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Varonis Suffers Revenue Decline Due to Subscription Growth

Timothy Green, The Motley Fool

Data security and analytics provider Varonis Systems (NASDAQ: VRNS) reported its second-quarter results after the market closed on July 29. Revenue declined due to the company's aggressive shift to subscriptions, and that decrease is expected to worsen in the third quarter. The bottom line dropped deep into negative territory for the same reason, and Varonis is expecting a big loss for the full year.

Varonis results: The raw numbers

Metric

Q2 2019

Q2 2018

Year-Over-Year Change

Revenue

$59.6 million

$62.2 million

(4.1%)

Net income (loss)

($24.5 million)

($12.7 million)

N/A

Non-GAAP earnings per share

($0.30)

($0.04)

N/A

Data source: Varonis.

What happened with Varonis this quarter?

  • Varonis continued to transition from perpetual software licenses to subscriptions. Since subscription revenue is recognized over the lifetime of the subscription, this move to a software-as-a-service business model puts pressure on total revenue.
  • Perpetual license revenue was $11.5 million, down 64.3% year over year.
  • Subscription revenue was $14.8 million, up more than 1,000% year over year.
  • Maintenance and services revenue was $33.3 million, up 16.2% year over year.
  • Annualized recurring revenue, which is the annualized value of active term-based subscription license contracts and maintenance contracts, totaled $155.2 million at the end of the quarter, up 39% year over year.
  • Varonis added 162 new customers during the second quarter, down from 227 new customers in the prior-year period.
  • North America revenue rose 4% year over year to $40.0 million; Europe, Middle East, and Africa revenue declined 18% to $17.6 million; and revenue from the rest of the world was $2.1 million.
  • As of June 30, 74% of customers had purchased two or more product families, and 42% had purchased three or more product families. These percentages are up from 71% and 38%, respectively, one year prior.
A person looking a charts on a screen.

Image source: Getty Images.

What management had to say

During the earnings call, Varonis CEO Yaki Faitelson talked up the company's subscription progress: "In just our second quarter of the transition, we generated more subscription revenues than perpetual license revenue, confirming the customer demand to consume the platform under our new model."

Faitelson also pointed out an opportunity to produce more revenue from certain existing customers: "Additionally, it is important to remember that half of our revenue come from our existing customers with whom we remain underpenetrated. We are spending more time with these customers and are becoming much more strategic and efficient in our coverage."

CFO Guy Melamed quantified the headwind from the transition to subscriptions: "... we still estimate that for every incremental $1 million of subscription revenues we generate versus our guidance, we will see a $1.2 million to $1.5 million headwind to reported revenues, which we expect to equally impact operating margins."

Looking forward

Varonis provided the following guidance for the third quarter:

  • Revenue between $61.0 million and $62.5 million, down from $67.1 million in the third quarter of 2018.
  • Non-GAAP net loss per share between $0.34 and $0.36, down from net income per share of $0.05 in the third quarter of 2018.
  • Subscription revenue will be approximately 55% of total license revenue.

For the full year, Varonis expects:

  • Revenue between $255.5 million and $259.5 million, down from $270.3 million in 2018.
  • Non-GAAP net loss per share between $0.90 and $0.93, down from net income per share of $0.32 in 2018.
  • Subscription revenues will be approximately 45% of total license revenues. Up from previous guidance of 25%.

Varonis' move to subscriptions is going much faster than the company originally expected. This is putting additional pressure on its results, and that pressure won't let up for the rest of 2019. Once subscription revenue becomes a large enough portion of total license revenue, the company's top line should start growing again.

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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.