Varonis Earnings: SaaS Transition Is Going Strong Even as Macro Tightness Elongates Sales Cycles

We maintain our $22 fair value estimate for no-moat Varonis Systems VRNS after the company reported first-quarter financial results largely in line with our expectations. As a company in the middle of a SaaS transition, we expect Varonis’ near-term profitability and revenue growth to be affected as clients switch over to its SaaS offering, with lower upfront revenue recognition negatively affecting sales growth and operating margins. We also believe that the firm’s cloud transition could open it up to heightened churn as customers, instead of adopting Varonis’ SaaS offering, could opt for a competitor’s platform. More near term, however, we expect continued demand for Varonis’ SaaS offering. We believe that in a period of heightened budget scrutiny, Varonis’ SaaS platform may find willing buyers due to its lower upfront costs relative to its on-premises offering. Varonis’ shares are trading flat afterhours and we view them as currently fairly valued.

Varonis’ top line clocked in at $107 million, up 12% year over year and in line with our estimates. With Varonis’ model transition, we believe investors should focus on the firm’s annual recurring revenue, which grew 18% year over year to $478 million. Varonis’ SaaS offering’s contribution to new ARR for the quarter was around 37%, well above management’s expectation of around 15%. While interest in its SaaS platform may be driven by customers seeking to cut up front costs, Varonis’ on-premise offering (still the vast majority of its overall top line) saw elongated sales cycles as businesses continued to scrutinize IT spend. We expect this scrutiny to continue through 2023 before a sharp rebound in 2024.

On the profitability front, the firm’s adjusted margins came in at negative 4%, up 400 basis points year over year. We expect Varonis’ margins to remain affected by the cloud transition in the near term as lower revenue recognition coupled with increased investments in research and sales dampen its profitability.