Varonis Systems Expects Growth to Slow Down This Year

Data security and analytics provider Varonis Systems (VRNS 1.59%) reported its first-quarter results after the market closed on April 30. The company grew revenue at a brisk pace, but its guidance called for a substantial slowdown for the rest of 2018. Here's what investors need to know about Varonis' first-quarter report.

Varonis results: The raw numbers

Data source: Varonis. EPS = earnings per share.

Image source: Varonis.

What happened with Varonis this quarter?

• License revenue was $25.1 million, up 38.6% year over year.
• Maintenance and services revenue was $28.5 million, up 32.3% year over year.
• Revenue in North America surged 24% year over year to $31.6 million, and revenue in Europe, the Middle East, and Africa (EMEA) jumped 60% to $20.3 million.
• New customers were responsible for 51% of license and first-year maintenance revenue, with the rest coming from existing customers.
• Varonis added 183 new customers during the first quarter, similar to the 184 customers added during the prior-year period.
• Varonis is having success cross-selling its products, with 70% of customers having purchased two or more product families, and with 37% of customers having purchased three or more product families.
• At the end of the first quarter, Varonis had $153.7 million in cash, cash equivalents, and short-term investments. That's up from $136.6 million at the end of 2017.
• Cash flow from operations totaled $17.4 million during the first quarter, up from $8.3 million in the prior-year period.

Varonis provided the following guidance for the second quarter and the full year:

• Second-quarter revenue is expected to come in between $61.5 million and $62.5 million, up 24% to 26% year over year.
• Second-quarter non-GAAP EPS is expected to be between negative $0.07 and negative $0.04.
• Full-year revenue is expected to be between $264 million and $268.5 million, up 23% to 25% from 2017.
• Full-year non-GAAP EPS is expected between $0.01 and $0.07. That's down from $0.24 in 2017.

What management had to say

During the earnings call, Varonis CEO Yaki Faitelson discussed the company's strategy in the EMEA region: "So we make sure that people that we are bringing onboard, they will have all the chances and all the support to be very successful, and a big part of this strategy is to add self-capacity, we're just going to -- we're just doing it in a measured, responsible way."

CFO Guy Melamed explained the seasonality of the business in response to an analyst question about cash flow:

So if you remember, the way our business works Q4 is the largest revenue from a dollar perspective and which kind of generates Q1 to be the largest from a collection perspective, and if you look at the cash flow from operations last year, you will see very similar trends. We're very happy with the cash flow from operations and the number we generated this quarter.

Looking forward

Varonis expects its revenue growth to slow down in the second quarter to a rate that would be the slowest since the third quarter of 2015. Since going public in 2014, Varonis has reported only two quarters with year-over-year revenue growth rates below 30%. The second quarter will bring that number up to three, assuming the company hits its guidance.

Despite this slowdown, the long-term potential for Varonis is vast, given the size of the cybersecurity market. The company will generate just over a quarter-billion dollars of revenue this year, making it a small fish in a very big pond. That fact alone doesn't guarantee success, but it does give the company a long growth runway that extends many years into the future.