Data security company Varonis Systems (NASDAQ:VRNS) reported Q4 CY2025 results topping the market’s revenue expectations, with sales up 9.4% year on year to $173.4 million. Guidance for next quarter’s revenue was better than expected at $165 million at the midpoint, 0.9% above analysts’ estimates. Its non-GAAP profit of $0.08 per share was significantly above analysts’ consensus estimates.
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Varonis Systems (VRNS) Q4 CY2025 Highlights:
- Revenue: $173.4 million vs analyst estimates of $168.2 million (9.4% year-on-year growth, 3.1% beat)
- Adjusted EPS: $0.08 vs analyst estimates of $0.03 (significant beat)
- Adjusted Operating Income: $4.55 million vs analyst estimates of $1.54 million (2.6% margin, significant beat)
- Revenue Guidance for Q1 CY2026 is $165 million at the midpoint, above analyst estimates of $163.5 million
- Adjusted EPS guidance for the upcoming financial year 2026 is $0.08 at the midpoint, missing analyst estimates by 76.6%
- Operating Margin: -17.5%, down from -11.1% in the same quarter last year
- Annual Recurring Revenue: $745.4 million (16.1% year-on-year growth, beat)
- Billings: $274.1 million at quarter end, up 18.3% year on year
- Market Capitalization: $3.13 billion
StockStory’s Take
Varonis Systems’ fourth quarter was marked by ongoing momentum in its transition from legacy on-premises software to a SaaS model, with management attributing performance to robust SaaS adoption and a record number of customer conversions following the decision to end-of-life its self-hosted platform. CEO Yakov Faitelson described the SaaS platform as delivering “automation and centralized visibility” that legacy solutions could not match. However, the market responded negatively, reflecting concerns around declining operating margins and the near-term headwinds from transitioning customers and lower renewal rates among remaining on-prem accounts.
Looking forward, Varonis Systems’ guidance is shaped by the expectation that SaaS ARR growth will be driven by a renewed sales focus on new accounts and expanded offerings to existing SaaS customers, as the conversion of remaining on-premises customers tapers off. Management pointed to growing demand for advanced automation, AI-driven security, and new product integrations following the Altu acquisition. CFO Guy Melamed cautioned that while the shift to SaaS should support long-term profitability, the company expects “lower ARR contribution margin and lower free cash flow” in 2026 due to the residual impact of the on-premises business wind-down.
Key Insights from Management’s Remarks
Management cited the SaaS transition, customer conversion momentum, and increased demand for automation and AI-driven security as primary contributors to the quarter’s performance and evolving financial profile.
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SaaS conversion surge: The end-of-life announcement for Varonis Systems’ self-hosted platform prompted a record wave of customer conversions in Q4, with approximately $65 million in annual recurring revenue (ARR) shifting to SaaS, accelerating the company’s shift toward a fully SaaS business.
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AI and automation demand: Management highlighted strong adoption of AI-driven features such as Managed Data Detection and Response (MDDR) and CoPilot, with customers seeking automated remediation and threat detection capabilities that legacy tools lacked. CEO Yakov Faitelson emphasized that “automation is necessary to achieve real outcomes,” especially as AI increases the complexity of cyber threats.
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New product traction: The SaaS portfolio saw growth in cloud security, database activity monitoring, and email security, driven by expanded use cases and the need to protect data across increasingly complex environments. Early feedback on new products, including database monitoring and email security, has been positive and is expected to support upsell opportunities in 2026.
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Altu acquisition: The purchase of Altu, an AI security company, was positioned as a strategic move to enhance end-to-end visibility and control over AI tools and agents, complementing Varonis Systems’ core data security offerings. This acquisition is intended to bolster the platform’s value proposition amid rising AI-driven threats.
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Revenue mix shift and margin pressure: As the company transitions to SaaS, legacy on-premises renewals declined, impacting overall operating margins and contribution margins. Management expects these pressures to persist in the near term but believes the SaaS-only model will ultimately provide a healthier financial profile.
Drivers of Future Performance
Varonis Systems expects its SaaS growth to be propelled by expanded product offerings, increased focus on new customer acquisition, and the integration of AI-driven security solutions, while margin headwinds remain during the transition period.
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Sales realignment post-conversion: With the bulk of conversions from on-premises to SaaS complete, the sales organization is now incentivized to focus on acquiring new customers and expanding within existing SaaS accounts, rather than on conversion activities. Management believes this shift will support a higher net retention rate and more sustainable long-term growth.
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Product expansion and AI integration: Continued investment in new SaaS features—such as automated threat detection (MDDR), enhanced database monitoring, and expanded cloud platform coverage—along with the newly acquired Altu capabilities, are expected to drive upsell opportunities and address emerging customer needs around AI security.
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Short-term profitability pressures: The wind-down of the legacy on-premises business is anticipated to result in lower ARR contribution margins and free cash flow in 2026, primarily due to reduced renewal rates from non-SaaS customers and integration expenses from recent acquisitions. Management expects these headwinds to subside as the business becomes fully SaaS by the end of 2026.
Catalysts in Upcoming Quarters
In the coming quarters, the StockStory team will closely watch (1) the pace and success of upselling new AI-driven security products to the expanding SaaS customer base, (2) execution on integrating the Altu acquisition into the Varonis Systems platform, and (3) improvement in ARR contribution margin and free cash flow as the company completes its SaaS transition. Ongoing adoption of cloud and database security solutions will also be important indicators of sustained demand.
Varonis Systems currently trades at $24.10, down from $26.53 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).
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