Varonis Systems Inc (VRNS) 2014 Q2 法說會逐字稿

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.

Thank you, Operator. Good afternoon. Thank you for joining us today to review Varonis's 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 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 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 as risks associated with anticipated growth in our addressable market; competitive factors including increased sales, cycle time, changes in the competitive environment, pricing changes and increased competition; the risk that we may not be able to attract or 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 expenditure transfer data governs and data security software; new product introductions and Varonis' ability to develop and deliver innovative products; risks associated with international operations; Varonis' ability to provide high-quality service and support offerings in macro-economic conditions, could cause actual results to differ materially from those contained in forward-looking statements.

These factors are addressed in our 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 documents filed with the Securities and Exchange Commission, including the final perspectives from our initial public offering and what we discussed in our reports filed with the Securities and Exchange Commission going forward.

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

Additionally, non-GAAP financial measures will be discussed in this conference call. A reconciliation for the most directly comparable GAAP financial measures 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 not that our 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 CEO, Yaki Faitelson. Yaki?

Thanks, Stacy and good afternoon, everyone.

This 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 organizations to get more out of their rapidly growing human generated data, as well as the investment we have been making to our sales teams 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 us the financial details in a moment, but I wanted to provide you with additional business highlights that illustrate the success we are having and what is driving the increased adoption of false solutions.

The explosive goals of human generated data is bringing two urgent realities that can often seem in conflict. The opportunity for increased productivity, improved collaboration and driving 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 marketplace today with solutions that enable organizations to thrive in the section of productivity and risk. By using our technology they can understand, control and enhance the connections 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 a few moments further examining the sustainable business drivers for our solutions. To begin, (inaudible) and organization become more productive. Our solutions enable end-users to work with data efficiently and securely without compromising on enterprise control. End-users can find and reliably access data quickly from anywhere in any device. Collaborate with colleagues and business partners more easily, and gain access to data faster without involvement of IT staff.

Varonis also with management to gain critical insight about the organization, the information and the people. Data is better understood and stored in the right places. This means that business organization and infrastructure operates happen more quickly and the infrastructure lasts longer.

We also help our customers save money by becoming more operationally efficient and spending less on storage. Common data protection and management tasks that organizations are already doing take hours, if not days or weeks. Given the volume of data generated in the enterprise, manual methods are time-consuming and often ineffective.

With terabytes upon terabytes of data, a significant percentage is likely stale and unused. And much is scattered throughout disorganized data structures that have gone very quickly. Varonis helps organizations identify and systematically migrate, archive or delete their data. In many cases saving hundreds of thousands of dollars in storage costs per year and making infrastructure capacity planing more accurate.

With research and anywhere anytime access, users can drive more value from the intellectual capital stored in those files. Varonis measurably reduces overhead and improves the effectiveness of IT departments by automating day-to-day management tasks that are struggling to carry out. Our solutions make it possible for organizations to complete tasks 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 the power to simulate changes and apply them across the IT environment from a single interface. We also ensure that only the right people have access to the right data. All use is monitored and abuse is slight.

Data specification becomes actionable and just understanding what is sensitive isn't enough to protect it. Enterprises need to understand how critical data is being used, including who has access, who is using it and who it belongs to. They need context around the data in order to really begin to protect it. Varonis automation ensures employees have access to only what they need, mistakenly exposed data is identified and logged down safely, including sensitive and regulated content. Enterprises must be able to ensure their customers and partners the data is stored safely in the right places and that is accessed only by the right people.

Importantly, compliance is much easier to obtain. Regulation mandates that enterprises identify regulated content, restrict assess, monitor use and enforce policies accordingly. We believe that Varonis addresses virtually every significant regulation if there's a data component.

Supported by our underlying Metadata Framework that is the foundation of our product suite. Varonis system data organization grid fully supports multiple use cases and solve many business problems. It you have wonderful products you're a candidate for (inaudible). This is very powerful and is driving our customer expansion and continue to fuel our product innovation, which again this quarter, led to some new product introduction and enhancements.

In addition to announcing the beta release in Q2 of DatAnswers, our enterprise search product, we announced general availability of DatAnywhere version 1.8, as well as the availability of DatAnywhere APIs. In June, we announced that DatAnywhere is now free to download and use for up to five users. This has generated a lot of excitement as many organizations with file shares can now turn them into private clouds with less than an hour.

During the second quarter, we added 206 new customers. A 38% increase compared to Q2 last year. 38% of the license and first-year maintenance revenues from the period came from existing customers and we are seeing the dividends from investments across our line expense strategy. We have accelerated hiring to create additional server 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 help illustrate our value and differentiation. KME, the world's largest manufacturer of semi-finished copper and copper iron products became a new customer with the purchase of five licenses. They managed both change, SharePoint, direct of services and data lift.

They have 12 production sites in Europe and one in Asia and needed to verify global access control in order to make some changes across their entire infrastructure. As with many of our customers, they choose Varonis after learning about our concept evaluation that help them visualize the infrastructure and spot potential issues that they previously weren't able to see.

The research arm of Cincinnati Children's Health Care Medical Center, the healthcare leader in Cincinnati, has been a Varonis customer for several years. The clinical arm wanted to increase visibility into its important data, identify owners to actively lockdown access controls and shore-up their auditing capabilities.

So they expanded their deployment by purchasing additional licenses for both DatAvantage and DatPrivilege. The years of experience with Varonis gave them confidence that they could further automate manual data management tasks, improve data protection capabilities, and continue to stay in front of data compliance activities.

Finally, Trafigura, a leading international commodities trading and logistics company, expanded their Varonis investment with additional licenses for DatAdvantage for Windows and purchased more products, including DatAdvantage for exchange, the ideal specifications framework and data transport engine.

The purchase of the data transport engine is a good example of innovation and use expansion and we are uniquely positioned in this area. One of the primary use cases in their work was to address specific needs around their data retention policies.

Overall, this was a very strong quarter for Varonis. We are pleased with our growth projectories for the first half of the year and feel our momentum continuing throughout 2014. The business drivers for our solutions are becoming increasingly clear in the marketplace and we are continuing to invest to drive awareness and adoption of this on top market opportunity.

Gili.

Thank you, Yaki.

Our second-quarter results came in above expectations and we continue to see strong momentum and demand in the marketplace. Total revenue 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 rates of over 90%.

We delivered license revenues of $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. US 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 customers 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 the investments to broaden the relationship with existing customers, as well as increase new customers addition.

Before moving on to the profit and loss items, I would like to point out that today we will be discussing non-GAAP results going forward unless otherwise stated, which for the second quarter 2014 excludes a total of $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 with presenting a gross margin of 90.1%, compared to a 91.6% gross margin in the second quarter of 2013. This was in line with our expectations as we invest in infrastructure and personnel to support our increased revenue and high renewal rates.

Total marketing expenses increased to $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 outperformance, as well as increased health for headcount and go-to market expenses designed to drive future goals.

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 products and launch new products to expand our value, stand 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 our business.

Operating expenses totaled $25.8 million in the second quarter, compared to $17.2 million 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 gains and interest income, compared to a loss of $88,000 due primarily to foreign-exchange losses in the same period last year. As you know, foreign-exchange gain and losses can fluctuate. Our guidance does not consider any additional potential impact to financial and other increment expense associated with foreign-exchange gains or losses as we do not estimate movements in foreign currency rates.

Our net loss was $3.7 million for the second quarter of 2014, or a loss of $0.15 per basic common share, compared to a net loss of $1 million or a 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 to end of the quarter with approximately $120.2 million in cash, cash equivalents and short-end deposits. During the first six months of 2014 we used $580,000 in cash for operations.

We ended the quarter with [722] a 49% increase from 486 at the end of the second quarter of 2013. This reflects the increased investments in our business to support additional innovation, new products and expended 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 $0.20. This assumes a tax provision of $200,000 to $300,000 and 24.5 million basic common shares outstanding.

Our third-quarter and non-GAAP operating loss guidance 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 year 2014, we are raising our revenue guidance and now expect total 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 growth to be in the range of $14.3 to $13.3 million and non-GAAP loss per basic common share of $0.63 to $0.57. This assumes a tax provision of $700,000 to $1 million and 24.4 million basic common shares outstanding.

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

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

Thank you.

(Operator Instructions)

Keith Weiss, Morgan Stanley

Excellent, thank you guys and a very nice quarter.

I definitely saw some nice returns in terms of net new customer adds and very nice product revenue growth in the quarter. But also I see you guys continuing on the path of investment showing confidence in the business on a going-forward basis. So two questions for you.

One, on looking backwards, the last quarter we were talking about some new partnership agreements, new distribution partners. Can you give us some color into how those are ramping up?

And then, the second part of the question on a going-forward basis, these new investments, can you give us a little bit more color in terms of where they're targeting? Where specifically you see under investments and how should we be trying to keep track of the yields on those investments on a going-forward basis?

Hi Keith.

In terms of partnerships we invested more in the China and bringing more China managers and we definitely see that we get more leads from a China partner than the -- the perfect China partners for our sell they evolve but their selling infrastructure.

We also see very good returns from our investment in sales capacity and engineering and this is where you can expect us to keep investing. When you look at our overall, look at our business it is a very strong earnings power and parts of our business are externally profitable like high renewal rates, the up-sale, the call sales and sales people that are here for more than a year or year and a half.

And this is what you can expect from us to invest in the distribution and it's a capacity play. We have two units of economics one is a sales team in the other one is customers.

We're going to invest to capture the opportunity by having more feet on the street, making sure that we have the distribution that it will be easier to capture the market opportunity and we'll have more leverage in the sales model and bring more customers. And you can see they are buying more and more and they are renewing. This is what you can expect from us.

And the other aspect is to keep and innovate. Our mission is to take human generated data and to be able to solve all of the problems around it from IT to the business. As you can see we cater to more and more use case sells and so far this strategy is working very well for us.

Got it. Excellent.

Maybe I can sneak in one follow-up. Any update you could give us on some of the newer product initiatives? How those are being received by customers and any in particular that you're seeing better or worse traction in?

We are pleased. DatAnywhere and the Data Transport engine are still fairly new but we see definitely that the Data Transport engine brings us to many data centers and infrastructure integration. And bring us to many other fees and dedicated project for harbor repo-shares and leading Internet and things of this nature.

In terms of DatAnywhere it's also in terms of the relatively smaller than our other products but the volume is great. It's also the drag is working very well. Sometimes we are leaving with DatAnywhere and it drags our other products so we are very pleased with them.

In terms of DatAnswers, it's still in the beta phase but we are pleased with how it is playing out. I think that everything that we anticipated in terms of scalability and security and speed is working very well. It is stable. There is a warm reception from customers but as I said in the last call, it usually takes us a year to get material revenue contribution from a new product.

So far, the new products that we introduced are working very well and also the enhancement to it that we did, like DatAlert and others to our core products are also working well in the case the life of the overall platform.

Excellent. Think you very much, guys.

Raimo Lenschow, Barclays.

Thanks for taking my question and congratulations on a great quarter.

Can I start with the first question, I know your sales operation is in the US but obviously a lot of R&D is back in Israel. Do we see any impact that you guys have from the trouble that is going on there at the moment or is there anything we should be aware of?

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

Okay. And the next question is obviously an IPO gets you more visibility in the market.

Have you seen any change on the competitive front in terms of the newer smaller entrance making more noise or established vendors trying to say that can compete with you? Has there been any change since the IPO?

No. We say that we see less. Usually we see out of 20 valuations that we are doing maybe one or two is a competitive situation.

And almost in all of them when they need to go to the deep water, a massive amount of production data, they vanish. No, the only thing we can say from the IPO is that it was a good marketing event for us and we are capitalizing on it. It helps to drive awareness.

It's just very hard to do it. The volumes of data are going all the time and it's unique to build this bottoms up. Metadata framework in order to compete with us, it's very hard to do.

We are doing it from almost a decade. Every customer we have we become better and better and on top of it we have such an enormous sort of production with many features and many products. It's just at this point competition is just not a risk.

Okay. Perfect.

One last question if I may? Could you talk a little bit about the ASP? How that's trending? Is there an uplift from launch ideas or is there anything you can share in terms of metrics? Thank you.

We are not discussing ASP on a quarterly basis. I can say that the ASP this quarter was in the range of our expectations.

We will provide this metric on an annual basis. I think we've presented that the overall trend line because it will eliminate seasonality and fluctuation between the quarters. We did have one large deal this quarter [greater than $1 million] (corrected by company after the call) but we didn't have any customer's concentration. The volume with new customers and with up-sells.

Okay, perfect. Thank you.

Matt Hedberg, RBC Capital Markets

Thanks for taking my questions, guys.

I had a question on DatAnswers. I know it's still early and only in beta, but I'm curious, who do you see as the primary competitor for that product and how should we think about pricing?

It's interesting. When you look at our customer base most of them -- almost all of them with file shares, they just don't have any search product because it's such an expensive proposition. So it's still early stages.

What I am saying can change but everybody trying to do search. It's something basic. You're going to -- any operating system that you're on and you're trying to do search. But for most organizations out there that we see they don't have any search on the file shares.

If it will stay like that what we see is the market that conceptually is trying for search because of the enormous data volumes and this is really the only way to unlock and realize value and the potential of this data set. But at the same time the common solutions are just extremely expensive.

What we think -- we're not going to disclose pricing yet but it's is going to be a percentage. I don't know if it's 60% of data advantage or 70% of data advantage and we are going to do it per user basis. So we also see from initial feedback that our pricing versus the ROI works very well.

That's great. Thank you, Yaki.

In terms of new products, obviously leveraging your Metadata Framework. How should we think about new product roll-out in the future? It seems to me that products and storage are back up would be a natural. Are those areas interesting to you guys?

There are many things we could do with our Metadata Framework. What I can say that the data transport engine is for migration and things of this nature. We can definitely do product enhancement for this specific product to address more backup and replication.

I don't want to talk specifically about any feature or direction but I will say again, is that on top of this Metadata Framework we have so much intelligence. And we can capitalize on the data structure that we build to address many use cases and build many interesting products that a lot of value for any enterprise in the world, but files are important too.

That's great. Thanks, Yaki. Congratulations on the quarter.

Thank you.

Michael Kim, Imperial Capital

Hi, guys.

I know you've certainly been adding a lot of new channel partners in recent quarters. I was hoping you could provide any metrics around productivity and channel enablement and maybe speak to the quantity or quality of leads in sales conversions? Thanks.

We're not providing these kind of metrics but what I can say is that it's a combination of the quantity and quality. We're bringing more China partners and they bring more leads. The China partners that we already have, we make sure that more reps are participating in the upwards of selling Varonis and we are doing more and more marketing events with them. We definitely see China leverage.

Great. With this China evolution would you expect the land expand strategy lean more towards the landing of new customers? Or do you see a pretty consistent mix between existing in terms of license and per share maintenance revenue?

It depends. I think in the foreseeable future -- the market is everybody. But obviously it's much easier to do up-sales because it is [conductivation play].

If you have one of our products you're a candidate for all of them. The data that you have in your file share, you have in your Internet, the same content you have in email, you need to do data migration, you need to do backup and access the data from anywhere on any device.

We can capture the opportunity in bringing more customers. It's very important for us. I think as we will grow you will see, on a percentage basis, the business goes to new customers. But new customer acquisition is something that is very important for us and also sales teams are compensated -- part of their compensation is new customer acquisition.

Got it.

And more broadly, can you talk about budgets and if you're seeing your category becoming more formalized or is this still a significant discretionary budget? Any commentary on how that's trending.

Definitely the market is coming to us and with all of the products that we have with DatAnywhere and DatAnswers we can talk directly to the business users and add a lot of volume. The question of IT stop stay flat and data growing is such enormous growth of data -- explosion of data, makes the problem just greater every day. We definitely see the organization and enterprises are allocating more budget solve this kind of problems.

The other thing that we see and read everyday in the business publications is that the world becomes 100% digital. It's like you are not going to put your money in a bank that can protect it and can give you a ledger and don't have 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 blocks. And what I mean by that is, where is my data, who can access it, who is accessing it? And this gives really the start foundation to enable business. This is another thing that we see.

The market is evolving and the problem is becoming just a bigger problem for IT in the business.

Okay. Great. Thank you very much.

(Operator Instructions)

Scott Zeller, Needham and Company

Hi, good afternoon.

Could you talk to us about the urgency of budget and spending around the various use cases that you talk 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 in these different use cases?

It varies. All the products that we have we can bid on many projects and many use cases. If you have a data center, refresh or a storage migration so definitely this will be the use case that will drive the purchase.

If you have HIPAA compliance issue, so compliance will drive it. If you have a lot of data that you can't find it will be data answers, it will be search.

I can say that in terms of functionality, if you see the common ground between all the use cases is the 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 all the challenges in each one of these cases.

But now with all of the products I can tell you that I see dominant capabilities but each one of the use case can generate an urgency and can justify a large Varonis purchase.

Thank you.

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

Before we end the call, I would like to thank all Varonis 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.

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