Varonis Systems' (VRNS) Yaki Faitelson on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Varonis Systems (VRNS)

Varonis Systems, Inc. (NASDAQ:VRNS)

Q2 2014 Earnings Conference Call

August 4 2014 5:00 PM ET

Executives

Staci Mortenson - Investor Relations

Yaki Faitelson - Chief Executive Officer, President, Co-founder and Chairman of the Board

Gili Iohan - CPA - Chief Financial Officer.

Analysts

Keith Weiss - Morgan Stanley

Raimo Lenschow - Barclays Capital

Matt Hedberg - RBC Capital Markets

Michael Kim - Imperial Capital

Scott Zeller - Needham & Company

Operator

Good day. And welcome to the Varonis Systems Incorporated Second Quarter 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Staci Mortenson, Investor Relations. Please go ahead.

Staci Mortenson

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' second quarter 2014 financial results. With me on the call today are Yaki Faitelson, Chief Executive officer and Gili Iohan, Chief Financial Officer. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may statements related to our business that would be considered forward-looking statements under federal securities laws including projections of future operating results for our quarter ending September 30, 2014 and our fiscal year ending December 31, 2014. Actual results may differ materially from those set forth in such statements. Important factors such risks associated with anticipated growth in our addressable market, competitive factors including increased sales, cycle time, changes in competitive environment, pricing changes and increased competition, the risk that we may not able to attract to retain employees, including engineers and sales personnel, our ability to build and expand our direct sales efforts and resale our distribution channels. General economic and industry conditions including expenditures data governs and data security software, new product introductions and Varonis' ability to develop and deliver innovative products, risks associated with international operation, Varonis' ability to provide high quality services and products offering and macro conditions could cause actual results to differ materially from those contained in forward-looking statements. These factors are addressed in earnings press release that we issued today under the section captioned forward-looking statements and these and these other important risk factors are described more fully in documents filed with Securities and Exchange Commission. Including a final prospective from our initial public offering. And what we discuss in our report filed with Securities and Exchange Commission going forward. We encourage all investors to read our SEC filings. These statements reflects our views as only as of today and should not be relied upon as representing our views as of any subsequent day. Varonis expressly disclaims any application undertaking to release publicly any update or revisions for any forward-looking statements made here in. Additionally, non-GAAP financial measures will be discussed in this conference call, reconciliation for the most directly comparable GAAP financial measure is also available in our second quarter 2014 earnings press release which can be found at www.varonis.com in the Investor Relations section. Also please note that our webcast for today's call will be available on our website in the Investor Relations section.

With that, I would like to turn the call over to our CEO, Yaki Faitelson. Yaki?

Yaki Faitelson

Thanks, Staci. And good afternoon everyone. It was a strong quarter for Varonis with revenue increasing 38% year-over-year to $24.6 million. This was driven by the increasing need for organization to get more out of the rapidly growing human generated data as well as the investments we've been making to our sales team and expand our product portfolio. Varonis is uniquely positioned to help companies realize value from the human generated data to increase productivity while sustainably reducing risk and lowering costs. Gili will walk you through the financial details in a moment, but I wanted to provide you with additional business highlights that illustrate the success we are having, Varonis driving the increased production of our solutions.

The explosive growth of human generated data is bringing two urgent realities that can often seem in conflict. The opportunity for increased productivity, improved collaboration and deriving more value from the data in the risk of exposing or losing control of valuable, sensitive information that your customers, partners and employees are trusting you to protect. Varonis is the only company in the market place today with solution that enables organization to thrive in the section of productivity and risks. By using our technology they can understand, control and enhance the connection between people and data. This means that they can increase productivity and secure their data at the same time and even significantly reduce costs in the process.

Let's spend few more moment further examining the sustainable business driver for our solution. To begin, the organizations have become more productive. Our solution enables end users to work with data efficiently and securely without compromising on enterprise control. End user can find and reliably access data quickly from anywhere in any device, collaborating colleague and business partner with more easily and again access the data faster without the involvement of IT staff. Varonis also help management to gain critically insight about the organization, the information and their people, data is better understood and stored in the right places. This mean the business organization and infrastructure upgrade happened more quickly and the infrastructure last longer. We also help our customer save money by becoming more operationally efficient and spending less on storage. Common data protection and management task that organization they are already doing take hours if not days or week. Given the volume of data generated in the enterprise, manual methods are time-consuming and often ineffective. With terabyte upon terabytes of data, a significant percentage is likely stay unused. As much is scattered throughout disorganized data structure that have gone very quickly. Varonis helps organization identify and automatically migrate archived or delete sale data. In many cases saving hundreds of thousands of dollar in storage cost per year and making infrastructure capacity planning more accurate. And with research in anywhere anytime access, users can derive more value from intellectual capital stored in those files. Varonis measurably reduces overhead and improve the effectiveness of IT department by automating day-to-day management task that they are struggling to carryout. Our solution makes it possible for organization to complete task and projects they could barely start without us. We provide the intelligence and visibility to help IT and the business understand what actions must be taken and to follow to stimulate changes and applied them according to IT environment from a single interface. We also ensure that the only the right people have access to the right data. All this is monitored and abuse is slight. Data classification becomes actionable just understanding whether a sensitive isn't enough to protect it. Enterprises need to understand how critical data is being used, including who is access, who is using it and who it belongs to. We need context around a data in order to really begin to protect it. Varonis automation ensure employees have access to only what they need, mistakenly exposed data is identified and locked down safely including sensitive and regulated content. Enterprises must be able to show those customers and partners that data stored safely in the right places and that is accessed only by the right people. Importantly, compliance is much easier to attend. Regulation mandate that enterprises identify regulated content, restrict access, monitor use, and enforce policies accordingly. We believe that Varonis addresses virtually every significant regulation if there is a data component supported by our underlying Metadata Framework that is the foundation of our product suite; Varonis Systems data organization is our portfolio support multiple use cases and solves many business problems. If you had one of our products, you are candidate for all of them. This is very powerful and is driving our customer expansion and continues to fuel our product innovation which again this quarter led to some new products and production and enhancement. In addition to announcing the beta release in Q2 of DatAnswers of our enterprise sales product, we announced general availability of DatAnywhere version 1.8 as well as availability of DatAnywhere APIs. In June, we announced that DatAnywhere is now free to download and use for up to five uses. This has generated lot of excitement as much organization with file shares can now turn them into private cloud with less than an hour. During the second quarter, we added 206 new customers, a 38% increase compared to Q2 last year. 38% of our license in first year maintenance revenue from the period came from existing customers and we've seen the dividend from investment across our line expense strategy. We've accelerated hiring to create additional sales capacity given the clear evidence that these investments are driving our plan.

Now I would like to share a few customer examples from this quarter that will illustrate our value and differentiation. KME, the world's largest manufacture of semi-finished copper and copper alloy product became a new customer with the purchase of five licenses. DatAdvantage for Exchange, SharePoint, Directory Services and DatAlert. They have 12 production site in Europe and one in Asia; they needed to verify global access control in order to make some changes across their infrastructure. As with many of our customers, they choose Varonis after learning about our concept evaluation that helps them visualize the infrastructure and for potential issue that they previously weren't able to see. The research arm of Cincinnati Children Healthcare of Medical Center, the healthcare leader in Cincinnati has been a Varonis customer for several years. The clinical arm wanted increase visibility into its important data identifies owners to actively lockdown access control and show up their auditing capabilities. They expanded their deployment by purchasing additional licenses for both DatAdvantage and DataPrivilege. The years of experience with Varonis gave them confidence that they could further automate manual data management task, improve data protection capabilities and continue to stay in front of data compliance activities.

Finally, Trafigura, a leading international commodities training and logistics company expanding their Varonis investment with additional licenses for DatAdvantage for Windows and purchase more product including DatAdvantage for Exchange, the IDU Classification Framework and Data Transport Engine. The purchase from the Data Transport Engine is a good example of innovation and use case of expansion as we are uniquely positioned in this area. One of the final use cases in their work was to address strategic need on the data retention policies. Overall, this was a very strong quarter for Varonis. We are pleased with our growth trajectory for the first half of the year. And see our momentum continuing throughout 2014. The business drivers for our solution are becoming increasingly clear in the marketplace. And we will continue to invest to drive awareness and adoption of this untapped market opportunity. Gili?

Gili Iohan

Thank you, Yaki. Our second quarter result came in above expectations and we continue to see strong momentum and demand in the marketplace. Total revenues increased 38% to $24.6 million. Growth was driven by new customer wins, a success we are seeing with our land and expand strategy and consistently high maintenance renewal rate of 90%. We delivered license revenue to $14.4 million or an increase of 37% from the second quarter of 2013. Our maintenance and services revenue was $10.2 million, increasing 39% compared to the second quarter of 2013. Looking at the business geographically, we saw broad based growth. U.S. revenues increased 38% to $14.8 million or 60% of total revenue. EMEA increased 41% to $7.6 million or 31% of total revenue. And Rest of World increased 30% to $2.2 million or 9% of total revenue. For the second quarter, existing customer license and first year maintenance revenue contribution increased to 38% versus 35% in the second quarter of 2013. Our land and expand model is the leader in results and we will continue making investments to broaden the relationship with existing customers as well as to increase new customers addition. Before moving on to the profit and loss item, I would like to point out that we will be discussing non-GAAP results going forward unless otherwise stated which for the second quarter of 2014 exclude a total $978,000 in stock based compensation expense. Please note, the details GAAP to non-GAAP reconciliation can be found in the tables of our press release which is available on our website. Gross profit for the second quarter was $22.2 million, representing a gross margin of 90.1% compared to 91.6% gross margin in the second quarter of 2013. This was in line with our expectation as we invest in infrastructure and personnel to support our increased revenue and high renewal rates. Total marketing expenses $16.7 million or 68% of revenue for the second quarter of 2014 compared to $10.3 million or 58% of revenue in the second quarter of 2013. The increase was primarily due to additional commission expense related to our revenue out performance as well as increased health for headcount and go to market expenses designed to drive future growth. R&D dollars in the second quarter increased by 38% year-over-year to $6.6 million. We will continue investing in innovation so that we can enhance our existing product and launch new product to expand our value term and competitive position. G&A expenses were $2.5 million or 10% of revenue, up from $2.1 million or 12% of revenue in the second quarter of 2013, primarily due to expenses related to becoming a public company in addition to the global expansion of her business. Operating expenses totaled $25.8 million in the second quarter compared to $17.2 million of last year. As a result, our operating loss was $3.6 million for the second quarter compared to an operating loss of $800,000 in the same period last year. During the quarter, we had financial income of $74,000 primarily due to foreign exchange gain and interest income compared to a loss of $88,000 due primarily foreign exchange losses in the same period last year. As you know foreign exchange gain and losses can fluctuate. Our guidance is not considered any additional potential impact to financial and other increment expense associated with foreign exchange gain or losses as we do not estimate movement in foreign currency rate. Our net loss was $3.7 million for the second quarter of 2014 or loss of $0.16 per basic common share compared to a net loss of $1 million or loss of $0.05 per basic common share for the second quarter of 2013. This is based on $24.5 million and $18.7 million basic common shares outstanding for Q2, 2014 and Q2, 2013 respectively.

If we look at the balance sheet, we ended the quarter with approximately $120.2 million in cash, cash equivalent and short-end deposits. During the first six months of 2014, we used $580,000 in cash for operation. We ended the quarter with [722], a 49% increase from 486 at the end of the second quarter of 2013. This reflects the increase investment in our business to support additional innovation, new product and expanded sales capacity in order to drive significant, sustainable growth.

Moving to guidance. For the third quarter of 2014, we expect total revenue of $23.9 million to $24.5 million which would represent growth of approximately 29% to 32% year-over-year. We expect our non-GAAP operating loss to range between $5 million and $4.7 million and non-GAAP loss per basic common share of $0.22 to $0.22. This assumed tax provision of $200,000 to $300,000 and 24.5 million basic common share outstanding. Our third quarter non-GAAP operating loss reflects the accelerated investments we made in the second quarter as well as ongoing investments to support our increased revenue growth assumption.

For the full 2014, we are raising our revenue guidance and now expect our revenues in the range of $98.7 million to $100.1 million representing year-over-year growth of approximately 32% to 34%. We continue to expect our non-GAAP operating loss to be in the range of $14.3 million to $13.3 million, and non-GAAP loss per basic common share of $0.63 to $0.57. This assumed the tax provision of $700,000 million to $1 million and 24.4 million basic common shares outstanding.

To summarize, we are pleased with our second quarter performance. And we are very excited about the company's positioning for the second half of 2014 and beyond.

With that, we would be happy to face questions you have. Operator?

Question-and-Answer Session

(Operator Instructions).

Operator

We will take our first question from Keith Weiss of Morgan Stanley.

Keith Weiss - Morgan Stanley

Excellent, thank you, guys. And very nice quarter. I definitely saw some nice returns in terms of new customer and very nice product revenue growth in the quarter. But also see guys continuing in the past investments showing confidence in the business on going forward basis. So two questions for you. One on sort of looking backward, last quarter we were talking about some new partnership agreement, redistribution partners. Can you give us some color into how those are ramping up? And then the second part of the question on going forward basis, this new investment, can you give us a little bit more color in term where they are targeting, where specifically you see under investment and how should we be trying to keep track of sort of the yield on those investments on going forward basis.

Yaki Faitelson

Hi, Keith. So in terms of partnerships, we are investing more into channel and bringing more channel managers and we definitely see that we get more lead for more channel partner and the channel partner -- they involved with the selling infrastructure and we also see very good return from our investments in self capacity and engineering and this is where you can expect us to keep investing. When you look at overall, look at our business details, very strong end power and parts of our business are extremely positive like high renewal rate, the up sale, the cost sale and sales people that are here for more than year and year and half. And this is what you can expect from us to invest into distribution and capacity play. We have two units of economic. One is a sales team and the other one is customer. We are going to invest to capture the opportunity by having more feet on the street, making sure that we have distribution that it would be easier to capture the market opportunity and we'll have more leverage in the sales model and bring more customers where you can see they are buying more and more and they are renewing. So this is what you can expect from us. And the other aspect is to keep innovate; our mission is to take human generated data and to be able to solve all the problems around it from IT to the business. And you can see we take more and more way use cases and so for they started really working well for us.

Keith Weiss - Morgan Stanley

Got it, excellent. And maybe if could speak one follow up. Any update if you can give us on some of the newer product initiatives. How those are being received by customers and any in particular that you are seeing better or worse traction in.

Yaki Faitelson

No. We are pleased. DatAnywhere and the Data Transport Engine are still fairly new but we see definitely that the Data Transport Engine bring us too many datacenter and infrastructure integration and bring us to many and dedicated project for how to repurchase and building internet and things of this nature. And in terms of DatAnywhere, it is also in terms of that the ASP are relatively smaller than our other product but their volume is great. And it is also drag working very well. Sometimes we are leading with DatAnywhere and drag other products so we are pleased with them. In terms of data answer, we feel the data phase but we are pleased with how it is playing out. I see that everything that we anticipate in terms of scalability and security and speed is working very well. It is stable; there is warm reception from customer. But as I said in the last, it usually takes a year to get material revenue contribution from any product. So far the new products that we introduced are working very well. And also the enhancement that we did like DatAlert and others, our co product are also working well and increasing the overall platform.

Operator

And we will take our next question Raimo Lenschow of Barclays.

Raimo Lenschow - Barclays Capital

Hi, guys, thanks for taking my question. And congratulation on a great quarter. And can I start with the first question like I know like your sales operation in U.S. but obviously lot of R&D is back in Israel. Do you see any impact that you guys have from the trouble that's going on there at the moment or is there anything we should be kind of aware?

Yaki Faitelson

We don't see anything material that is disturbing the operation Israel. Obviously, it is a very unfortunate situation but for us it's almost 100% business as usual. And I am not a politician. I don't know how things will play out but so far there is no impact on launch.

Raimo Lenschow - Barclays Capital

Yes, okay. And then the next question is obviously IPO gets you more visibility in the market. Have you seen any change on the competitive firm that-- in terms of new and small entrance making more noise or established vendors trying to kind of they can compete with you or something, has there been any change since the IPO?

Yaki Faitelson

No. Even we will say that we see less. It is usually out of -- now we see out of 20 evaluations but we are doing mainly one or two, a competitive situation and almost in all of them when they need to go to the deep waters of -- a massive amount of production data they vanish. And no, the only thing we can say from the IPO that it was a good marketing invest for us and we are capitalizing on it. And it helps to drive awareness but it's just very hard to do it. The volumes of data going all the time and it's -- you need to build these bottoms up, made the data frame working in order to compete with us. It's very hard to do. We are doing it for almost a decade. Every customer we have, will become better and better. And on top of it, we have such enormous effective production, these many features and many products; it's just -- at this point competition which is not a risk.

Raimo Lenschow - Barclays Capital

Okay, perfect, and then one last question for me. Can you talk a little bit about the ASP? How that's trending? Is there any up list from the larger deals or is there anything you can share in terms of metrics there? Thank you.

Gili Iohan

We are not disclosing it on the quarterly basis. And I can say that ASP disclosure was in the range of expectation. We will provide this metrics on an annual basis which obviously present better overall trend line because it will eliminate seasonality and fluctuation between the quarters. We did have one large deal this quarter of $1 million but we didn't have any customers' concentration. We stuck with volumes with new customers and with up sell.

Operator

And we will take our next question from Matt Hedberg of RBC Capital Markets.

Matt Hedberg - RBC Capital Markets

Yes, thanks for taking my questions, guys. I had a question on DatAnswers, I know it's too early and only in beta. But I am curious who do you see as the primary competitor for that product and how should we think about pricing?

Yaki Faitelson

So it is interesting when you look at our customer base, most of them, almost all of them file share, they don't have -- they just don't have any search product because it's such expensive proposition. So it's still early stages so what I can -- what I am saying can change but everybody tried to do search, it's something basic. You are going to any operating system, you are trying to do search but for most of organization out there that we see they don't pay any search on the file shares. So if it will stay like that what we see is a market that conceptually is a prime for sales because of the enormous data volume and this is really the only way to unlock realized value and the potential of this dataset. But at the same time, they are calling solution is extremely expensive. But we think we are not going to be disclosed pricing yet but it just going to be a percentage. I don't know if 60% of DatAdvantage or 70% of DatAdvantage, and we are going to do it their user base. So we also see from initial feedback our pricing versus the ROI works very well.

Matt Hedberg - RBC Capital Markets

That's great, thank you. And now in terms of new product service, leveraging your Metadata Framework, how should we think about a new product rollout in the future? It seems to me that products and storage or back up would be a natural. Are those areas interesting to you guys?

Yaki Faitelson

There are many things we can do with our Metadata Framework. What I can say is that the Data Transport Engine is for migration and things of this nature and we can definitely do product enhancement for this specific product to address more back up and replication. But I don't want to talk specifically about any future or direction but I will say again is that on top of this metadata data framework, we have so much intelligence and we can capitalize on the data structure that we build to address --to just address many use case and build many interesting products that have a lot of value for any enterprise in the world that files and email are important to you.

Operator

And we will take our next question from Michael Kim of Imperial Capital.

Michael Kim - Imperial Capital

Hi, guys. I know you certainly been adding a lot of new channel partners in recent quarter. I was hoping if you could provide any metrics around productivity and channel enablement and maybe speak to the quantity or quality leads in sales conversion. Thanks.

Yaki Faitelson

So we are not providing this kind of metrics but what I can say is that it's combination of quantity and quality. And we bringing more channel partners to bring more lead and the channel partners that we already had, we'll make sure more heads are participating in the efforts of say selling volumes and we are doing more and more marketing events with them. So we definitely see channel leverage.

Michael Kim - Imperial Capital

Okay, great. And with this channel evolution would you expect the line expand strategy sort of lean north towards the landing of new customers or do you see a pretty consistent mix between existing and in terms of license and plus your maintenance revenue.

Yaki Faitelson

It depends; I think in the foreseeable future, the market is everybody. But obviously it's much easier to up sales because it is done up a position place. If you have wonderful product, you have a candidate for all of them. Data that you are having your file share, you have in your internet, the same content you have in email. You need to do data immigration, you need to do back up and access the data from anywhere and any device. But so we can capture the opportunity and bringing more customers is very important for us. I think that as we will grow you will see a bit on a percentage basis the business goes in new customer but new customer acquisition is something that is very important for us. And also our sales teams are compensated; part of their compensation is a new customer acquisition.

Michael Kim - Imperial Capital

Got it, and then more broadly, can you talk about budget and if you are seeing your category becoming more formalized or is it still significant discretionary budget, any commentary on how that's trending?

Yaki Faitelson

Definitely the market is coming to us. And all the product that we have with DatAnywhere and DatAnswers we talk, you can directly to the business users add a lot value. And the equation of IT stock based plate and data growing in such enormous growth of data, the explosion of data make the problem just severe --greater everyday. So we definitely see that organization, enterprises are allocating more budget to solve this kind of problems. The other things that we see and you can -- you read it everyday the business publication is that the world become 100% digital and it's like you are not going to put your money in a bank that can protect it and can't give you a ledger and don't take enough money on the balance sheet. We see that business partners, employees and customers are pushing enterprises from every business vertical to be able to give them the most fundamental protection building block. And what I mean by that is where my data is? Who can access it? Who is accessing it? And this gives really to start foundation to enable business. And this is another thing that we see. So the market is evolving and the problem just becoming just a bigger problem for IT and the business.

Operator

(Operator Instructions) We will go next Scott Zeller of Needham & Company.

Scott Zeller - Needham & Company

Hi, good afternoon. Could you talk to us about the urgency of budget and spending around the various use cases that you talked to us about and went through in your prepared remarks? Whether it's from a compliance perspective or from an enterprise data storage migration project. Are you noticing changes all in the urgency these different use cases?

Yaki Faitelson

It value, all the products that we have we can bid on many projects and many use cases. If you have datacenter refresh or storage migration so definitely this will be use case that will drive the purchase. If you have that HIPAA compliance issues so compliance will drive it, and if you have a lot of data that you can find it will be DatAnswers, it will be search. I can say that in terms of functionality if you see the common ground between all the use cases is their ability to visualize who can access the data and who is accessing the data. This is what connects users and data and let us really solve old day challenges in each one of these cases. But now with all the products I can tell you that I see dominate capability but each one of this use case can generate urgency and can justify a large Varonis purchase.

Operator

And this does conclude today's Q&A session. I'll turn the call back over to Yaki for any closing remarks.

Yaki Faitelson

Before we end the call, I would like to thank to all of our employees for their hard work this quarter. Thank you all for joining us today. I look forward to speaking with you all again soon. Thank you.

Operator

And this does conclude today's conference call. Thank you again for your participation. And have a wonderful day.

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