Varonis Earnings: Cloud Transition Execution Is Strong as Firm Navigates Tough Macro Conditions

We are raising our fair value estimate to $25 from $22 for no-moat Varonis VRNS after the firm closed out its second quarter with strong financials including higher-than-expected annual recurring revenue, or ARR, growth. As we have highlighted previously, Varonis is moving its solutions over to the cloud, which stands to have an impact on near-term profitability and revenue growth. 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. At the same time, however, we believe that heightened budget scrutiny during a time of macro uncertainty could damp Varonis’ financial performance. Varonis’ shares are up 2% after hours, and we view them as currently fairly valued relative to our updated valuation.

Varonis’ top line clocked in at $115 million, up 4% year over year. As with other firms undergoing a cloud transition, we believe investors should key in on Varonis’ ARR as a more accurate measure of financial performance than sales. The firm’s ARR came in at $497 million, growing a robust 17% year over year. Encouragingly, the firm’s cloud transition appears to be on track, as 58% of the contribution to new ARR came from its software-as-a-service offering (well above management’s expectation of 35%).

Varonis’ on-premises offering, which constitutes the majority of its sales, continued to see elongated sales cycles as businesses continued to scrutinize IT spending. At the same time, much like other security companies under our coverage, we expect a gradual thawing of frosty demand conditions in the upcoming quarters as the macro stabilization continues.