Varonis (NASDAQ:VRNS) Reports Revenue Below Analyst Estimates In Q2 Earnings, But Stock Soars On Strong ARR

Petr Huřťák /
2023/07/31 4:12 pm EDT

Data protection and security software company Varonis (NASDAQ:VRNS) fell short of analysts' expectations in Q2 FY2023, with revenue up 3.56% year on year to $115.4 million. Next quarter's outlook also missed expectations with revenue guided to $125.3 million at the midpoint, or 6.34% below analysts' estimates. Varonis made a GAAP loss of $38.7 million, down from its loss of $36.3 million in the same quarter last year.

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Varonis (VRNS) Q2 FY2023 Highlights:

  • Revenue: $115.4 million vs analyst estimates of $119.3 million (3.23% miss)
  • EPS (non-GAAP): $0.01 vs analyst estimates of $0.02 (-$0.01 miss)
  • Revenue guidance for Q3 2023 is $125.3 million at the midpoint, below analyst estimates of $133.7 million
  • The company dropped revenue guidance for the full year from $515 million to $500 million at the midpoint, a 2.91% decrease
  • Free cash flow of $4.34 million, down 87.8% from the previous quarter
  • Gross Margin (GAAP): 84.9%, up from 84% in the same quarter last year
  • ARR: $497.0m, up 17% year over year

Yaki Faitelson, Varonis CEO, said, "Our second quarter results reflect the strong adoption of Varonis SaaS, and provide further validation that our transition to SaaS is well-received by our customers and sales force worldwide. The acceptance of SaaS is progressing at a rapid pace with approximately 10% of our total ARR coming from SaaS today, which is benefiting our ARR performance and cash flow generation, despite the company facing continued macro headwinds.”

Founded by a duo of former Israeli Defense Forces cyber warfare engineers, Varonis (NASDAQ:VRNS) offers software-as-service that helps customers protect data from cyber threats and gain visibility into how enterprise data is being used.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. As the volume of internet enabled devices grows, every device that employees use to connect to business networks represents a potential risk. Endpoint security software enables businesses to protect devices (endpoints) that employees use for work purposes either on a network or in the cloud from cyber threats.

Sales Growth

As you can see below, Varonis's revenue growth has been over the last two years, growing from $88.4 million in Q2 FY2021 to $115.4 million this quarter.

Varonis Total Revenue

Varonis's quarterly revenue was only up 3.56% year on year, which isn't particularly great. However, its revenue increased $8.08 million quarter on quarter, a strong improvement from the $35.3 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter's guidance suggests that Varonis is expecting revenue to grow 1.57% year on year to $125.3 million, slowing down from the 22.9% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 10.9% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Varonis's free cash flow came in at $4.34 million in Q2, turning positive over the last year.

Varonis Free Cash Flow

Varonis has generated $36.6 million in free cash flow over the last 12 months, a decent 8.56% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from Varonis's Q2 Results

Sporting a market capitalization of $3.08 billion, Varonis is among smaller companies, but its more than $753.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was good to see Varonis report strong growth in ARR, showing that the move to the SaaS business model is progressing well. The company also improved its gross margin this quarter, even if just slightly. On the other hand, its full-year revenue guidance missed analysts' expectations. Overall, this was a mostly positive quarter for Varonis. The stock is up 6.23% after reporting and currently trades at $30.5 per share.

Varonis may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned in this report.