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Next Wave Portfolio Update—Varonis Systems & New Relic

By Rob DeFrancesco on February 16, 2016

Securing data that doesn’t easily fit into a spreadsheet is becoming more critical. Since half of all data breaches these days involve some form of unstructured data (everything from text to video images), decision-makers higher up in organizations are now much more interested in learning how to best protect critical documents and images, especially from insider attacks and malware.

The uptick in general awareness is good news for Next Wave Portfolio holding Varonis Systems (VRNS)—a provider of solutions to manage and secure unstructured data—because it means the company now goes into sales calls facing more-educated prospects. While enterprise deals on average still take six to nine months to close, at least sales reps have to spend less time informing potential customers about the risks involved in leaving unstructured data unsecured.

Varonis continues to see solid demand for its solutions, which automatically analyze and detect suspicious activity (deploying machine learning and user behavior analytics)  in order to prevent data breaches. The company’s sales model is high-volume, with relatively low average selling prices (ASPs). In 2015, the average ASP was $59,000.

Varonis’ software continuously monitors critical assets for insider threats, looking for any signs of escalation against a benchmark. With solutions from Varonis, customers are able to reduce the amount of time it takes to find and assess any problems involving compromised accounts.

In the fourth quarter, Varonis’ revenue rose 30% (acceleration from growth of 22% in the third quarter) to $43.8 million, above the consensus estimate of $41.9 million and the high end of the guidance range of $40.6 million to $43.3 million. Gross margin remained strong at 93%, up 100 basis points from the year-ago level.

License revenue in the December quarter of $28.2 million (64% of total revenue) rose 30%, acceleration from growth of 18% in the previous quarter and 11% in the second quarter. Maintenance and services revenue of $15.6 million was up 30%, acceleration from 27% growth in the third quarter. On a regional basis, the Americas (56% of total revenue) stood out, with revenue advancing 36%, acceleration from 17% growth in the third quarter. Varonis saw accelerated growth in the EMEA region (38% of revenue) as well, with revenue up 32%.

Varonis in the fourth quarter added 377 new accounts, bringing its total customer base to 4,350 in 65 countries. New customers in the latest quarter accounted for 64% of license and first-year maintenance revenue. About 45% of customers have purchased more than one Varonis product, up from 42% a year ago.

For the first quarter, Varonis offered revenue guidance of $28.3 million to $28.8 million, in line with the consensus estimate of $28.5 million. For 2016, the revenue guidance range of $153.5 million to $156.5 million (representing growth of 21% to 23%) came in above the consensus of $152.5 million.

Also in the Next Wave Portfolio, New Relic (NEWR) delivered an excellent fiscal third quarter (ended December) report, with revenue up 64% to $47.7 million, above the consensus estimate of $45.8 million and the high end of the guidance range of $45 million to $46 million. International revenue of $15.7 million (representing a third of total revenue) rose 59%. Gross margin was flat year over year at 81%.

The provider of cloud-based solutions for software performance management, monitoring and analytics in the latest quarter added 286 paid business accounts, resulting in a total customer base of 13,126. There are now 5,581 customers (42% of the base) paying more than $5,000 annually, an increase of 35% from the year-ago level.

Fully 90% of New Relic’s transactions in the quarter were non-competitive deals, meaning the total addressable market involves a lot of greenfield opportunities. Sales reps are doing a good job convincing prospects that the company’s solutions are effective and offer a fast payback period. More than half of all revenue now comes from customers purchasing more than one of New Relic’s five products.

New Relic’s annualized revenue per average paid business account in the latest quarter gained 38% year over year and 8% sequentially to $14,700. The number of six-figure deals doubled year over year.

The company continues to expand up-market, selling more of its solutions into enterprise accounts, which now represent 11% of the customer base and 35% of annualized recurring revenue (ARR). General Electric is a good example of a new enterprise customer. GE has deployed New Relic globally across all of its critical systems because it’s moving more of its workloads to the cloud and wants to be able to monitor everything in real-time.

About 73% of New Relic’s customer base is still made up of small businesses, but the segment only contributes 30% of ARR because of the smaller average deal sizes. Mid-market accounts (16% of customers) represent 28% of ARR.

Deferred revenue at the end of December totaled $58.1 million, a gain of 147% from the year-ago level, with the upside driven mainly by annualized billing terms of enterprise customers. About 60% of the customer base still pays monthly, but that figure will slowly trend downward as New Relic adds more enterprise accounts. Increased deferred revenue improves overall visibility, reducing the chances that New Relic would ever have a big quarterly miss.

Looking ahead to the fiscal fourth quarter, New Relic sees revenue of $49.8 million to $50.8 million (growth of 49% to 52%), above the consensus estimate of $48.9 million.

For fiscal 2016 (ending March), upwardly revised top-line guidance of $178.6 million to $179.6 million (growth of 62% to 63%) came in comfortably above the consensus of $175.4 million. Previous guidance for the year called for growth of 58.5% at the midpoint.

Varonis Systems and New Relic are rated ‘Buy’ in the Next Wave Portfolio.

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