Varonis Bets on Subscriptions to Drive Long-Term Growth

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Data security and analytics provider Varonis Systems (NASDAQ: VRNS) reported its fourth-quarter results after the market closed on Feb. 11. While revenue and adjusted earnings grew at double-digit rates, Varonis' guidance calls for a significant slowdown thanks to the company's plan to adopt a subscription business model.

Varonis results: The raw numbers

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What happened with Varonis this quarter?

  • License revenue was $53.3 million, up 16% year over year. Subscription revenue accounted for about 6% of license revenue.
  • Maintenance and services revenue was $34.2 million, up 27% year over year.
  • Revenue in North America rose 18% year over year to $52.4 million; revenue in Europe, the Middle East, and Africa jumped 22% year over year to $32.2 million; and revenue in the rest of the world went up 45% year over year to $2.9 million.
  • New customers accounted for 46% of license and first-year maintenance revenue, with 54% coming from existing customers. These percentages shifted by 10 percentage points toward existing customers compared to the fourth quarter of 2017.
  • Varonis added 275 new customers during the quarter. It added 327 new customers in the prior-year period.
  • 73% of customers had purchased two or more product families, and 40% had purchased three or more product families, as of the end of 2018. Those percentages are up from 69% and 36%, respectively, at the end of 2017.
  • Varonis had $158.9 million in cash, cash equivalents, marketable securities, and short-term deposits at the end of the quarter, up from $136.6 million at the end of the prior-year period.
  • The company generated $23.5 million in operating cash flow during 2018, up from $16.4 million in 2017.

What management had to say

Varonis has begun transitioning its business model from perpetual licenses to subscriptions. CEO Yaki Faitelson explained the rationale during the earnings call: "We also recognize that we need to make it easier for our customers to adopt more of the platform earlier in the journey with us and make it smoother for our sales teams and partners to sell the first platform which will ultimately drive accelerated increases in total customer lifetime value. Based on this, I'm very excited to announce that we have started transitioning our licenses on perpetual to subscription model."

CFO Guy Melamed talked about the upsides of the transition: "With subscription, we can drive greater business predictability and visibility with an increase in recurring revenue, as well as the ability to sell more into our total addressable market and increase customer lifetime value. We don't expect the transition to be perfectly linear, but we have learned a great deal from the pilot we ran."

Looking forward

Varonis' guidance for both the first quarter of 2019 and for the full year reflect this shift to subscriptions. "... the more success we have in driving subscription adoption, the greater the effect on our near-term reported results, effectively masking the significant underlying long-term value being created," Melamed explained during the earnings call. Revenue is recognized over time with subscriptions, which can hurt revenue growth in the short term.

The company provided the following guidance:

  • First-quarter revenue between $58.5 million and $60.0 million, up 9% to 12% year over year.
  • First-quarter non-GAAP net loss per share between $0.36 and $0.38.
  • Full-year revenue between $297 million and $305 million, up 10% to 13% year over year.
  • Full-year non-GAAP net income per share between $0.04 and $0.16.

Moving from perpetual licenses to subscriptions will put pressure on Varonis' results in 2019. The company expects to generate about 10% of its license revenue from subscriptions in 2019, and it will increase its sales and marketing expenses to support the transition.

Varonis is aiming to eventually generate $1 billion in annual sales. The company sees subscriptions as the key to making that happen.

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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.