Varonis Earnings: Cloud Transition Remains Strong as Tough Macro Continues to Elongate Sales Cycles

We are maintaining our $25 fair value estimate for no-moat Varonis VRNS after the firm reported its third-quarter financial results with a weaker-than-expected top line offset by improved cash generation. Encouragingly, the firm continued to execute strongly on its software-as-a-service transition, with Varonis SaaS now making up more than 15% of the firm’s annual recurring revenue, or ARR. At the same time, we believe the firm’s near-term results will continue to be affected as customers confront a turbulent macroeconomic environment with financial prudence and budgetary scrutiny leading to longer sales cycles. The firm’s shares traded flat afterhours and we view them as overvalued. For investors seeking cybersecurity exposure, we’d point to moatier companies under our coverage from both a valuation and a quality perspective.

Varonis’ third-quarter sales clocked in at $122 million, down 1% year over year. While the top-line decline can be worrying to look at, we’d remind investors that much like other firms undergoing a cloud transition, Varonis’ financials are negatively affected. As a firm increases its SaaS portion of sales, there is a headwind to reported sales as larger renewals of on-premises solutions, that are recognized upfront, are replaced with subscription sales, that are recognized over the contract term. Management highlighted that due to increased SaaS sales in Varonis’ bookings mix, the firm saw a 12% headwind to its year-over-year revenue growth rate. From a long-term perspective, we believe Varonis’ cloud transition is the right step and necessary in a cloud-first world in which customers increasingly look to cloud security solutions to protect their IT assets.

For a better idea about the firm’s results, we look at ARR, which grew 16% year over year to $518 million. Encouragingly, the firm’s cloud transition appears to be on track as 59% of the contribution to new ARR came from its SaaS offering (above management’s expectation of 45%).