Data protection and security software company Varonis (NASDAQ:VRNS) missed 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.
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
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.
The company's key product is the Varonis Data Security platform. It provides features including real-time threat detection, data classification/governance, and compliance reporting. Threat detection tells an organization if a rogue employee is moving large amounts of data. Data classification/governance helps organize data by levels of sensitivity and can automatically apply access and security measures based on this. Compliance reporting ensures that an organization’s data practices comply with regulations that may govern where consumer demographic data is stored, for example.
Without proper tools, organizations are generally better equipped to create data than protect it, and data breaches can have significant financial and reputational consequences. For example, international email marketing company Epsilon suffered a database hack in 2011 that affected 75 clients and was estimated to cost the company $3-4bn when factoring in direct costs, forensic audits, litigation, and lost business.
The company’s customers are of various industries but tend to be larger enterprises rather than small or medium-sized businesses with few employees and simple IT architectures. Varonis generates revenue through software licensing and maintenance fees. The company also offers professional services such as implementation and training to ensure customer success.
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.
Competitors offering data protection and security software providers include Qualys (NASDAQ:QLYS), Rapid7 (NASDAQ:RPD), and F5 (NASDAQ:FFIV).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'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.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Varonis's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 84.9% in Q2.
That means that for every $1 in revenue the company had $0.85 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Varonis's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
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 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
With a market capitalization of $3.08 billion, Varonis is among smaller companies, but its $753.8 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
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.
Is Now The Time?
Varonis may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. We think Varonis is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics and its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from Varonis given its price to sales ratio based on the next 12 months is 5.8x. There's definitely a lot of things to like about Varonis and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.
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