Varonis Systems Stumbles in North America

Varonis Systems (VRNS 6.66%), a provider of data security and analytics, reported its second-quarter results after the market closed on July 30. Revenue growth slowed compared to the first quarter, driven by sluggish growth in North America. The company does expect an improvement in North America, but overall revenue growth is expected to slow even further in the third quarter.

Here's what investors need to know about Varonis' second-quarter report.

Varonis results: The raw numbers

Data source: Varonis. GAAP = generally accepted accounting principles.

What happened with Varonis this quarter?

• License revenue was $33.5 million, up 22.5% year over year.
• Maintenance and services revenue was $28.7 million, up 29.9% year over year.
• Revenue in North America was $38.4 million, up 12% year over year; revenue in Europe, the Middle East, and Africa was $21.5 million, up 60% year over year; and revenue in the rest of the world was $2.3 million, up 42% year over year.
• Of license and first-year maintenance revenue, 58% came from new customers, while 42% came from existing customers. That's a 2-percentage-point shift toward new customers, compared to the second quarter of 2017.
• Varonis added 227 new customers during the second quarter, down from 242 new customers in the prior-year period.
• Two or more product families were purchased by 71% of customers, up from 67% at the end of the second quarter of last year. Three or more product families were purchased by 38% of customers, up from 32% a year ago.
• At the end of the second quarter, Varonis had $158.7 million of cash, cash equivalents, and short-term investments, up from $136.6 million at the end of 2017.
• Varonis generated $20.4 million of operating cash flow in the second quarter, up from $7.4 million in the prior-year period.

Image source: Getty Images.

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

• Third-quarter revenue is expected to be between $64 million and $65 million. That range represents year-over-year growth of 20% to 22%.
• Third-quarter non-GAAP operating income is expected to be breakeven to $1 million. Non-GAAP earnings per share is expected to fall between a loss of $0.02 and a profit of $0.01.
• Full-year revenue is expected between $265 million and $268.5 million. That range represents growth of 23% to 25% from 2017.
• Full-year non-GAAP operating income is expected between $2.5 million and $4.5 million. Non-GAAP EPS is expected between zero and $0.05; previous guidance called for a range of $0.01 to $0.07.

What management had to say

During the conference call, Varonis CEO Yaki Faitelson explained the weak performance in North America:

Our growth in North America was impacted by underperformance in the West Coast region. We have moved top sales leadership into the region to help ensure we more effectively capture the demand in the region, as we are doing across the business. We feel confident that these changes will help in improvements in the second half of the year, and we remain on track to deliver our goals for 2018.

Faitelson also commented on the slowdown in new customer additions: "We have growth in new customers in 1,000-plus, in the market that we want to play in. So we feel very comfortable with the way we are penetrating the market and the customer sizes."

Faitelson sees a path to $1 billion of annual revenue, but stressed that growth is not the only concern:

We just definitely see a clear opportunity to be [a] $1 billion business in revenues. But you know, this is a different company. We invented this market. We go to market. This is something that we created and when we are investing in the business, we want to make sure that we are hiring people in a way that we can enable them, we can support them. So we are balancing everything between growth, profitability, investing back in the business, the ability to invest in the people that we hire.

Looking forward

While Varonis didn't win as many new customers in the second quarter as it did a year ago, the company is finding success winning larger customers. The third quarter is expected to be a big one for the part of the business dealing with the U.S. federal government, but CFO Guy Melamed stressed during the conference call that the company didn't have a long enough history in that area to predict exactly when and how those deals would close.

Varonis' third-quarter guidance assumes that the U.S. West Coast business will improve, so there's a chance revenue growth will fall below 20% if it doesn't. Faitelson emphasized during the conference call that investors should take a multiquarter view of the company: Growth could pick back up if Varonis can fix its issues in the back half of this year.