Data security and analytics provider Varonis Systems (NASDAQ:VRNS) reported its third-quarter results after the market closed Oct. 29. A recovery in North America, particularly in the West Coast region, helped offset slower growth in other regions. The company expects revenue growth to slow down overall in the fourth quarter, reflecting the company's efforts to win larger customers.

Varonis results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$67.1 million

$53.4 million

25.7%

Net income

($7.3 million)

($3.3 million)

N/A

Non-GAAP earnings per share

$0.05

$0.06

(16.7%)

Data source: Varonis.

What happened with Varonis in Q3?

  • License revenue was $35.8 million, up 23% year over year, and up 6.9% from the second quarter.
  • Maintenance and services revenue was $31.2 million, up 28% year over year, and up 8.7% from the second quarter.
  • Revenue in North America was $44.9 million, up 27% year over year; revenue in Europe, the Middle East, and Africa was $19.8 million, up 20% year over year; and revenue in the rest of the world was $2.4 million, up 48% year over year.
  • New customers were responsible for 47% of license and first-year maintenance revenue, with 53% coming from existing customers. This revenue shifted 4 percentage points toward existing customers from the prior-year period.
  • Varonis added 188 new customers during the third quarter, down from 208 additions in the prior-year period, and down from 227 additions in the second quarter.
  • 72% of customers had purchased two or more product families as of the end of the quarter, and 39% had purchased three or more product families. Those percentages are up from 68% and 34%, respectively, as of the end of the prior-year period.
  • Varonis had $158.1 million in cash, cash equivalents, and short-term investments at the end of the third quarter, down slightly since the end of the second quarter.
  • Varonis generated $16.3 million of operating cash flow through the first nine months of the year, up from $10.8 million through the first nine months of 2017.

Varonis provided the following guidance:

  • Fourth-quarter revenue is expected between $86.5 million and $88 million, up 18% to 21% year over year.
  • Fourth-quarter non-GAAP EPS is expected between $0.32 and $0.34.
  • Full-year revenue is expected between $269.5 million and $271.0 million, up 25% to 26% from 2017. This represents an increase from the company's previous guidance range of $265 million to $268.5 million.
  • Full-year non-GAAP EPS is expected between $0.11 and $0.13, compared with a previous guidance range of $0.00 and $0.05.
Person looking at computer screen.

Image source: Getty Images.

What management had to say

During the earnings call, CEO Yaki Faitelson commented on the West Coast region of North America, which performed poorly during the second quarter:

To drill down a bit more on North America, we are pleased with the region performance and the contribution from the West Coast. As we discussed with you last quarter, we felt confident in our ability to drive growth in North America where the demand for our products is very strong. This is exactly what we saw in Q3.

Faitelson also reiterated the company's strategy: "As you know, we made strategic decisions several years ago to focus on customers with more than 1,000 employees. Larger customers yield larger initial deals and strong upsell opportunities and also greater customer lifetime value."

Looking forward

Varonis continues to see its customer additions trend downward, partly because it's going after larger customers. The company's revenue shifted toward existing customers during the quarter, and CFO Guy Melamed said he expects that trend to continue.

Varonis' GAAP bottom line sank deeper into negative territory in the third quarter. Embedded in the company's guidance is "our desire to continue to grow revenues," according to Melamed. Sustainable GAAP profits may be a long way off as the company spends on growth.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Varonis Systems. The Motley Fool has a disclosure policy.