Varonis’ Competitive Landscape Remains Tough as Firm Transitions Its Solutions to the Cloud

Analyst

Malik Ahmed Khan

We view Varonis Systems as a strong data security vendor that occupies a tough competitive landscape. The firm’s solutions revolve around data security, privacy, and compliance. While the firm’s history stretches back to its founding in 2004, we are pessimistic on what the future holds for the firm as intense competition and possibly higher churn due to the firm’s ongoing cloud transition stand to exact a cost on the firm’s growth and profitability outlook.

Varonis’ security solutions are geared toward securing sensitive data within enterprises, such as financial records or sensitive customer data. Within the data security space, we believe every breach carries not only the financial and regulatory damage but also reputational one. At the same time, the attack methods used by nefarious actors are only increasing in complexity as they find new methods to expose their targets’ weak points and exploit them to gain access to valuable data that can then be resold or be used as leverage for ransom.

In this evolving landscape, we see increased demand for data security vendors. While increased demand for data privacy and security is a tailwind for Varonis’ business, we believe the firm could face tough competition from larger public players such as the hyperscalers (where a lot of this data is stored in the first place) and smaller privately-owned start-ups. This tough competitive landscape coupled with the firm’s transition to a Software-as-a-Service (SaaS) model could lead to customers adopting SaaS solutions from other data security vendors as they migrate away from Varonis’ on-premise solutions.

As customers undergo cloud transitions of their own, we believe spending on SaaS security solutions is going to outpace spending on their on-premises peers. With that in mind, we believe Varonis’ shift to SaaS is strategically sound. However, we believe the firm’s execution of its transition to SaaS is going to be critical. For the transition to be successful, Varonis will have to manage their spending while ensuring that the firm doesn’t see a period of heightened churn.

Business Strategy & Outlook

We believe Varonis Systems merits a no-moat rating. While we believe Varonis has carved out a place in the broader data security space, we believe the company stands to face tough competition in a fragmented market. While we see some evidence of switching costs for the business, as illustrated by strong retention and upselling metrics, the company’s recent profitability has been less than stellar, and we do not have sufficient confidence in the firm’s ability to generate excess returns on capital over the next decade.

Varonis’ primary area of expertise is data security and privacy. The firm’s software allows clients to secure structured and unstructured data, monitor and control access to the data, and receive alerts on any potential breaches or security threats. Varonis’ security solutions are geared toward securing sensitive data within enterprises, such as financial records or sensitive customer data. In a time of heightened scrutiny around data privacy, Varonis’ software can also enable its clients to comply with regulatory requirements such as GDPR and CCPA. We believe the broader data security space, especially for enterprise customers, is conducive to the presence of economic moats. Data security vendors often handle and protect critical data for their clients, leaving them averse to switching away from their existing vendor.

We believe this natural moatiness of the data security space has allowed Varonis to keep churn low. The firm’s gross retention metric is above 90%, implying a customer lifetime of more than 10 years. At the same time, the firm’s upselling activity has allowed it to clock net retention in excess of 110% over the last few years. These impressive gross and net retention metrics show the presence of switching costs, as Varonis is able to not only retain existing clients but also entrench itself further within their data security infrastructure. While these metrics are in line with companies under our coverage that have been awarded economic moats, we remain unconvinced that these retention metrics—and the implied switching costs—will allow Varonis to out earn its cost of capital over the next decade. Varonis’ customers appear to be sticky, but the company has incurred operating losses to build its business and capture these customers. 

As we think of Varonis competitive positioning, we believe the firm may face difficulty maintaining its current retention rates. Varonis is currently undergoing a cloud transition, a process in which a firm weans its on-premises customers over to its cloud products delivered as software-as-a-service (SaaS). We believe that any cloud transition brings along difficulty in customer retention. For example, Varonis may wish to move one of its existing clients from a term license over to a cloud-based deal. The client, rightfully so, may wish to only move over to Varonis’ cloud offering once the term license is close to expiry. As a result, there is a sweet spot in which the client can effectively move off Varonis’ platform onto a competitor’s without signing the cloud deal. More broadly, the company undergoing a cloud transition effectively opens the exit door but asks the client not to leave. With the firm just beginning its cloud transition journey, we believe that, as it weans its customers off its on-premises offering, there will be a period of heightened churn as a portion of customers opt for a different data security vendor. 

While Varonis’ business demonstrates a qualitative argument for an economic moat via strong retention metrics, the firm’s profitability (both past and projected) is one filled with red ink. We believe that the firm’s cloud transition coupled with continued investments in research and sales will stack up hefty economic losses over the next few years. Thus, we don’t foresee Varonis generating excess returns on capital in the near-to-medium-term, which precludes us from assigning an economic moat rating to the firm.

None

Economic Moat

Varonis Systems

Varonis Systems, Inc. engages in providing data security and analytics. It operates through the following segments: United States, EMEA, and Rest of the World. Its products includes datadvantage, data classification engine, data transport engine, Varonis edge, datanswers, datalert, dataprivilege, automation engine, and GDPR patterns. The company was founded by Yaki Faitelson and Ohad Korkus on November 3, 2004 and is headquartered in New York, NY.

Earnings data Q3 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Varonis Systems, Inc. engages in protecting enterprise data such as sensitive files and emails, confidential customer, patient, and employee data, financial records, strategic and product plans, and other intellectual property. It operates through the following geographical segments: North America, EMEA, and Rest of the World. The company was founded by Yakov Faitelson and Ohad Korkus on November 3, 2004 and is headquartered in New York, NY.

Industry-leading Data Security Platform adds Salesforce Shield integration to enhance its world-class Salesforce security solution Industry-leading Data Security Platform adds Salesforce Shield integration to enhance its world-class Salesforce security solution

Varonis Announces Salesforce Shield Integration for Unprecedented Data Security

VRNS is a data security software company that offers data management systems to organize and protect business data. The company is undergoing a transition to a SaaS model, which is expected to drive growth and improve earnings quality. While near-term challenges exist, such as economic uncertainties, the potential benefits of SaaS adoption are substantial, and the company has a historical precedent of robust growth.

Varonis Systems: SaaS Transition Is On Track

Expansion allows Varonis customers to achieve automated data security outcomes while following data privacy principles Expansion allows Varonis customers to achieve automated data security outcomes while following data privacy principles

Varonis Opens UK Data Center to Support SaaS Customers

NEW YORK, Aug. 22, 2023 (GLOBE NEWSWIRE) -- Varonis Systems, Inc. (Nasdaq: VRNS), a leader in data security, announced its participation at the following upcoming conferences:

Varonis to Present at Upcoming Investor Conferences

Test your hacking skills, attend a live cloud attack simulation, and see how Varonis delivers automated data security outcomes Test your hacking skills, attend a live cloud attack simulation, and see how Varonis delivers automated data security outcomes

Varonis at Black Hat USA 2023: Capture the Flag and Secure Your Cloud Data With DSPM

While the top- and bottom-line numbers for Varonis (VRNS) give a sense of how the business performed in the quarter ended June 2023, it could be worth looking at how some of its key metrics compare to Wall Street estimates and year-ago values.

Compared to Estimates, Varonis (VRNS) Q2 Earnings: A Look at Key Metrics

Varonis Systems, Inc. (NASDAQ:VRNS ) Q2 2023 Earnings Conference Call July 31, 2023 4:30 PM ET Company Participants Tim Perz - Director of IR Yaki Faitelson - Chairman and CEO Guy Melamed - CFO and COO Conference Call Participants Matt Hedberg - RBC Capital Markets Joel Fishbein - Truist Securities Andrew Nowinski - Wells Fargo Shaul Eyal - TD Cowen Rob Owens - Piper Sandler Roger Boyd - UBS Jason Ader - William Blair Saket Kalia - Barclays Brian Essex - JPMorgan Rudy Kessinger - D.A. Davidson Joshua Tilton - Wolfe Research Chad Bennett - Craig-Hallum Capital Group Annick Baumann - Jefferies Shrenik Kothari - Robert W.

Varonis Systems, Inc. (VRNS) Q2 2023 Earnings Call Transcript

Varonis Systems (VRNS) came out with quarterly earnings of $0.01 per share, missing the Zacks Consensus Estimate of $0.02 per share. This compares to break-even earnings per share a year ago.

Varonis Systems (VRNS) Misses Q2 Earnings and Revenue Estimates

Annual recurring revenues grew 17% year-over-year58% SaaS mix of new business and upsell ARR in the second quarterYear-to-date cash from operations generated $42.6 million vs. $10.1 million last yearYear-to-date free cash flow generated $40.0 million vs. $3.9 million last year

Varonis Announces Second Quarter 2023 Financial Results

NEW YORK, July 11, 2023 (GLOBE NEWSWIRE) -- Varonis Systems, Inc. (Nasdaq: VRNS), a leader in data security, announced that it will report its second quarter 2023 financial results following the close of the U.S. financial markets Monday, July 31, 2023.

Varonis Announces Date of Second Quarter 2023 Financial Results

Visit booth 912 to learn how the Varonis SaaS platform continuously classifies critical data, eliminates exposure, and stops threats without manual effort Visit booth 912 to learn how the Varonis SaaS platform continuously classifies critical data, eliminates exposure, and stops threats without manual effort

Varonis at Gartner® Security & Risk Management Summit 2023: Powering Effortless Security Outcomes With Automation

SEATTLE--(BUSINESS WIRE)--Qumulo, the simple way to manage exabyte-scale data anywhere, today announced integration with the Varonis Data Security Platform and introduced their new Snapshot-Locking capability to protect customers against ransomware. With an increasing number of ransomware attacks on private businesses, public agencies, and healthcare organizations, managing cybersecurity risk is a bigger priority than ever before. The ongoing threat of cyberattacks forces IT organizations to co.

Qumulo Bolsters Customers' Security and Ransomware Defenses with Varonis Integration and New Snapshot-Locking Capabilities

Varonis Systems, Inc. (NASDAQ:VRNS ) Q1 2023 Earnings Conference Call May 1, 2023 4:30 PM ET Company Participants Tim Perz - Director of IR Yaki Faitelson - Chairman and CEO Guy Melamed - CFO and COO Conference Call Participants Matt Hedberg - RBC Capital Markets Hamza Fodderwala - Morgan Stanley Saket Kalia - Barclays Joel Fishbein - Truist Securities Fatima Boolani - Citigroup Roger Boyd - UBS Brian Essex - JPMorgan Rob Owens - Piper Sandler Josh Tilton - Wolfe Research Chad Bennett - Craig-Hallum Capital Group Andrew Nowinski - Wells Fargo Shrenik Kothari - Robert W. Baird Shebly Seyrafi - FBN Securities Operator Greetings, and welcome to the Varonis Systems First Quarter 2023 Earnings Conference Call.

Varonis Systems, Inc. (VRNS) Q1 2023 Earnings Call Transcript

Varonis Systems (VRNS) reported break-even quarterly earnings per share versus the Zacks Consensus Estimate of a loss of $0.05. This compares to loss of $0.09 per share a year ago.

Varonis Systems (VRNS) Reports Break-Even Earnings for Q1

Annual recurring revenues grew 18% year-over-year 37% SaaS mix of new business and upsell ARR in the first quarter Year-to-date cash from operations generated of $36.8 million vs. $24.5 million last year Year-to-date free cash flow generated of $35.7 million vs. $21.0 million last year

Varonis Announces First Quarter 2023 Financial Results

Reduce your cloud attack surface by discovering and remediating risky third-party integrations connected to Microsoft 365, Google Workspace, and Salesforce Reduce your cloud attack surface by discovering and remediating risky third-party integrations connected to Microsoft 365, Google Workspace, and Salesforce

Varonis Launches Third-Party App Risk Management

Visit North Hall, Booth #5345, to learn how Varonis' new SaaS platform continuously classifies critical data, eliminates exposure, and stops threats without manual effort Visit North Hall, Booth #5345, to learn how Varonis' new SaaS platform continuously classifies critical data, eliminates exposure, and stops threats without manual effort

Varonis at RSAC 2023: Automating Data Security Outcomes Across the Cloud

Expansion allows Varonis customers to achieve automated data security outcomes while following national standards for data privacy Expansion allows Varonis customers to achieve automated data security outcomes while following national standards for data privacy

Varonis Opens Australia Data Center to Support SaaS Customers

Akamai Technologies

The CEO or Chief Executive Officer is a company's leader and the individual who is supposed to have the greatest vision and insight into where the company is heading. The CEO's “right hand” is the Chief Financial Officer (CFO), who feeds the latest financial forecasts to the CEO, while the Chief Revenue Officer (CRO) often gives revenue growth updates and the Chief Operating Officer (COO) informs the CEO of how well operational expansion is going.

2 Cybersecurity Stocks CEOs Are Buying

NEW YORK, April 10, 2023 (GLOBE NEWSWIRE) -- Varonis Systems, Inc. (Nasdaq: VRNS), a pioneer in data security and analytics, announced that it will report its first quarter 2023 financial results following the close of the U.S. financial markets Monday, May 1, 2023.

Varonis Announces Date of First Quarter 2023 Financial Results

Independent Research Firm report asserts, "Varonis is a top choice for organizations prioritizing deep data visibility, classification capabilities, and automated remediation for data access" Independent Research Firm report asserts, "Varonis is a top choice for organizations prioritizing deep data visibility, classification capabilities, and automated remediation for data access"

Varonis Named a Leader in Data Security Platforms

Varonis is a pioneer company in the protection and digital security systems and security for data and information. I believe that what makes the company very different is the ability to follow the activity of millions of users.

Varonis Systems: Cheap Cyber Security Play

Varonis (VRNS) was a big mover last session on higher-than-average trading volume. The latest trend in earnings estimate revisions might not help the stock continue moving higher in the near term.

Strength Seen in Varonis (VRNS): Can Its 8.1% Jump Turn into More Strength?

NEW YORK, March 14, 2023 (GLOBE NEWSWIRE) -- Varonis Systems, Inc. (Nasdaq: VRNS), a pioneer in data security and analytics, is hosting an Investor Day today, in New York, beginning at 9.00 a.m. ET. Members of the Varonis executive management team will provide an update on the company's vision and SaaS transition strategy followed by a question and answer session.

Varonis Hosts Investor Day

Varonis' annual channel awards honor partners that have gone above and beyond to safeguard data for customers worldwide Varonis' annual channel awards honor partners that have gone above and beyond to safeguard data for customers worldwide

News for Varonis Systems Stock (VRNS)