Varonis Systems Inc (VRNS) 2014 Q1 法說會逐字稿

Good day and welcome to the Varonis Systems, Incorporated first-quarter 2014 earrings 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.

Thank you. Good afternoon. Thank you for joining us today to review Varonis' first-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 up the call to a question-and-answer session.

During this call, we may make 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 ended June 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 as risks associated with anticipated growth in our addressable market; competitive factors, including increased in cycle time, changes in the competitive environment, pricing changes and increased competition; the risks that we might not be able attract or retain employees, including engineers and sales personnel; our ability to build and expand our direct sales efforts and resellers distribution channel; general, economic and industry conditions, including expenditure transfer, data governance and data security software; new product introductions; and Varonis' ability to development and deliver innovative product; risks associated with international operations; Varonis' ability to provide high-quality service and support offerings; and macroeconomic conditions could cause actual results to differ materially from those contained in forward-looking statements.

These factors are addressed in the earnings press release that we issued today under the section captioned forward-looking statements and these and other important risk factors are described more fully in the documents filed with the Securities and Exchange Commission, including the final prospectus from our initial public offering and will be discussed and in our reports filed with that Securities and Exchange commission going for.

We encourage all investors to read our SEC filings. These statements reflects our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expresses disclaims any application under taking to release publicly any updates or revisions to any forward-looking statement made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation of the most directly comparable GAAP financial measures is also available in the first quarter 2014 press release which can be found at www.varonis.com in the Investor Relations section.

Also, please note, that a webcast of 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 Chief Executive Officer, Yaki Faitelson. Yaki?

Thanks, Stacy, and good afternoon, everyone.

I would like to start by thanking all of you for joining us today in our first conference call as a public company. We are very excited to have started our IPO in February, we believe the IPO is an important milestone for Varonis, in one (inaudible) and increase the resources we have available to execute the Company's long-term strategy.

We are also very pleased with our strong first-quarter financial results. The success of our business is driven by multiple factors, including our industry-leading solutions, our metadata technology framework, allows under penetrated available markets and our highly effective and scalable growth market models.

The financial highlights of the first-quarter, we reported total revenue of $17.5 million representing a 39% increase over Q1 last year and a non-GAAP loss per basic share of $0.30. These very strong results are directly related to the investments we have made in last two year's to both our sales teams, as well as expand our product offering to address an ever-growing set of (inaudible).

Gili will walk you through the financial details in a moment, but this as of our first quarter as a public company and some of you may be relatively new our story, I wanted to provide a brief overview of the Varonis value propositions, our market opportunities, and our business model. As I think you all know, the length of scope of data carries big opportunities for organizations of all sizes, however, it also creates serious challenges and risks.

We believe Varonis is unique among big data players because we thrive at the intersection of the opportunity and the challenges. Today's organizations spent fortunes on managing, protecting, and extracting value from the critical data assets, using various processes and technology you know well like data specification, enterprise search, and identity access management. We tap into this multiple substantial IT budgets that amount to tens of billions of annual spend.

Our customers spend virtually all industries in range from the largest enterprises to small and medium-size businesses. If you have more than 25 users in a file server, you are a potential Varonis customer. Varonis specialized in human-generated data. The type of unstructured data that includes spreadsheets, word documents, presentations, audio, video files, and e-mails.

Each data set is an essential part of every business and every enterprise. We provide an innovative software platform that allows enterprises to map, analyze, manage, migrate and now search the unstructured data. Despite all the process and technologies in place today, there are still many questions that most organizations cannot currently answer about the human-generated data, like who has access to which files and folders and mail boxes.

If you take a random employee and ask IT what is their access, in most enterprises it will take days or weeks for them to answer. Who is accessing, modifying, moving and deleting files and emails. In most enterprises, if you took a thousand files and deleted them, no one would know who did it or when it happened.

Which files contain critical information? Companies from every vertical store massive volumes of data that belongs to customers, business partners, and employees. Much of this information is sensitive, critical to the business, and some is regulated. Which data is exposed to too many people?

Almost every enterprise that installed the Varonis software sees that approximately 70% of the data people can access is not relevant for them and this is a huge risk. Another question that we realized employees have every day is, where are the files they need and which are the most relevant? Is a huge productivity gain when users can easily find the file they need and access them from the IT devices.

The reason IT departments and businesses are not able to answer this question is that not of their existing technologies map the connection between users and data. Without this connection, there are many operational and business failures.

Our ability to map the connection has enabled us to create the most critical building block needed to realize value from human-generated data and protect it effectively. We walk with our customers to demonstrate (inaudible), based on automated manual processes, realizing efficiency gains across the enterprise, and reducing storage costs. With our product, our customers increase productivity and lower risks and costs.

The core of our technology is that we can intelligently extract and analyze metadata or data about data from enterprise's vast distributed data storage. Our Metadata Framework creates advanced searchable data structures and provides real-time intelligence about an enterprises massive volume of human generate content, making human-generated data more accessible, manageable, and secure.

We now have 11 licenses and six products that are used by IT lines of business professionals for a variety of used cases, including data government data security, integration, file condensation and mobile access.

We're very excited about the introduction of our new product, DatAnswers, which as we just announced, will be released to beta at the end of May and will be available generally later this year. One of the most frustrating problems employees face is not being able to easily find the files they are looking for when they need them.

They also spend hours recreating content over and over again that their colleagues or predecessors have already created because they cannot effectively find it or do not know who to ask. DatAnswers provides secure efficient service functionally for human-generated data content residing in file share and SharePoint. Leveraging DatAdvantage, the ideal purification framework and our underlying MetaData Framework, DatAnswers uses our Metadata analytics to deliver highly relevant search results in scale to the people, and only the people, who should have access to them.

As with most of our product instruction, it usually takes at least a year until we see any significant revenue contrition as the products move from beta to general availability and full cycle. However, we are confident that this particle positioned us well in the adjacent space of enterprise search, enable us to capture another set of budget dollars owned by the office of the CIO.

Leverage is a platform and expend the value we deliver to the businesses Our product suite is (inaudible). If you have one of our product, you're likely candidate for more of them with the same data you have file shares in, you have in internet systems and you need access the data from anywhere on any device.

This is very powerful and is driving our customer attention, which I will discuss now is how we go to market. We have built a predictable model that is based on high volume low average sales price, as well as lending and expending for our customers with inside sales, outside sales, channel partner and marketing teams, which together drive our high-volume sales model.

The heart of the sale process is to ensure (inaudible) product is the correlation between those that evaluate the products and those who ultimately buy them is high and has been consistent over time. Our sales process begins with our marketing and insides sales teams working with our channel partners to reach as many potential customers as possible, encourage them to try our solutions.

Next, our customer evaluations are installed quickly and easily. It usually takes less than one hour to install our products on existing customer infrastructure and our solutions demonstrate value immediately. The results that we have seen rapid growth in new customers, we added 158 new customers in the first quarter, a 31% increase compared to Q1 last year.

We ended the first quarter with approximately 2,550 customers. For example, (inaudible) DatAdvantage about two years ago to enhance the control around the unstructured data and identified data owners. In Q1, they were data privileged to follow the automated data owners involvement and empower them to manage and review access to their data.

MOC, a medical research organization is another good example. In Q1, they purchased three products: DatAdvantage, DatAnswers and DatAnywhere. With DatAdvantage to align their data with the current department and research project and to make sure the use of clinical data was touched. The purchased data transport engine to automate and aide the intermigration and consolidation for upcoming organizational changes and data center restructuring.

And lastly, the purchase DatAnywhere to enable employees to access and share data from anywhere on their own devices to ensure the remote into these files was mirrored with their in-house storage. The second example I just mentioned reinforces our ability to successfully bring new products to market and customers who bought two or more products increases to 40% as of the end of the first quarter. The more we expand our presence with customers, the more sticky our product become.

Further, the global nature of our market opportunity is evidenced by the fact that international operations already represents 48% of our revenues which is significant for a company of our size. Given the large market opportunity and our product leadership position, we believe there are multiple longer term drivers for our business and we expect to continue to invest in certain marketing and product development to capture the meaningful growth opportunity in front of us.

As you can tell, we are very excited to be operating as a public company and are focused on building our organization for the long-term success.

Now, I will turn it over to turn it to Gili Iohan, our CFO, for some more details on the financials and key operating metrics. Gili?

Thank you, Yaki.

Our first-quarter results came in above expectations, and we continue to see strong momentum in demand in the marketplace. Total revenues increased 39% to $17.5 million. Growth was driven by solid new customer acquisition, increasing penetration within our installed base, a large range of this and consistently high maintenance renewal rates at over 90%. We delivered license revenues of $8.1 million or an increase of 37% from the first quarter of 2013.

Our maintenances and services revenues were $9.4 million, and also continue to grow at a rapid pace, increasing 40%, compared to the first quarter of 2013. Looking at the business geographically, we saw broad base growth. US revenues increased 39% to $9.1 million or 52% of total revenues. [EMEA] increased 42% to $6.9 million or 40% of total revenues. And rest of the world increased 26% to $1.5 million or 8% of total revenues.

For the first quarter, existing customers license and first-year maintenance revenue contribution increased to 33%, versus 24% in the first quarter of 2013. As Yaki mentioned, we have lending expense model. We're making investments to increase new customers additions, as well as broaden our relationship with existing customers.

Before moving on to the profit and loss items, I would like to point out that we will be discussing non-GAAP results going forward, unless otherwise stated, which for the first quarter of 2013 excluded total of $646,000 in stock-based compensation expense. Please note that a detailed GAAP to non-GAAP reconciliation can be found in the table of our press release, which is available on our website.

Gross profit for the first quarter was $50.4 million, representing a gross margin of 88.4%, compared to an 89.3% gross margin in first quarter of 2013. In 2012 and 2013, we began to increase investments in the business in order to capitalize on our market opportunity to prepare ourselves for the public market, and these investment continued in the first quarter of 2014.

Total marketing expenses increased to $13.9 million or 80 % of revenue for the first quarter of 2014, compared to $9.1 million or 73% of revenues in the first quarter of 2013. ( Indiscernible) dollars in the first increased by 40% year over year to $6.2 million, as we continue to enhance our existing product and prepare new products to be launched in 2014 and beyond. This is an important part of expanding our value, our stamp and our competitive position.

G&A expenses were $2.69 million or 15% of revenue, absent $1.5 million or 12% of revenues in the first quarter of 2013, primarily due to expenses related to become a public company, in addition to the global expansion for our business.

Operating expenses totaled $22.7 million in the first quarter, compared to $15.1 million last year. As a result, our operating loss was $7.3 million for the first quarter, compared to an operating loss of $3.8 million in the same period last year.

During the quarter, we had financial expenses of $38,000, primarily due to foreign exchange loss, compared to a loss of $679,000, due primarily to foreign change losses and the reevaluation of [forex] in the same period last year.

As you know, foreign exchange gains and losses can fluctuate. Our guidance does not consider any additional potential impact to financial and other implement expense associated with foreign exchange gains or losses as we do not estimate [movement] in foreign currency rate.

Our net loss was $7.4 million for the first quarter of 2014, or a loss of $0.30 per basic common share, compared to a net loss of $4.2 million or a loss of $0.23 per basic common share for the first quarter of 2013. This is based on $24.4 million and $18.7 million basic common share outstanding for Q1 2014 and Q1 2013 respectively.

If we look at the balance sheet, we ended the quarter with approximately $125.9 million in cash and cash equivalent and short term deposits, inclusive of $108.4 million in cash raised during our IPO.

During the first three months of 2014, we generated $4.3 million in cash flow from operations, compared to $3.3 million in the first quarter of 2013. We ended the quarter with 613 employees. A 42% increase from 443 at the end of the first quarter of 2013. This reflects the increase investments in our business to support additional innovation, new products, and expanded distribution capacity in order to drive significant growth on a sustained basis.

Moving to guidance. For the second quarter of 2014, we expect total revenues of $22.9 million $23.4 million, which represents growth of approximately 28% to 31%. We expect income of non-GAAP operating loss to range between $4.1 million and $3.8 million and non-GAAP loss per basic share of $0.18 to $0.16 This assumes stocks provision of $200,000 to $300,000 and 24.5 million basic shares outstanding.

For the full-year 2014, we expect total revenues in the range of $96.5 million to $98 million or a growth of approximately 29% to 31%. We expect non-GAAP operating loss to be in the range $14.3 million to $13.3 million, and non-GAAP loss per basic share of $0.63 to $0.57 This assumes [stock] provisions of $700,000 to $1 million and 24.4 million basic shares outstanding.

To summarize, it was a very good start to 2014 and we are very excited about the Company's outlook for the remainder of the 2014 and beyond

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

(Operator instructions)

Pete Weiss, Morgan Stanley.

It seems like you guys put this nice quarter in what was in an even operating environment for a lot of infrastructure software vendors. Maybe just start out with you could tell us a little bit that sort of the selling environment in particular, in the US. Do you have any trouble with large deals? But overall, how do you find the demand environment to be out there overall?

We didn't have any concentration with large deals in the first quarter. It was a fairly regular Q1 for us, and it was a strong quarter mainly because of several drivers. The first one is really the relentless goals of data which carriers big opportunities but a lot of challenges and risks and today we are the only Company that can really answer the data access usage and control questions regarding human-generated data. The other thing that we saw we that we really expanded the market opportunity with new product and new [key] sales like data migration, restructuring and file sharing. And customers were buying more to more use cases, and the sales [run] was really realizing the benefit of the investments that we are making in certain marketing and R&D in the last two years. I think Q1 validated our strategy and we didn't see any particular challenges in any of the markets.

And in terms of those investments in sales and marketing, particularly on the partner enablement and adding new partners, I know this is important part of the distribution strategy. Could you talk to us a little bit about what you're looking to do in 2014 in terms of the pace of investment and perhaps a target to have in terms of how many new partners you want to get on board or is there any sort of metrics or milestones you could lay out for us too. What your trying to do on the distribution investments in 2014?

There's not any particular metrics that we can share, but the key is to bring a partner with this infrastructure on board and we are doing it every quarter and the second aspect is to get them more and more productive come. We are getting a lot of leads from the channel distribution these is what we keep doing by adding more partners. Also we have several hundred of channel partners and we also make sure to make more productive and make sure that more salespeople within our partners are participating in selling Varonis.

I can add that almost all of our business our to the channel partners and we expect them to stay the same trend. We are not depend on any one partner. We have several hundred like Yaki said, and addition significant proportion of the sale is being done by Varonis.

As you guys get more well known in the market as sort of the partner base builds out, any shorting of the sales cycle that you are seeing? Or it is still very much the sort of long sales cycles as you analyzing what is essentially a new platform out on there in the marketplace?

Its stays fairly the same I just not for Varonis and I think the problems is becoming more known. Just customers of us targeting using enormous amounts of data and they have more and more budgeted projects to solve these kinds of problem.

Raimo Lenschow, Barclays.

Yaki, can you talk a little bit on the upsell, cross sell opportunity. How does it work in terms of the different [buying centers that] you are touching here. I would assume some of them are going to same people, but especially thinking about DatAnywhere is the same buying center that a straightforward upsell or how does it work for you there?

For all of our products we usually send -- the same buyer that owns the budget is the CTO, the person that owns the infrastructure. But with DatAnywhere its really expand the total available market because the use case we cater to the business. This is also something that we are doing now with DatAnswers. We're seeing that we are going also to give more and more value to the business people. It is the same buyer that needs to install it and deliver the value to the business. But more business people are touching our products and what we see is we have had good volumes of DatAnywhere. The data transport engine really brings into this integration and restructuring products we just feel that it's really expands the overall use cases and because of them the customers are buying more and more products.

DatAnywhere the product has not been in the market for that long so how do you see -- what you see in terms of customers reception and how customers are using. Is that kind of a standalone [mobile] solution? Or do they have still have other guys like-- [in use as well] and you guys just use for the [links] of data that is on premise?

What we see with it is that most of the human-generated data files, our file share. And customer starting to understand that in order to make sure that employees can access the data from anywhere on any device, they need to take this enormous complexity [the folder], the permission, the massive data volumes and cloud enable them. Make sure that people that can access them from any where and any device. They are not stop using and what we see with DatAnywhere is that sometimes starting with the small portion of the organization and then they expand but we definitely see there is a lot of interest.

The mobile access is driving it, and we believe the product will do very well for us, but sometimes we are starting department by department with limited number of users. We did not see the budgets for initial purchase is a big challenge.

If you look at -- obviously you have a very healthy [run within] Q1 and we saw guidance for the full year. How do you think about investment in growth versus delivery EPS numbers? How do you think about that dynamic in terms what is a trigger for you to say -- look, I need to invest more or the [guidance is to guidance]. I'm just kind of thinking since this is the first quarter for all of us with you -- just, how do you think about that dynamic?

We have very high gross margins and we have very strong earnings power in our model. We run the Company close to breakeven and generate cash flow several years and we are a Management that knows how to manage a profitable business. Now we strive to profitability on a much greater scale. For us right now is just to capture market share and invest in the business obviously in a sensible way to make sure that the new hires that we bring our productive, its a capacity play to bring the right people, but you can do margin extrapolation fairly easily and understand the earning power that the business has in scaled and this is what we are starting to do.

Aaron Schwartz, Jefferies.

You mentioned a couple times that the strong results show here the benefit of the sales reinvestments you made over the last two years or so. Can you talk about sort of where the capacity play is from your maybe the sales reinvestment in 2013, where that productivity level is? Is there still sort of way to go in terms of seeing the contribution from some of the hires over the last 12 months? Or maybe you can just walk through how you see some recent investments playing out this year.

I think all of our investments came to fruition, in sales capacity and R&D. We see it in new customer goals seeing the expansion with our customers. We have good programs to on board the new hires in sales and marketing [seasoned], and inside sales, and all of them are turning well for us.

As we look at reinvestments in 2014, I believe that some of your plan was to maybe front end load the year a little bit and you wanted to sort of even take some of the hiring in the first half. Can you talk about how you think about current hires you are making today on the Lan versus the expand, especially with the expanding product set. Will there by any more specialization in order to drive penetration or a standardization on your broader products? Or should we expect the similar sales model that you had over the last year or so?

It will be fairly similar sales models for most of our products because there's really a logical correlation between all of them. It had the same people usually an organization the 5,000, sometimes, 10,000 employees, the same people that own the file shares, also the Internet, and e-mail systems. So it is really a standardization play there but we do also build a small team of overlays that will help us push DatAnywhere because we believe that we call it the [data] framework which is another big platform for us, and we can execute it well.

In a few years, I think we can do it in terms of the platform play similar things that we're doing with DatAdvantage to [attack] more use cases and bring more value to our customers. Most of it, if we are not going at this point to say that are reps that are running after new business and other salespeople that are going to upsell, and they're doing both also running after new customers and after the growing base.

Matt Hedberg, RBC Capital Markets.

I want to dig into data answers a little more which at first glance seems like a great new product. Can you give us a sense for the value of that product and perhaps what the competitive environment looks like for that product?

What happened to us was a bit mind-boggling, is that we have more 2,500 customers and we just saw that almost all of them don't have search on their file systems and we started to [dig in, wide]. If you look at the Internet, everybody is going to Google or Bing several times a day. We just understood that current technology is having a hard time to being very effective on flex file systems, or they cost too much, or they having a hard time to scale, or they are not secure.

We just understood that on top of our Metadata Framework, we can deliver search engine that is secure and scalable and affordable. Even though enterprise search market is an established market we believe that we are approaching it in a different way, and we are now going to experience a lot of competition.

DatAnywhere, again a newer product that is another crowded space, as well. Can you help us with -- it's been out there a little longer now which its traction this quarter in terms of up sells?

[Both after] the new customers the product did very well for us. I think it is a crowded place, but the ability -- we are among the very few companies that can come and cloud enabled the massive amount of data shares that the organization of every size has today. People are using these file shares enormous amount of data. They had Meta drives, very complex and permissions and folders structure and we just come and build -- we call it a user [mode] file system we proxy and publish it to all the people that consume the data. Without changing the infrastructure and without changing permissions and really capitalizing on the investment that they have in place. It is a crowded market, but here we also don't see a lot of competition in the way that we are approaching it.

You guys put up great growth, 39%. I'm wondering what level of conservatism is embedded in your for full year guidance? I think it calls for about 30% at the midpoint.

We did a very thorough analysis of our business and we have an experienced Management team, we have many years together and we have good track record against setting goals and delivering [revenue].

(Operator Instructions)

Scott Zeller, Needham & Company.

I wanted to ask about the typical most common use cases, Yaki. And if you saw any shift amongst those, maybe the -- how common each was, you mentioned the migration progress, for instance. Do you notice a shift at all, and if there was a shift, does that change deal sizes at all?

We didn't see a shift and we didn't see a change in deal sizes. It is important to understand the ability who can access the data an auditing is the first building block of everything you will do. If you want classified the data and if you want to do data migration, and usually our customers buying one of the licenses of DatAdvantage.

And on top of that they can buy the DCS and they can buy the data transport engine and can be an upsell or [in cost] sell. We didn't see any change in the [core] use cases what we saw is an expansion of use cases. Sometimes you want to be at the big data migration and restructuring. But first you need DatAdvantage to have visibility, to understand who can access the data, who can own the data, and on top of it you need a transport data engine to make the actual migration. Just really -- it's a very logical build up from the base product and platform to the additional products.

And I wanted to ask about the pipeline. I think you talked about your visibility a number of times. But when you look at the coverage you have -- the ratio for coverage on the pipeline. Can you just comment, on how that has been to start of the year versus the other periods?

We did just a thorough analysis of the business, and we look at the pipeline and according to that we give the guidance.

It appears we have no further questions at this time. I would like to turn the conference back over to Yaki for any additional and closing remarks.

Thank you. Before we end the call, I would like to thank all of our employees for their hard work and amazing dedication. I would like particularly like to express my gratitude to Gili and her team for all the hard work and on our successful IPO. Think you for joining us today. I look forward to speaking again with you soon.

Thank you. Again, this does conclude today's Varonis Systems, Inc. first-quarter 2014 earnings conference call. We thank you again for your participation and you may now disconnect.