What Happened:
Shares of data protection and security software company Varonis (NASDAQ:VRNS) jumped 7.68% in the morning session after Morgan Stanley upgraded the stock's rating from Equal Weight (Neutral) to Overweight (Buy). The firm's research indicates the stock price can double from here.
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What is the market telling us:
Varonis's shares are very volatile and over the last year have had 13 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The biggest move we wrote about over the last year was 3 months ago, when the company gained 6.27% on the news that the company reported strong growth in ARR (annual recurring revenue) that also beat Wall Street analysts' expectations in the second quarter, showing that the move to the SaaS (software as a service) business model (from a legacy license model) is progressing well. The company also beat on free cash flow and improved its gross margin, even if just slightly. Lastly in terms of positives, full year ARR and free cash flow guidance were both raised. Revenue guidance for the next quarter and the full year fell short of Consensus and revenue guidance for the full year was lowered. However, it's important to note that the transition to the SaaS model can introduce noise to reported topline and operating metrics, potentially masking the actual progress made until the change is fully completed. Therefore, the quarter's performance should be viewed in the context of the ongoing business model transition. To further add context and point the market in the right direction, Varonis's CEO said: "The momentum of Varonis SaaS, reflected by our second quarter SaaS mix of 58% versus our guidance of 35% as well as the significant increase in existing customer conversions, generated meaningful improvements to our three north stars during this transition, which are ARR, free cash flow and ARR contribution margin. That gives us the confidence to raise our guidance for full-year ARR, SaaS mix, and free cash flow." Overall it was a positive quarter, given the encouraging guidance and progress made regarding the business model change.
Varonis is up 35.6% since the beginning of the year, TODO Investors who bought $1,000 worth of Varonis's shares 5 years ago would now be looking at an investment worth $1.53 thousand.
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