Document


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
 
FORM 10-Q
____________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File Number: 001-36324
____________________
VARONIS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
____________________
 
Delaware
57-1222280
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1250 Broadway, 29th Floor
New York, NY
10001
(Address of principal executive offices)
(Zip Code)
 
(877) 292-8767
(Registrant’s telephone number, including area code)
____________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No






Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
 
As of October 26, 2018, there were 29,464,713 shares of Common Stock, par value $0.001 per share, outstanding.

 
 
 
 
 

 





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30,
2018
 
December 31, 2017
 
(unaudited)
 
(as adjusted, see note 1)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
67,868

 
$
56,689

Short-term investments
90,214

 
79,868

Trade receivables (net of allowance for doubtful accounts of $459 and $433 at September 30, 2018 and December 31, 2017, respectively)
52,938

 
75,596

Prepaid expenses and other current assets
14,665

 
14,346

Total current assets
225,685

 
226,499

 
 
 
 
Long-term assets:
 

 
 

Other assets
7,601

 
7,243

Property and equipment, net
12,593

 
11,896

Total long-term assets
20,194

 
19,139

Total assets
$
245,879

 
$
245,638

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Trade payables
$
3,145

 
$
635

Accrued expenses and other short term liabilities
46,104

 
42,453

Deferred revenues
72,544

 
73,493

Total current liabilities
121,793

 
116,581

 
 
 
 
Long-term liabilities:
 

 
 

Deferred revenues
6,374

 
6,608

Other liabilities
7,651

 
7,807

Total long-term liabilities
14,025

 
14,415

 
 
 
 
Stockholders’ equity:
 

 
 

Share capital
 

 
 

Common stock of $0.001 par value - Authorized: 200,000,000 shares at September 30, 2018 and December 31, 2017; Issued and outstanding: 29,424,275 shares at September 30, 2018 and 28,146,162 shares at December 31, 2017
29

 
28

Accumulated other comprehensive income (loss)
(1,742
)
 
136

Additional paid-in capital
256,210

 
223,868

Accumulated deficit
(144,436
)
 
(109,390
)
Total stockholders’ equity
110,061

 
114,642

Total liabilities and stockholders’ equity
$
245,879

 
$
245,638

 The accompanying notes are an integral part of these consolidated financial statements.

1



UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 

 
(as adjusted, see note 1)
 
 

 
(as adjusted, see note 1)
Revenues:
 

 
 

 
 

 
 

Licenses
$
35,804

 
$
29,000

 
$
94,338

 
$
74,402

Maintenance and services
31,248

 
24,365

 
88,432

 
67,987

Total revenues
67,052

 
53,365

 
182,770

 
142,389

 
 
 
 
 
 
 
 
Cost of revenues
7,052

 
5,423

 
19,934

 
14,997

 
 
 
 
 
 
 
 
Gross profit
60,000

 
47,942

 
162,836

 
127,392

 
 
 
 
 
 
 
 
Operating costs and expenses:
 

 
 

 
 
 
 
Research and development
17,267

 
11,903

 
50,526

 
33,810

Sales and marketing
40,792

 
32,458

 
122,113

 
95,952

General and administrative
8,774

 
6,708

 
23,832

 
18,796

Total operating expenses
66,833

 
51,069

 
196,471

 
148,558

 
 
 
 
 
 
 
 
Operating loss
(6,833
)
 
(3,127
)
 
(33,635
)
 
(21,166
)
Financial income, net
99

 
622

 
266

 
2,041

 
 
 
 
 
 
 
 
Loss before income taxes
(6,734
)
 
(2,505
)
 
(33,369
)
 
(19,125
)
Income taxes
(583
)
 
(759
)
 
(1,677
)
 
(1,539
)
 
 
 
 
 
 
 
 
Net loss
$
(7,317
)
 
$
(3,264
)
 
$
(35,046
)
 
$
(20,664
)
 
 
 
 
 
 
 
 
Net loss per share of common stock, basic and diluted
$
(0.25
)
 
$
(0.12
)
 
$
(1.21
)
 
$
(0.76
)
 
 
 
 
 
 
 
 
Weighted average number of shares used in computing net loss per share of common stock, basic and diluted
29,281,701

 
27,595,461

 
28,859,156

 
27,292,216

 
The accompanying notes are an integral part of these consolidated financial statements.

2



UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(as adjusted,
see note 1)
 
 
 
(as adjusted,
see note 1)
Net loss
$
(7,317
)
 
$
(3,264
)
 
$
(35,046
)
 
$
(20,664
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized income (loss) on short-term investments, net of tax
6

 
9

 
33

 
(3
)
Gains on short-term investments reclassified into earnings, net of tax
(4
)
 
(2
)
 
(20
)
 

 
2

 
7

 
13

 
(3
)
 
 
 
 
 
 
 
 
Unrealized income (loss) on derivative instruments, net of tax
(100
)
 
(352
)
 
(3,985
)
 
3,183

Losses (gains) on derivative instruments reclassified into earnings, net of tax
1,194

 
(774
)
 
2,094

 
(1,692
)
 
1,094

 
(1,126
)
 
(1,891
)
 
1,491

Total other comprehensive income (loss)
1,096

 
(1,119
)
 
(1,878
)
 
1,488

 
 
 
 
 
 
 
 
Comprehensive loss
$
(6,221
)
 
$
(4,383
)
 
$
(36,924
)
 
$
(19,176
)

The accompanying notes are an integral part of these consolidated financial statements.

3



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
September 30,
 
2018
 
2017
 
 

 
(as adjusted, see note 1)
Cash flows from operating activities:
 

 
 

Net loss
$
(35,046
)
 
$
(20,664
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
2,480

 
1,970

Stock-based compensation
24,174

 
14,445

Amortization of deferred commissions
9,718

 
9,292

Capital gain from disposal of fixed assets
(27
)
 
(14
)
 
 
 
 
Changes in assets and liabilities:
 

 
 

Trade receivables
22,658

 
9,181

Prepaid expenses and other current assets
(927
)
 
(838
)
Deferred commissions
(9,864
)
 
(9,511
)
Other long term assets
5

 

Trade payables
2,510

 
78

Accrued expenses and other short term liabilities
1,922

 
4,167

Deferred revenues
(1,183
)
 
3,161

Other long term liabilities
(155
)
 
(421
)
 
 
 
 
Net cash provided by operating activities
16,265

 
10,846

 
 
 
 
Cash flows from investing activities:
 

 
 

Increase in short-term investments
(10,333
)
 
(9,473
)
Increase in long-term deposits
(319
)
 
(209
)
Proceeds from sale of property and equipment
27

 
14

Purchase of property and equipment
(3,177
)
 
(3,572
)
 
 
 
 
Net cash used in investing activities
(13,802
)
 
(13,240
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from employee stock plans, net
8,169

 
7,600

Net cash provided by financing activities
8,169

 
7,600

Increase in cash, cash equivalents and restricted cash
10,632

 
5,206

Cash, cash equivalents and restricted cash at beginning of period
57,236

 
48,803

Cash, cash equivalents and restricted cash at end of period
$
67,868

 
$
54,009

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for income taxes
$
561

 
$
278

 
The accompanying notes are an integral part of these consolidated financial statements.


4



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:-     GENERAL
 
a. Varonis Systems, Inc. (“VSI” and together with its subsidiaries, collectively, the “Company”) was incorporated under the laws of the State of Delaware on November 3, 2004 and commenced operations on January 1, 2005.
 
VSI has nine wholly-owned subsidiaries: Varonis Systems Ltd. (“VSL”) incorporated under the laws of Israel on November 24, 2004; Varonis (UK) Limited (“VSUK”) incorporated under the laws of England on March 14, 2007; Varonis Systems (Deutschland) GmbH (“VSG”) incorporated under the laws of Germany on July 6, 2011; Varonis France SAS (“VSF”) incorporated under the laws of France on February 22, 2012; Varonis Systems Corp. (“VSC”) incorporated under the laws of British Columbia, Canada on February 19, 2013; Varonis Systems (Ireland) Limited incorporated under the laws of Ireland on November 11, 2016; Varonis Systems (Australia) Pty Ltd (“VSA”) incorporated under the laws of Victoria, Australia on February 28, 2017; Varonis Systems (Netherlands) B.V. ("VNL") incorporated under the laws of the Netherlands on March 13, 2018; and Varonis U.S. Public Sector LLC ("VPS") incorporated under the laws of the State of Delaware on May 14, 2018.
 
The Company’s software products and services allow enterprises to manage, analyze and secure enterprise data. Varonis focuses on protecting enterprise data: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and other intellectual property.  Through its products DatAdvantage (including the Automation Engine), DatAlert (including Varonis Edge), Data Classification Engine (including GDPR Patterns and Data Classification Labels), DataPrivilege, Data Transport Engine and DatAnswers, the software platform enables enterprises to protect sensitive data from insider threats and cyberattacks and realize the value of their enterprise data in ways that are easy to implement and not resource-intensive.
 
VSI and VPS market and sell products and services mainly in the United States. VSUK, VSG, VSF, VSC, VSA and VNL resell the Company’s products and services mainly in the UK, Germany, France, Canada, Australia and the Netherlands and Belgium, respectively. The Company primarily sells its products and services to a global network of distributors and Value Added Resellers (VARs), which sell the products to end user customers.
 
b.
Basis of Presentation:
 
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
 
In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its consolidated financial position, results of operations and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the 2017 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2017 filed with the SEC on February 13, 2018 (the “2017 Form 10-K”). There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the fiscal year ended December 31, 2017 included in the 2017 Form 10-K, except as follows:
 

5



Effective as of January 1, 2018, the Company adopted Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“Topic 606”) on a full retrospective basis which requires the Company to restate its historical financial information for fiscal year 2017 and to be consistent with the new standard in 2018. The Company implemented internal controls and key system functionality to enable the preparation of financial information upon adoption. Topic 606 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The most significant impacts of the standard to the Company relate to the timing of revenue recognition for arrangements involving term licenses and sales commissions. Under Topic 606, the Company is required to recognize term license revenues upon the transfer of the license and the associated maintenance revenues over the contract period, as opposed to the Company’s prior practice of recognizing both the term license and maintenance revenues ratably over the contract period. In addition, the Company is required to capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, over the remaining contractual term or over an expected period of benefit, which the Company has determined to be approximately four years. Previously, the Company did not capitalize sales commission costs but rather recognized these costs when they were incurred.
 
Adoption of the standard results in a reduction of revenues of $1,974 for the year ended December 31, 2017 primarily due to the net change in term license revenue recognition. As of December 31, 2017, the adoption of the standard results in an increase in deferred commission of $13,486, a decrease in short-term deferred revenues of $398, a decrease in long-term deferred revenues of $426 and an increase of $1,246 in deferred tax liabilities. This is the result of the capitalization of sales commission costs and the upfront recognition of license revenues from term licenses. The cumulative impact to the Company’s accumulated deficit as of December 31, 2017 is a reduction of $13,064.

Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, financing or investing activities on the Company’s consolidated statements of cash flows.
 
The Company adjusted its consolidated financial statements from amounts previously reported due to the adoption of Topic 606. Select consolidated statement of operations, consolidated balance sheet and consolidated statement of cash flows, which reflect the adoption of the new standard are as follows:
 
 
Three Months Ended
September 30, 2017
 
As Reported
 
Adjustments
 
As Adjusted
Revenues:
 
 
 
 
 
License revenues
$
29,409

 
$
(409
)
 
$
29,000

Maintenance and service revenues
24,192

 
173

 
24,365

Total revenues
53,601

 
(236
)
 
53,365

Cost of revenues
5,436

 
(13
)
 
5,423

Gross profit
48,165

 
(223
)
 
47,942

Operating costs and expenses:
 
 
 
 
 
Research and development
11,903

 

 
11,903

Sales and marketing
32,802

 
(344
)
 
32,458

General and administrative
6,711

 
(3
)
 
6,708

Total operating expenses
51,416

 
(347
)
 
51,069

Operating loss
(3,251
)
 
124

 
(3,127
)
Financial income, net
622

 

 
622

Loss before income taxes
(2,629
)
 
124

 
(2,505
)
Income taxes
(685
)
 
(74
)
 
(759
)
Net loss
$
(3,314
)
 
$
50

 
$
(3,264
)


6



 
Nine Months Ended
September 30, 2017
 
As Reported
 
Adjustments
 
As Adjusted
Revenues:
 
 
 
 
 
License revenues
$
76,984

 
$
(2,582
)
 
$
74,402

Maintenance and service revenues
67,171

 
816

 
67,987

Total revenues
144,155

 
(1,766
)
 
142,389

Cost of revenues
14,986

 
11

 
14,997

Gross profit
129,169

 
(1,777
)
 
127,392

Operating costs and expenses:
 
 
 
 
 
Research and development
33,810

 

 
33,810

Sales and marketing
96,173

 
(221
)
 
95,952

General and administrative
18,806

 
(10
)
 
18,796

Total operating expenses
148,789

 
(231
)
 
148,558

Operating loss
(19,620
)
 
(1,546
)
 
(21,166
)
Financial income, net
2,041

 

 
2,041

Loss before income taxes
(17,579
)
 
(1,546
)
 
(19,125
)
Income taxes
(1,649
)
 
110

 
(1,539
)
Net loss
$
(19,228
)
 
$
(1,436
)
 
$
(20,664
)

 

 
December 31, 2017
Balance Sheet Data
 
As Reported
 
Adjustments
 
As Adjusted
Assets
 

 
 

 
 

Current assets:
 

 
 

 
 

Prepaid expenses and other current assets
$
7,130

 
$
7,216

 
$
14,346

Long-term assets:
 
 
 
 
 
Other assets
$
973

 
$
6,270

 
$
7,243

 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Deferred revenues
$
73,891

 
$
(398
)
 
$
73,493

Long-term liabilities:
 
 
 
 
 
Deferred revenues
$
7,034

 
$
(426
)
 
$
6,608

Other liabilities
$
6,561

 
$
1,246

 
$
7,807

Stockholders’ equity:
 
 
 
 
 
Accumulated deficit
$
(122,454
)
 
$
13,064

 
$
(109,390
)
 
 

7



 
Statement of Cash Flows
Nine Months Ended
September 30, 2017
 
As Reported
 
Adjustments
 
As Adjusted
Cash flows from operating activities
 

 
 

 
 

Net loss
$
(19,228
)
 
$
(1,436
)
 
$
(20,664
)
Amortization of deferred commissions
$

 
$
9,292

 
$
9,292

Deferred commissions
$

 
$
(9,511
)
 
$
(9,511
)
Deferred revenues
$
1,390

 
$
1,771

 
$
3,161

Other long term liabilities
$
(305
)
 
$
(116
)
 
$
(421
)
Net cash provided by operating activities
$
10,846

 
$

 
$
10,846


c.
Revenue Recognition:

The Company generates revenues in the form of software license fees and related maintenance and services fees. License fees include perpetual license fees and term license fees which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Maintenance and services primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available) and to a lesser extent professional services which focus on both deployment and training the Company’s customers to fully leverage the use of its products although the user can benefit from the software without the Company’s assistance. The Company sells its products worldwide directly to a network of distributors and VARs, and payment is typically due within 30 to 60 calendar days of the invoice date.

The Company recognizes revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

Software license revenues are recognized at the point of time when the software license has been delivered.
 
The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term. The term of the maintenance contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the period.
 
Revenues from professional services consists mostly of time and material services. The performance obligations are satisfied, and revenues are recognized, when the services are provided or once the service term has expired.
 
In contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The Company allocates the transaction price to each performance obligation based on its relative standalone selling price out of total consideration of the contract. For maintenance and support, the Company determines the standalone selling price based on the price at which the Company separately sells a renewal contract. The Company determines the standalone selling price for sales of licenses using the residual approach. For professional services, the Company determines the standalone selling prices based on the price at which the Company separately sells those services.
 
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts.
 
Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. Deferred revenues are recognized as (or when) the Company performs under the contract. The amount of revenues recognized in the period that was included in the opening deferred revenues balance was $62,687 for the nine months ended September 30, 2018.
 
The Company does not grant a right of return to its customers, except for one of its resellers. In 2017 and for the nine months ended September 30, 2018, there were no returns from this reseller.
 

8



The Company pays commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales goals. Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized. The Company is required to capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, over the remaining contractual term or over an expected period of benefit, which the Company has determined to be approximately four years. Amortization expenses related to these costs are included in sales and marketing expenses in the accompanying consolidated statements of operations.
 
For information regarding disaggregated revenues, please refer to note 5.

d.
Derivative Instruments:
 
The Company’s primary objective for holding derivative instruments is to reduce its exposure to foreign currency rate changes. The Company reduces its exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecast to be incurred in currencies other than the U.S. dollar. A majority of the Company’s revenues and operating expenditures are transacted in U.S. dollars. However, certain operating expenditures are incurred in or exposed to other currencies, primarily the New Israeli Shekel (“NIS”).
 
The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. The Company does not enter into derivative financial instruments for trading purposes. In addition, the Company enters into forward contracts to hedge a portion of its monetary items in the balance sheet, such as trade receivables and payables, denominated in British Pound and Euro for short term periods (the “Fair Value Hedging Program”). The purpose of the Fair Value Hedging Program is to protect the fair value of the monetary assets from foreign exchange rate fluctuations. Gains and losses from derivatives related to the Fair Value Hedging Program are not designated as hedging instruments.
 
Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following table (in thousands):
 
 
Assets (liabilities) as of
September 30, 2018
(unaudited)
 
Assets as of
December 31, 2017
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Foreign exchange forward contract derivatives in cash flow hedging relationships - included in other current assets and accrued expenses and other short term liabilities
$
34,805

 
$
(1,819
)
 
$
1,746

 
$
163

Foreign exchange forward contract derivatives for monetary items included in other current assets
$
15,385

 
$
35

 
$

 
$

 
For the three and nine months ended September 30, 2018, the unaudited consolidated statements of operations reflect a loss of approximately $1,194 and $2,094, respectively, related to the effective portion of the cash flow hedges. For the three and nine months ended September 30, 2017, the unaudited consolidated statements of operations reflect a gain of approximately $774 and $1,692, respectively, related to the effective portion of the cash flow hedges. Any ineffective portion of the cash flow hedges is recognized in financial income, net in the consolidated statement of operations. No material ineffective hedges were recognized in financial income, net for the three and nine months ended September 30, 2018 and 2017.

For the three and nine months ended September 30, 2018, the unaudited consolidated statements of operations reflect a loss of approximately 199 in financial income, net, related to the Fair Value Hedging Program. The Company did not enter into any transactions related to the Fair Value Hedging Program for the three and nine months ended September 30, 2017.
 
e.
Cash, Cash Equivalents and Short-Term Investments:   
 

9



The Company accounts for investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities”. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand, highly liquid investments in money market funds and various deposit accounts.
 
The Company considers all high quality investments purchased with original maturities at the date of purchase greater than three months to be short-term investments. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond one year. Cash equivalents and short-term investments are classified as available for sale and are, therefore, recorded at fair value on the consolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s consolidated balance sheets, until realized. The Company uses the specific identification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of financial income, net in the consolidated statement of operations. Cash, cash equivalents and short-term investments consist of the following (in thousands):
 
 
As of September 30, 2018
 
(unaudited)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized  
Loss
 
Fair
Value
Cash and cash equivalents
 

 
 

 
 

 
 

Cash
$
65,584

 
$

 
$

 
$
65,584

Money market funds
2,284

 

 

 
2,284

Total
$
67,868

 
$

 
$

 
$
67,868

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
US Treasury securities
$
39,864

 
$

 
$
(13
)
 
$
39,851

Term bank deposits
50,363

 

 

 
50,363

Total
$
90,227

 
$

 
$
(13
)
 
$
90,214

 
 
As of December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized  
Loss
 
Fair
Value
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
 

 
 

 
 

Cash
$
49,819

 
$

 
$

 
$
49,819

Money market funds
6,870

 

 

 
6,870

Total
$
56,689

 
$

 
$

 
$
56,689

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
US Treasury securities
$
39,758

 
$*)

 
$
(27
)
 
$
39,731

Term bank deposits
40,137

 

 

 
40,137

Total
$
79,895

 
$*)

 
$
(27
)
 
$
79,868

 
*) Represents an amount lower than $1

All the US Treasury securities in short-term investments have a stated effective maturity of less than 12 months as of September 30, 2018 and December 31, 2017.

 

10



The gross unrealized loss related to these short-term investments was due primarily to changes in interest rates. The Company reviews its short-term investments on a regular basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Company considers factors such as length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s amortized cost basis. If the Company believes that an other than temporary decline exists in one of these securities, the Company writes down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to other income (expense), net in the Company’s consolidated statements of operations. Any portion not related to credit loss would be recorded to accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s condensed consolidated balance sheets. During the nine months ended September 30, 2018, the Company did not consider any of its investments to be other-than-temporarily impaired.

f.
Restricted Cash:
 
In November 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017. The Company adopted this standard effective December 31, 2017 using the retrospective transition method, as required by the new standard. The adoption of this standard had an immaterial impact on the Company’s consolidated statements of cash flows.
 
The following table provides a reconciliation of cash and cash equivalents, and long term restricted cash reported within the consolidated balance sheets that sum to the total of such amounts in the consolidated statements of cash flows:
 
 
September 30, 2018
 
September 30, 2017
Cash and cash equivalents
$
67,868

 
$
53,478

Long term restricted cash included in other assets

 
531

Cash, cash equivalents and long term restricted cash shown in the consolidated statement of cash flows
$
67,868

 
$
54,009

 
g.
Recently Issued Accounting Pronouncements:

In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January 1, 2020, and early adoption is permitted. The Company is currently evaluating the potential effect of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to the accounting under existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard supersedes the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periods beginning on or after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the potential effect of the guidance on its consolidated financial statements and expects to adopt this standard effective January 1, 2019.
 

11



In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (“TCJA”). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either (i) accounting for deferred taxes related to GILTI inclusions, or (ii) treating any taxes on GILTI inclusions as period cost, are both acceptable methods subject to an accounting policy election. In accordance with SEC Staff Accounting Bulletin No. 118, and as the Company is not yet able to reasonably estimate the effect of the GILTI tax, as described in note 9 of the Company’s 2017 consolidated financial statements included in the 2017 Form 10-K, the Company has not yet adopted an accounting policy with respect to the GILTI tax.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for the interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company expects to adopt this standard effective January 1, 2019.

NOTE 2:-     FAIR VALUE MEASRUEMENTS

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. There have been no transfers between fair value measurements levels during the three months ended September 30, 2018.
 
The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
 
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

12



The following table sets forth the Company’s assets and liabilities that were measured at fair value as of September 30, 2018 and December 31, 2017 by level within the fair value hierarchy (in thousands):
 
 
As of September 30, 2018
(unaudited)
 
As of December 31, 2017
 
Level I
 
Level
II
 
Level III
 
Fair
Value
 
Level I
 
Level
II
 
Level III
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
2,284

 

 

 
2,284

 
6,870

 

 

 
6,870

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US Treasury securities
39,851

 

 

 
39,851

 
39,731

 

 

 
39,731

Term bank deposits
50,363

 

 

 
50,363

 
40,137

 

 

 
40,137

Other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts

 
35

 

 
35

 

 
163

 

 
163

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts

 
(1,819
)
 

 
(1,819
)
 

 

 

 

Total financial assets (liabilities)
$
92,498

 
$
(1,784
)
 
$

 
$
90,714

 
$
86,738

 
$
163

 
$

 
$
86,901


NOTE 3:-    COMMITMENTS AND CONTINGENT LIABILITIES

a.
Liens:

The Company has several liens granted to financial institutions mainly to secure various operating lease agreements in connection with its office space.

b.
Lease Commitments:
 
The Company rents its facilities in all locations under operating leases with lease periods expiring from 2018 - 2029. The lease agreement of VSL includes extension options. VSL leases cars for its employees under operating lease agreements expiring at various dates from 2018 – 2021.
 
Aggregate minimum rental commitments under non-cancelable leases as of September 30, 2018 for the upcoming years were as follows:
 
 
(unaudited)
 
 
2018
$
1,996

2019
7,566

2020
9,087

2021
9,390

2022
9,461

Thereafter
49,666

 
 
 
$
87,166

 
Total rent expenses for the nine months ended September 30, 2018 and 2017 were $4,011 and $2,903, respectively. The total minimum rent to be received in the future under the non-cancelable sublease as of September 30, 2018 was $133.


13



For leases that contain predetermined fixed escalations of the minimum rent, the Company recognizes the related rent expense on a straight-line basis from the date of possession of the property to the end of the initial lease term. The Company records any differences between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate. Cash or lease incentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date of possession of the property through the end of the initial lease term. The Company records the unamortized portion of tenant allowances as a part of deferred rent, in current liabilities or other long-term liabilities, as appropriate.

c.
Credit Facility:

On March 31, 2014, the Company entered into a promissory note and related security documents with Bank Leumi USA. The Company may borrow up to $7,000 against certain of its accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall Street Journal Prime Rate less 0.15%; provided, however, that the annual interest rate for advances will not be less than 4.10%. As of September 30, 2018, that rate amounted to 5.10%. This promissory note enables the Company, among other things, to engage in foreign currency hedging transactions with Bank Leumi USA to manage exposure to foreign currency risk without restricted cash requirements. The Company may borrow under the promissory note until November 15, 2018 at which time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of September 30, 2018, the Company had no balance outstanding under the promissory note. As part of the transaction, the Company granted the lender a security interest in its personal property, excluding intellectual property and other intangible assets. The promissory note also contains customary events of default.

NOTE 4:–    STOCKHOLDERS’ EQUITY

a. On December 30, 2005, the Company’s board of directors adopted the Varonis Systems, Inc. 2005 Stock Plan (the “2005 Stock Plan”). As of December 31, 2013, the Company had reserved 4,713,319 shares of common stock available for issuance to employees, directors, officers and consultants of the Company and its subsidiaries. The options generally vest over four years. No awards were granted under the 2005 Stock Plan subsequent to December 31, 2013, and no further awards will be granted under the 2005 Stock Plan.
 
On November 14, 2013, the Company’s board of directors adopted the Varonis Systems, Inc. 2013 Omnibus Equity Incentive Plan (the “2013 Plan”) which was subsequently approved by the Company’s stockholders. The Company initially reserved 1,904,633 shares of common stock for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2013 Plan was increased on January 1, 2016 and will be increased on each January 1 thereafter by four percent (4%) of the number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to the nearest whole share), but the amount of each increase will be limited to the number of shares of common stock necessary to bring the total number of shares of Common Stock available for grant and issuance under the 2013 Plan to five percent (5%) of the number of shares of common stock issued and outstanding on each December 31. On January 1, 2018, 2017 and 2016, the share reserve under the 2013 Plan was automatically increased by 1,125,846, 1,072,870 and 1,042,766 shares, respectively. Awards granted under the 2013 Plan generally vest over four years. Any award that is forfeited or canceled before expiration becomes available for future grants under the 2013 Plan.


14



A summary of employees’ stock options activities during the nine months ended September 30, 2018 is as follows:
 
 
Nine Months Ended
September 30, 2018 (unaudited)
 
Number
 
Weighted
average
exercise price
 
Aggregate
intrinsic value
(in thousands)
 
Weighted average
remaining
contractual life
(years)
 
 
 
 
 
 
 
 
Options outstanding as of January 1, 2018
1,456,285

 
$
16.172

 
$
47,152

 
4.906
Granted

 
$

 
 
 
 
Exercised
(689,227
)
 
$
13.843

 
 
 
 
Forfeited
(1,471
)
 
$
21.972

 
 
 
 
 
 
 
 
 
 
 
 
Options outstanding as of September 30, 2018
765,587

 
$
18.257

 
$
42,102

 
4.800
 
 
 
 
 
 
 
 
Options exercisable at the end of the period
722,216

 
$
18.054

 
$
39,900

 
4.682
 
The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on the last date of the period. Total intrinsic value of options exercised for the nine months ended September 30, 2018 was $38,639.

b. The options outstanding as of September 30, 2018 (unaudited) have been separated into ranges of exercise price as follows:

Range of exercise price
 
Options
outstanding
as of
September 30,
2018
 
Weighted
average
remaining
contractual
life (years)
 
Weighted
average
exercise price
 
Options
exercisable
as of
September 30,
2018
 
Weighted
average
remaining
contractual
life (years)
 
Weighted
average
exercise price
of options
exercisable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1.256

 
 
1.576
 
130,625

 
0.914

 
$
1.282

 
130,625

 
0.914

 
$
1.282

$
6.230

 
 
8.800
 
12,356

 
3.259

 
$
8.039

 
12,356

 
3.259

 
$
8.039

$
12.470

 
 
16.870
 
157,613

 
5.201

 
$
13.936

 
139,903

 
4.924

 
$
13.463

$
19.510

 
 
21.660
 
240,699

 
5.825

 
$
21.190

 
230,416

 
5.806

 
$
21.191

$
22.010

 
 
24.230
 
98,380

 
5.427

 
$
22.404

 
98,380

 
5.427

 
$
22.404

 

 
$29.880
 
 
 
75,936

 
6.397

 
$
29.880

 
60,558

 
6.397

 
$
29.880

 

 
$39.860
 
 
 
49,978

 
5.477

 
$
39.860

 
49,978

 
5.477

 
$
39.860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
765,587

 
4.800

 
$
18.257

 
722,216

 
4.682

 
$
18.054


15



c.
Options issued to consultants:

The Company’s outstanding options granted to consultants for services as of September 30, 2018 (unaudited) were as follows:
 
 
Options for
shares of
common stock
 
Exercise price
per share
 
Options
exercisable
 
Exercisable
through
 
(number)
 
 
 
(number)
 
 
 
 
 
 
 
 
 
 
February 2013
1,500

 
$
12.470

 
1,500

 
February 2023
August 2013
4,000

 
$
21.140

 
4,000

 
August 2023
March 2014
5,550

 
$
39.860

 
5,550

 
March 2024
May 2014
3,700

 
$
22.010

 
3,700

 
May 2024
November 2014
6,693

 
$
21.660

 
6,296

 
November 2024
May 2015
1,137

 
$
19.510

 
805

 
May 2025
February 2016
2,138

 
$
16.870

 
1,250

 
February 2026
 
 
 
 
 
 
 
 
 
24,718

 
 

 
23,101

 
 
 
d.
Restricted stock units:

A summary of restricted stock units for employees, consultants and non-employee directors of the Company for the nine months ended September 30, 2018 (unaudited) is as follows:
 
 
Number of
shares underlying
outstanding
restricted stock units
 
Weighted-
average
grant date
fair value
Unvested balance - January 1, 2018
2,018,121

 
$
27.32

Granted
1,220,624

 
$
53.56

Vested
(553,671
)
 
$
26.28

Forfeited
(121,351
)
 
$
37.04

Unvested balance – September 30, 2018
2,563,723

 
$
38.81

 
e. As of September 30, 2018, there was $397 and $84,994 of total unrecognized compensation cost related to unvested employee stock options and unvested restricted stock units, respectively. This cost is expected to be recognized over a period of approximately 0.587 years and 2.682 years for stock options and restricted stock units, respectively.

16



f.
2015 Employee Stock Purchase Plan

On May 5, 2015, the Company’s stockholders approved the Varonis Systems, Inc. 2015 Employee Stock Purchase Plan (the “ESPP”), which the Company’s board of directors had adopted on March 19, 2015. The ESPP became effective as of June 30, 2015. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% of the fair market value of the Company’s common stock on the first day or last trading day in the offering period, subject to any plan limitations. The Company initially reserved 500,000 shares of common stock for issuance under the ESPP. The number of shares available for issuance under the ESPP was increased on January 1, 2016, and will increase each January 1 thereafter, by an amount equal to the lesser of (i) one percent (1%) of the number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase, except that the amount of each such increase will be limited to the number of shares of common stock necessary to bring the total number of shares of common stock available for issuance under the ESPP to two percent (2%) of the number of shares of common stock issued and outstanding on each such December 31, or (ii) 400,000 shares of common stock. On January 1, 2018, 2017 and 2016, the share reserve under the ESPP was automatically increased by 188,813, 158,695 and 21,383 shares, respectively. The ESPP will continue in effect until the earlier of (i) the date when no shares of common stock are available for issuance thereunder or (ii) June 30, 2025; unless terminated prior thereto by the Company’s board of directors or compensation committee, each of which has the right to terminate the ESPP at any time.
 
g.
Stock-based compensation expense for employees and consultants:
 
The Company recognized non-cash stock-based compensation expense in the consolidated statements of operations as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
(in thousands)
 
(unaudited)
(in thousands)
 
 
 
 
 
 
 
 
Cost of revenues
$
470

 
$
283

 
$
1,300

 
$
783

Research and development
2,097

 
1,374

 
7,180

 
3,805

Sales and marketing
3,600

 
1,856

 
10,349

 
6,277

General and administrative
2,232

 
1,269

 
5,345

 
3,580

 
 
 
 
 
 
 
 
Total
$
8,399

 
$
4,782

 
$
24,174

 
$
14,445

  
h. Since the Company is in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all the periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. There were 3,354,028 and 3,775,137 potentially dilutive shares from the conversion of outstanding restricted stock units and stock options that were not included in the calculation of diluted net loss per share as of September 30, 2018 and 2017, respectively.
   

17



NOTE 5:–    GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER AND PRODUCT DATA

Summary information about geographic areas:
 
ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment and derives revenues from licensing of software and sales of professional services, maintenance and technical support (see note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
 
(as adjusted)
 
(unaudited)
 
(as adjusted)
 
(in thousands)
 
(in thousands)
 
 
 
 
 
 
 
 
Revenues based on customer’s location:
 

 
 

 
 

 
 

North America
$
44,890

 
$
35,307

 
$
114,951

 
$
95,172

EMEA (*)
19,778

 
16,449

 
61,606

 
42,550

Rest of World
2,384

 
1,609

 
6,213

 
4,667

 
 
 
 
 
 
 
 
Total revenues
$
67,052

 
$
53,365

 
$
182,770

 
$
142,389

 
(*)       Sales to customers in France accounted for $19,813 of the Company’s revenues for the nine months ended September 30, 2018 and did not exceed 10% of total revenues for the nine months ended September 30, 2017. Sales to customers in the UK accounted for $18,708 of the Company’s revenues for the nine months ended September 30, 2018 and did not exceed 10% of total revenues for the nine months ended September 30, 2017.
 
 
September 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
 
(in thousands)
Long-lived assets by geographic region:
 

 
 

United States
$
7,163

 
$
7,072

Israel
3,514

 
2,944

France
1,306

 
1,426

Other
610

 
454

 
 
 
 
 
$
12,593

 
$
11,896



18



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for our fiscal year ended December 31, 2017.

Special Note Regarding Forward-Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview
 
Varonis is a pioneer in data security and analytics, fighting a different battle than conventional cybersecurity companies. We are pioneers because over a decade ago, we recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believed the vast movement of information from analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profiles of corporations and government. Since then our focus has been on using innovation to address the cyber-implications of this movement, creating software that provides new ways to monitor and protect data wherever it is stored.
 
Our software allows enterprises to protect data stored on premises and in the cloud: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and other intellectual property. Recognizing the complexities of securing data, we have built a single integrated platform to simplify and streamline security and data management.

The Varonis Data Security Platform, built on patented technology, allows enterprises to protect data against insider threats and cyberattacks. Our products enable enterprises to analyze data, account activity and user behavior to detect attacks. Our Data Security Platform prevents or limits unauthorized use of sensitive information, prevents potential cyberattacks and limits others by locking down sensitive and stale data. Our product efficiently sustains a secure state with automation and addresses additional important use cases including governance, compliance, classification and threat analytics. Our Data Security Platform is driven by a proprietary technology, our Metadata Framework, that extracts critical metadata, or data about data, from an enterprise’s IT infrastructure. Our Data Security Platform uses this contextual information to map functional relationships among employees, data objects, content and usage.
 
We started operations in 2005 with a vision to make enterprise data more accessible, manageable, secure and actionable. We began offering our flagship product, DatAdvantage, which provides centralized visibility for enterprise data, in 2006. Since then we have continued to invest in innovation and have consistently introduced new products to our customers. In 2006, we introduced DataPrivilege as our self-service web portal for business users. In 2008, we enhanced our DatAdvantage offering with DatAdvantage for UNIX/Linux. In 2009, we introduced the Data Classification Engine (formally called the IDU Classification Framework) for sensitive data classification and DatAdvantage for SharePoint. We further enhanced our DatAdvantage offering by releasing DatAdvantage for Exchange in 2010, enabling our customers to exercise control over the information transferred through corporate e-mails. In 2011, we introduced DatAdvantage for Directory Services for increased visibility into Active Directory.


19



In 2012, we released the Data Transport Engine for intelligent data migration and archiving and DatAnywhere for secure hybrid cloud collaboration. In 2013, we introduced DatAlert to monitor and alert on sensitive data and file activity. In 2014, we introduced DatAnswers, a secure enterprise search solution for enterprise data that delivers highly relevant and secure search results to enterprise employees, greatly improving their productivity. In 2015, we enhanced our DatAdvantage, DataPrivilege and Data Classification Engine offerings; with DatAdvantage support for the following Microsoft Office 365 data stores: Exchange Online, SharePoint Online, OneDrive and Active Directory hosted in Azure; with DataPrivilege for SharePoint; and with Data Classification Engine for UNIX, SharePoint Online and OneDrive. In 2016, we enhanced our DatAdvantage offerings with additional Office 365 support; DatAnswers support for SharePoint Online and OneDrive; and introduced a new web user interface, or UI, for DatAlert for comprehensive security management and threat detection. In that year we also added additional user behavior analytics driven threat models to DatAlert to significantly enhance our detection of insider threats, including potential disgruntled employees, rogue administrators, hijacked accounts and malware, such as ransomware. We also established a behavioral research laboratory where a dedicated team of security experts and data scientists from Varonis continually research the latest threats and emerging security vulnerabilities and introduce new behavior-based threat models to DatAlert.
 
In 2017, we introduced the Automation Engine to allow customers to automatically repair and maintain file systems so that organizations are less vulnerable to attacks and security breaches, more compliant and consistently meeting a least privilege model. We enhanced DatAlert with DatAlert Analytics Rewind to allow customers to analyze past user and data activity to identify security breaches that may have occurred in the past and pre-emptively tune out false positives. We have continued to update our web UI for DatAlert and added new threat models to detect suspicious mailbox, Exchange and Exchange Online behaviors, password resets, unusual activity from personal devices and more. We introduced a new security dashboard in DatAlert, along with enhanced behavioral analytics, geolocation and more to make it easier than ever to perform security investigations and forensics. In 2017, we also released GDPR Patterns, part of the Data Classification Engine family, to help enterprises identify data that falls under the EU General Data Protection Regulation (GDPR) and expanded our offerings that can help enterprises meet compliance and regulation requirements.
 
In 2018, we introduced Varonis Edge, which analyzes perimeter devices like DNS, VPN and Web Proxies to detect attacks like malware, APT intrusion and data exfiltration. Varonis Edge enables enterprises to correlate events and alerts to track potential data leaks and spot vulnerabilities at the point of entry. We also made enhancements to DatAlert adding GDPR threat models to enable customers to more easily monitor and track when suspicious activity occurs on GDPR data and added maps and geolocation to the DatAlert web UI to help trace cyberattacks to a specific location. We added automated classification categories to Data Classification Engine, to help automatically identify and classify regulated data like GDPR, PCI, PHI and PII. In 2018, we also introduced Data Classification Labels which is part of the Data Classification Engine product family. Data Classification Labels integrates with Microsoft Information Protection (MIP) to enable customers to better classify, track and secure files across enterprise data stores. We optimized DatAnswers to address the ongoing prevalence of data privacy laws, assisting customers to better meet compliance regulations like right-to-be-forgotten and data subject access requests.
 
At the core of our technology is our ability to intelligently extract and analyze metadata from an enterprise’s vast, distributed data stores. The broad applicability of our technology has resulted in our customers deploying our platform for numerous use cases for security, IT, operations and business personnel. We currently have six product families, DatAdvantage (including the Automation Engine), DatAlert (including Varonis Edge), Data Classification Engine (including GDPR Patterns and Data Classification Labels), DataPrivilege, Data Transport Engine and DatAnswers. As of February 1, 2018, in order to focus our resources on our data security portfolio, we stopped selling DatAnywhere to new customers, and we do not expect renewals or sales of the product to our existing customers. In addition, beginning in 2018, DatAlert and Varonis Edge became a new product family. The attach rates and customer counts as of September 30, 2018 and 2017 reflect these changes. As of September 30, 2018 and 2017, approximately 72% and 68% of our customers purchased products in two or more product families, respectively, one of which was DatAdvantage for each of these customers. As of September 30, 2018 and 2017, approximately 39% and 34% of our customers purchased products in three or more product families, respectively, one of which was DatAdvantage for each of these customers. We believe our existing customer base serves as a strong source of incremental revenues given our broad platform of products, their growing volumes and complexity of enterprise data and associated security concerns. Our maintenance renewal rate for each of the three months ended September 30, 2018 and 2017, was over 90%. Our key strategies to maintain our renewal rate include focusing on the quality and reliability of our customer service and support to ensure our customers receive value from our products, providing consistent software upgrades and having sufficient dedicated renewal sales personnel. 


20



We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, which we refer to in this report as our customers. We believe that our sales model, which combines the leverage of a channel sales model with our highly trained and professional sales force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition for enterprise data. While our products serve customers of all sizes, in all industries and all geographies, the marketing focus and majority of our sales focus is on targeting organizations with 1,000 users or more who can make larger purchases with us over time and have a greater potential lifetime value. As of September 30, 2018, we had approximately 6,350 customers, spanning leading firms in the financial services, healthcare, public, industrial, insurance, energy and utilities, consumer and retail, education, media and entertainment and technology sectors. We believe our customer count is a key indicator of our market penetration and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us. We will continue our focus on targeting organizations with 1,000 users or more who can make larger purchases with us over time.

We believe there is a significant long term growth opportunity in both domestic and foreign markets, which could include any organization that uses file shares, intranets and email for collaboration, regardless of region. For the three and nine months ended September 30, 2018, approximately 67% and 63%, respectively, of our revenues were derived from North America, while Europe, the Middle East and Africa ("EMEA") accounted for approximately 29% and 34%, respectively, of our revenues and Rest of World (“ROW”) accounted for approximately 4% and 3%, respectively, of our revenues. Growth in North America was 27% and 21% for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. Growth in EMEA was 20% and 45% for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. We expect both continued sales growth in North America and international expansion to be key components of our growth strategy, and we will continue to market our products and services in international markets.

We plan to continue to expand our international operations as part of our growth strategy. The expansion of our international operations depends in particular on our ability to hire, integrate and retain local sales and marketing personnel in these international markets, acquire new channel partners and implement an effective marketing strategy. Given the nominal amount of our ROW revenues, our ROW revenue growth rates have fluctuated in the past and may fluctuate in the future based on the timing of deal closures. In addition, the further expansion of our international operations will increase our sales and marketing and general and administrative expenses and will subject us to a variety of risks and challenges, including those related to economic and political conditions in each region, compliance with foreign laws and regulations, and compliance with domestic laws and regulations applicable to our international operations.
 
We derive revenues from license sales of our products, services, including initial maintenance contracts and professional services, and renewals. As of September 30, 2018 and 2017, 100.0% and 99.6% of our customers, respectively, purchased DatAdvantage; 49.5% and 45.6% of our customers, respectively, purchased DatAlert; 47.6% and 41.6% of our customers, respectively, purchased Data Classification Engine; 15.6% and 16.3% of our customers, respectively, purchased DataPrivilege; and 7.4% and 6.4% of our customers, respectively, purchased Data Transport Engine. As of September 30, 2018 and 2017, 28.0% and 31.6% of our customers, respectively, made standalone purchases of DatAdvantage. No other product families outside of DatAdvantage can be sold on a standalone basis. Licenses sales accounted for 53.4% and 54.3% of our total revenues for the three months ended September 30, 2018 and 2017, respectively, and 51.6% and 52.3% of our total revenues for the nine months ended September 30, 2018 and 2017, respectively.
 
We have achieved significant growth and scale in recent periods utilizing our business model. For the three months ended September 30, 2018 and 2017, our revenues were $67.1 million and $53.4 million, respectively, representing year-over-year growth of 26%. For the nine months ended September 30, 2018 and 2017, our revenues were $182.8 million and $142.4 million, respectively, representing year-over-year growth of 28%. For the three months ended September 30, 2018 and 2017, we had operating losses of $6.8 million and $3.1 million and net losses of $7.3 million and $3.3 million, respectively. For the nine months ended September 30, 2018 and 2017, we had operating losses of $33.6 million and $21.2 million and net losses of $35.0 million and $20.7 million, respectively.

Components of Operating Results
 
Revenues
 
Our revenues consist of licenses and maintenance and services revenues.
 
License Revenues. License revenues reflect the revenues recognized from sales of software licenses to new customers and sales of additional licenses to existing customers who can purchase additional users for existing licenses or purchase new licenses. We are focused on acquiring new customers and increasing revenues from our existing customers.

21



 
Maintenance and Services Revenues. Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent, professional services. Typically, when purchasing a perpetual license, a customer also purchases a one year maintenance contract for which we charge a percentage of the license fee. Customers may renew, and generally have renewed, their maintenance agreements for a fee that is based upon a percentage of the initial license fee paid. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period. We have experienced growth in maintenance revenues primarily due to increased license sales to new and existing customers and high annual retention of existing customers. We recognize the revenues associated with maintenance ratably, on a straight-line basis, over the associated maintenance period. We measure the perpetual license maintenance renewal rate for our customers over a 12-month period, based on a dollar renewal rate for contracts expiring during that time period. Our maintenance renewal rate for each of the nine months ended September 30, 2018 and 2017 has been over 90%. We also offer professional services focused on both deployment and training our customers to fully leverage the use of our products. We recognize the revenues associated with these professional services, which are generally provided on a time and materials basis, as we deliver the services, provide the training or when the service term has expired.
 
The following table sets forth the percentage of our revenues that have been derived from licenses and maintenance and services revenues for the periods presented.
 
 
Nine Months Ended
September 30,
 
2018
 
2017
 
(as a percentage of total revenues)
Revenues:
 

 
 

Licenses
51.6
%
 
52.3
%
Maintenance and services
48.4

 
47.7

Total revenues
100.0
%
 
100.0
%
 
Our products are used by a wide range of enterprises, including Fortune 500 corporations and small and medium-sized businesses. As of September 30, 2018, we had approximately 6,350 customers across a broad array of company sizes and industries located in over 75 countries.
 
Cost of Revenues, Gross Profit and Gross Margin
 
Our cost of revenues consists of cost of maintenance and services revenues. Cost of maintenance and services revenues consist primarily of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation for our maintenance and services employees; travel expenses; and allocated overhead costs for facilities, IT and depreciation of equipment. We recognize expenses related to maintenance and services as they are incurred. We expect that our cost of maintenance and services revenues will increase in absolute dollars as we increase our headcount to support revenue growth.

Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Our gross margin has historically fluctuated slightly from period to period as a result of changes in the mix of license and maintenance and services revenues. Due to the seasonality of our business, the first quarter typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for the year and the majority of our expenses are relatively fixed quarter over quarter. Conversely, the fourth quarter typically results in the highest gross margin as our fourth quarter revenues have historically been the highest for the year.
 

22



Operating Costs and Expenses
 
Our operating costs and expenses are classified into three categories: research and development, sales and marketing and general and administrative. For each category, the largest component is personnel costs, which consists of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation. Operating costs and expenses also include allocated overhead costs for depreciation of equipment. Allocated costs for facilities primarily consist of rent and office maintenance. Operating costs and expenses are generally recognized as incurred. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.

Research and Development. Research and development expenses primarily consist of personnel costs attributable to our research and development personnel, as well as allocated overhead costs. We expense research and development costs as incurred. We expect that our research and development expenses will continue to increase as a percentage of revenues throughout 2018 and in absolute dollars as we increase our research and development headcount to further strengthen our technology platform and invest in the development of both existing and new products.
 
Sales and Marketing. Sales and marketing expenses are the largest component of our operating costs and expenses and consist primarily of personnel costs, as well as marketing and business development costs, travel expenses, training and education and allocated overhead costs. We expect that sales and marketing expenses will continue to increase in absolute dollars, as we plan to expand our sales and marketing efforts, both domestically and internationally. We expect sales and marketing expenses to be our largest category of operating costs and expenses as we continue to expand our business worldwide.
 
General and Administrative. General and administrative expenses mostly consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel. Other expenses are comprised of legal, accounting and other consultant fees and other corporate expenses and allocated overhead. We expect that general and administrative expense will increase in absolute dollars as we grow and expand our operations, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and related regulations.
 
Financial Income (Expenses), Net
 
Financial income (expenses), net consist primarily of foreign exchange gains or losses and interest income received on our cash, cash equivalents and short-term investments. Foreign exchange gains or losses relate to our business activities in foreign countries with different operational reporting currencies. As a result of our business activities in foreign countries, we expect that foreign exchange gains or losses will continue to occur due to fluctuations in exchange rates in the countries where we do business. The United Kingdom’s decision to withdraw, and upcoming exit, from the European Union (“Brexit”), as well as other member countries public discussions about the possibility of also withdrawing, could also contribute to instability and volatility in the global financial and foreign exchange markets, including volatility in the value of Pounds Sterling, Euros and other currencies.
 
Income Taxes
 
We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. To date, on a consolidated basis, we have incurred accumulated net losses and have not recorded any U.S. federal tax provisions. 

Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets, including loss carryforwards, in that jurisdiction; however, we have recorded a deferred tax asset of approximately $17,000 as of September 30, 2018 for foreign jurisdictions. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.
 
Our Israeli subsidiary currently qualifies as a “Beneficiary Enterprise” which, upon fulfillment of certain conditions, allows it to qualify for a reduced tax rate based on the beneficiary program guidelines.
 

23



In addition, we are subject to the continuous examinations of our income tax returns by different tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
 
On December 22, 2017, the TCJA was signed into law making significant changes to the Internal Revenue Code of 1986, as amended (the “Code”). These changes include, but are not limited to:
 
A corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017;
The transition of U.S international taxation from a worldwide tax system to a territorial system;
A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017;
Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations; and
Taxation of base erosion and anti-abuse (“BEAT”) payments made by U.S. corporations to foreign related parties. The BEAT tax applies only to corporations with average gross domestic sales of $500 million over three successive years.

We have calculated our best estimate of the impact of the TCJA in accordance with our understanding of the TCJA and guidance available as of the date of this filing. As a result:
 
While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the TCJA may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the U.S. Internal Revenue Service (“IRS”) and actions we may take. We are continuing to gather additional information to determine the final impact of the TCJA.
Due to the aggregated accumulated deficits of our foreign subsidiaries, we should not be subject to any transition tax under this provision of the TCJA.
Because of the complexity of the new GILTI tax rules and expected yet to be issued guidance from the IRS, we have not yet completed our analysis of the GILTI tax rules and are not yet able to reasonably estimate the effect of this provision of the TCJA or make an accounting policy election for the ASC 740 treatment of the GILTI tax.

We should not be subject to BEAT during 2018 due to the gross domestic sales threshold.


24



Results of Operations
 
Comparison of the Three Months Ended September 30, 2018 and 2017
 
The following tables are a summary of our consolidated statements of operations for the three months ended September 30, 2018 and 2017 in dollars and as a percentage of our total revenues.
 
 
Three Months Ended
September 30,
 
2018
 
2017
 
(unaudited)
(in thousands)
Statement of Operations Data:
 

 
 

Revenues:
 

 
 

Licenses
$
35,804

 
$
29,000

Maintenance and services
31,248

 
24,365

Total revenues
67,052

 
53,365

Cost of revenues
7,052

 
5,423

Gross profit
60,000

 
47,942

Operating costs and expenses:
 

 
 

Research and development
17,267

 
11,903

Sales and marketing
40,792

 
32,458

General and administrative
8,774

 
6,708

Total operating expenses
66,833

 
51,069

Operating loss
(6,833
)
 
(3,127
)
Financial income, net
99

 
622

Loss before income taxes
(6,734
)
 
(2,505
)
Income taxes
(583
)
 
(759
)
Net loss
$
(7,317
)
 
$
(3,264
)
 

25



 
Three Months Ended
September 30,
 
2018
 
2017
 
(as a percentage of total revenues)
Statement of Operations Data:
 

 
 

Revenues:
 

 
 

Licenses
53.4
 %
 
54.3
 %
Maintenance and services
46.6

 
45.7

Total revenues
100.0

 
100.0

Cost of revenues
10.5

 
10.2

Gross profit
89.5

 
89.8

 
 
 
 
Operating costs and expenses:
 

 
 

Research and development
25.8

 
22.3

Sales and marketing
60.8

 
60.8

General and administrative
13.1

 
12.6

Total operating expenses
99.7

 
95.7

 
 
 
 
Operating loss
(10.2
)
 
(5.9
)
Financial income, net
0.2

 
1.2

Loss before income taxes
(10.0
)
 
(4.7
)
Income taxes
(0.9
)
 
(1.4
)
Net loss
(10.9
)%
 
(6.1
)%
 
Revenues
 
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
% Change
 
(unaudited)
(in thousands)
 
 
Revenues:
 

 
 

 
 

Licenses
$
35,804

 
$
29,000

 
23.5
%
Maintenance and services
31,248

 
24,365

 
28.2
%
Total revenues
$
67,052

 
$
53,365

 
25.6
%
 
 
 
Three Months Ended
September 30,
 
2018
 
2017
 
(as a percentage of total revenues)
Revenues:
 

 
 

Licenses
53.4
%
 
54.3
%
Maintenance and services
46.6
%
 
45.7
%
Total revenues
100.0
%
 
100.0
%
 

26



Total revenue growth was achieved due to increased demand for our products and services from existing and new customers, mostly in the domestic market, as well as in international markets. The increase in license revenues was driven by sales to existing customers as well as larger aggregate sales to 188 new customers in the three months ended September 30, 2018 compared to the aggregate sales from 208 new customers in the three months ended September 30, 2017. As of September 30, 2018 and 2017, we had approximately 6,350 and approximately 5,550 customers, respectively. Almost all of our license revenues was attributable to sales of perpetual licenses. The increase in maintenance and services revenues was primarily due to an increase in the sale of maintenance agreements resulting from the growth of our installed customer base. In each of the three months ended September 30, 2018 and 2017, our maintenance renewal rate was over 90%. Of the license and first year maintenance and services revenues recognized in the three months ended September 30, 2018, 47% was attributable to revenues from new customers, and 53% was attributable to revenues from existing customers. Of the license and first year maintenance and services revenues recognized in the three months ended September 30, 2017, 51% was attributable to revenues from new customers, and 49% was attributable to revenues from existing customers. As of September 30, 2018 and 2017, 72% and 68% of our customers, respectively, purchased two or more product families. As of September 30, 2018 and 2017, 39% and 34% of our customers, respectively, purchased three or more product families.
 
Cost of Revenues and Gross Margin
 
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
% Change
 
(unaudited)
(in thousands)
 
 
Cost of revenues
$
7,052

 
$
5,423

 
30.0
%
 
 
Three Months Ended
September 30,
 
2018
 
2017
 
(as a percentage of total revenues)
Total gross margin
89.5
%
 
89.8
%

The increase in cost of revenues was primarily related to an increase of $1.4 million in salaries and benefits and stock based compensation expense due to increased headcount for support personnel to support our increased revenues and high renewal rate.
 
Operating Costs and Expenses
 
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
% Change
 
(unaudited)
(in thousands)
 
 
Operating costs and expenses:
 

 
 

 
 

Research and development
$
17,267

 
$
11,903

 
45.1
%
Sales and marketing
40,792

 
32,458

 
25.7
%
General and administrative
8,774

 
6,708

 
30.8
%
Total operating expenses
$
66,833

 
$
51,069

 
30.9
%

 

27



 
Three Months Ended
September 30,
 
2018
 
2017
 
(as a percentage of total revenues)
Operating costs and expenses:
 

 
 

Research and development
25.8
%
 
22.3
%
Sales and marketing
60.8
%
 
60.8
%
General and administrative
13.1
%
 
12.6
%
Total operating expenses
99.7
%
 
95.7
%
 
The increase in research and development expenses was primarily related to an increase of $4.3 million in salaries and benefits and stock based compensation expense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products and a $0.9 million increase in facilities and allocated overhead costs.
 
The increase in sales and marketing expenses was primarily related to a $7.3 million increase in salaries and benefits and stock based compensation expense due to increased headcount to expand our sales force and commissions on increased customer orders. Of the remainder, $0.6 million was related to facilities and allocated overhead costs.
 
The increase in general and administrative expenses was primarily related to an increase of $1.9 million in salaries and stock based compensation expense due to increased headcount to support the overall growth of our business.
 
Financial Income, Net
 
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
% Change
 
(unaudited)
(in thousands)
 
 
Financial income, net
$
99

 
$
622

 
(84.1
)%
 
Financial income, net for the three months ended September 30, 2018 was primarily due to interest income. Financial income, net for the three months ended September 30, 2017 was primarily due to foreign currency gains.

Income Taxes
 
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
% Change
 
(unaudited)
(in thousands)
 
 
Income taxes
$
(583
)
 
$
(759
)
 
23.2
%
 
Income taxes for the three months ended September 30, 2018 and 2017 were comprised primarily of foreign income taxes.


28



Results of Operations
 
Comparison of the Nine Months Ended September 30, 2018 and 2017
 
The following tables are a summary of our consolidated statements of operations for the nine months ended September 30, 2018 and 2017 in dollars and as a percentage of our total revenues.
 
 
Nine Months Ended
September 30,
 
2018
 
2017
 
(unaudited)
(in thousands)
Statement of Operations Data:
 

 
 

Revenues:
 

 
 

Licenses
$
94,338

 
$
74,402

Maintenance and services
88,432

 
67,987

Total revenues
182,770

 
142,389

Cost of revenues
19,934

 
14,997

Gross profit
162,836

 
127,392

Operating costs and expenses:
 

 
 

Research and development
50,526

 
33,810

Sales and marketing
122,113

 
95,952

General and administrative
23,832