | - The company has a promissory note allowing it to borrow up to $7.0 million, with no outstanding balance as of June 30, 2019[150] Quantitative and Qualitative Disclosures About Market Risk The company faces foreign currency risk from revenues in Euros/Pounds Sterling and expenses in NIS, mitigated by forward contracts, while interest rate risk is minimal due to short-term investments - The company is exposed to foreign currency risk as approximately one-third of revenues are in non-U.S. dollar currencies, while significant expenses are in New Israeli Shekels (NIS)[159] - Varonis uses derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks by hedging a portion of forecasted expenses in NIS[161] - Interest rate risk is low, as cash and investments of $146.3 million are held in short-term instruments, with declines in interest rates reducing future interest income but not materially impacting fair value[162] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - 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[166] - No material changes to the company's internal control over financial reporting occurred during the three months ended June 30, 2019[167] PART II. OTHER INFORMATION Legal Proceedings The company reports that it is not currently a party to any material litigation - As of the filing date, Varonis Systems, Inc. is not a party to any material legal proceedings[168] Risk Factors The company faces risks from its market's unproven nature, quarterly fluctuations, the subscription model transition, intense competition, dependence on channel partners, and international operations in Israel - The transition to a subscription-based business model could negatively impact revenues and cash flows in the short-term and may result in confusion among customers and partners[175][177] - Quarterly results may fluctuate significantly due to the timing of large transactions, often closing in the last three weeks of a quarter, making period-to-period comparisons difficult[171] - The company faces intense competition for highly skilled engineering personnel, especially in Israel, and failure to attract and retain them could adversely impact innovation and growth[174] - Substantially all sales are fulfilled through channel partners, and the loss of a substantial number of these partners or their failure to effectively market Varonis products could materially harm results[197][198] - Political, economic, and security conditions in Israel, where the company's principal R&D facility is located, could directly and adversely affect operations[253] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and executive compensation agreements