Varonis Systems (VRNS)

Data security company Varonis Systems (NASDAQ:VRNS) missed Wall Street’s revenue expectations in Q3 CY2025, but sales rose 9.1% year on year to $161.6 million. Next quarter’s revenue guidance of $168 million underwhelmed, coming in 1.2% below analysts’ estimates. Its non-GAAP profit of $0.06 per share was in line with analysts’ consensus estimates.

Company Overview

Beginning with protecting Windows file shares in 2005 and evolving into a comprehensive security platform, Varonis Systems (NASDAQ:VRNS) provides data security software that helps organizations protect sensitive information, detect threats, and comply with privacy regulations.

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.

Varonis Systems competes with CyberArk (NASDAQ:CYBR), Proofpoint (formerly NASDAQ:PFPT, now private), Microsoft (NASDAQ:MSFT), Crowdstrike (NASDAQ:CRWD), and several privately-held cybersecurity companies including Netwrix and SailPoint (formerly NYSE:SAIL, now private).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Varonis Systems’s sales grew at a decent 17.6% compounded annual growth rate over the last five years. Its growth was slightly above the average software company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Varonis Systems’s recent performance shows its demand has slowed as its annualized revenue growth of 11.7% over the last two years was below its five-year trend.

This quarter, Varonis Systems’s revenue grew by 9.1% year on year to $161.6 million, missing Wall Street’s estimates. Company management is currently guiding for a 6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.5% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and indicates its newer products and services will catalyze better top-line performance.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Varonis Systems’s ARR punched in at $718.6 million in Q3, and over the last four quarters, its growth was solid as it averaged 18.3% year-on-year increases. This alternate topline metric grew faster than total sales, which likely means that the recurring portions of the business are growing faster than less predictable, choppier ones such as implementation fees. That could be a good sign for future revenue growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Varonis Systems is extremely efficient at acquiring new customers, and its CAC payback period checked in at 15 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Varonis Systems, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Varonis Systems’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 80% gross margin over the last year. That means Varonis Systems only paid its providers $19.96 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Varonis Systems has seen gross margins decline by 5.7 percentage points over the last 2 year, which is among the worst in the software space.

In Q3, Varonis Systems produced a 78.2% gross profit margin, down 5.5 percentage points year on year. Varonis Systems’s full-year margin has also been trending down over the past 12 months, decreasing by 4 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Varonis Systems’s expensive cost structure has contributed to an average operating margin of negative 22% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Varonis Systems reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Analyzing the trend in its profitability, Varonis Systems’s operating margin decreased by 2.7 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Varonis Systems’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

Varonis Systems’s operating margin was negative 22.2% this quarter.

If you’ve followed StockStory for a while, you know 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 Systems has shown impressive cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that give it the option to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 21.6% over the last year, better than the broader software sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Varonis Systems’s free cash flow clocked in at $28.89 million in Q3, equivalent to a 17.9% margin. This result was good as its margin was 3.5 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Varonis Systems’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 21.6% for the last 12 months will decrease to 20.4%.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Varonis Systems is a well-capitalized company with $707.9 million of cash and $511.7 million of debt on its balance sheet. This $196.2 million net cash position is 5.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue in the quarter missed, which is a bad way to start an earnings report. Full-year revenue guidance slightly missed as well, and the company lowered its full-year adjusted EPS guidance. Overall, this was a pretty bad quarter. The stock traded down 28.6% to $45 immediately after reporting.

Updated: December 4, 2025 at 9:34 PM EST

Before deciding whether to buy Varonis Systems or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Varonis Systems’s business quality ultimately falls short of our standards. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its declining operating margin shows it’s becoming less efficient at building and selling its software. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its operating margins reveal poor profitability compared to other software companies.

Varonis Systems’s price-to-sales ratio based on the next 12 months is 5.3x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $52.63 on the company (compared to the current share price of $31.15).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.