Varonis Systems, Inc. (VRNS) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights several positive factors: strong SaaS transition progress, promising Microsoft partnership, significant ARR growth, and strategic acquisitions. The optimistic guidance and increased customer engagement in AI tools further support a positive outlook. While management avoided specific revenue details, the overall sentiment remains positive with robust growth prospects, especially in the SaaS domain.

Key Financial Performance

ARR (Annual Recurring Revenue) $693.2 million, a 19% increase year-over-year. The growth is attributed to the company's SaaS transition and strong demand for their SaaS platform.

Free Cash Flow (Year-to-Date) $82.7 million, up from $67.3 million in the same period last year, representing a significant increase. This improvement is due to strong cash flow generation and operational efficiency.

Total Revenues (Q2 2025) $152.2 million, a 17% increase year-over-year. The growth was driven by increased SaaS sales, although there was a 7% headwind due to the shift to SaaS sales being recognized ratably.

SaaS Revenues $105.9 million, contributing significantly to the total revenue. This reflects the company's ongoing SaaS transition.

Term License Subscription Revenues $32.4 million, part of the total revenue mix.

Maintenance and Services Revenues $13.9 million, with renewal rates over 90%. This segment is expected to decline as the SaaS transition progresses.

Gross Margin (Q2 2025) 80.6%, down from 84.1% in Q2 2024. The decline is attributed to the increased SaaS sales mix.

Operating Loss (Q2 2025) $1.9 million, compared to an operating income of $2.1 million in Q2 2024. The loss is due to the SaaS transition and increased investments.

Net Income (Q2 2025) $3.8 million, or $0.03 per diluted share, down from $6.8 million, or $0.05 per diluted share, in Q2 2024. The decrease is linked to the SaaS transition and associated costs.

Cash and Cash Equivalents (as of June 30, 2025) $1.2 billion, indicating strong liquidity.

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Operating Highlights

SaaS Transition: Varonis is advancing towards completing its SaaS transition, with SaaS ARR now representing 69% of total ARR, up from 61% in Q1 2025.

FedRAMP Authorization: The company achieved FedRAMP Authorization, enabling it to offer its SaaS platform to the federal sector.

AI and Data Security: Expanded coverage to protect OpenAI ChatGPT enterprise and updated its strategic partnership with Microsoft to address AI-related data security challenges.

DSPM Market Expansion: Varonis is entering the DSPM market, focusing on securing cloud data and expanding its use cases.

Federal Sector: FedRAMP Authorization allows Varonis to tap into the federal market.

ARR Growth: Annual Recurring Revenue (ARR) grew 19% year-over-year to $693.2 million.

Free Cash Flow: Year-to-date free cash flow increased to $82.7 million, up from $67.3 million in the same period last year.

Microsoft Partnership: Updated strategic partnership with Microsoft to enhance AI security and integration with Microsoft Co-pilot.

SaaS Transition Investments: Investments are being made to accelerate SaaS transition and capture market opportunities.

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Risk or Challenges

SaaS Transition Risks: The company is undergoing a transition to a SaaS model, which could lead to operational challenges, including potential disruptions in revenue recognition and customer adoption issues. The shift from upfront revenue recognition to a ratable model has already created a 7% headwind on revenue growth and a 6% headwind on operating margin.

Competitive Pressures in DSPM Market: Varonis faces competition from DSPM point tools, which focus on discovery and classification of data. While Varonis emphasizes its broader capabilities, the competitive landscape could pressure pricing and market share.

Economic Uncertainty: The company acknowledges an uncertain macroeconomic backdrop, which could impact customer spending and delay purchasing decisions, particularly for large-scale SaaS transitions.

Regulatory and Compliance Challenges: The company operates in a highly regulated environment, and evolving compliance requirements could increase operational complexity and costs. For example, the healthcare and federal sectors have stringent requirements that Varonis must meet.

Supply Chain and Operational Risks: Although not explicitly mentioned, the transition to SaaS and increased investments in cloud infrastructure could expose the company to supply chain and operational risks, including potential delays or cost overruns.

Customer Retention and Upselling Risks: While the company has strong SaaS NRR trends, the transition could pose risks to customer retention and upselling, especially if customers do not fully adopt the new SaaS platform or face challenges in migrating.

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Guidance & Outlook

Revenue Expectations: For Q3 2025, total revenues are expected to be between $163 million and $168 million, representing growth of 10% to 13%. For the full year 2025, total revenues are projected to be between $616 million and $628 million, representing growth of 12% to 14%.

ARR (Annual Recurring Revenue) Projections: ARR is expected to reach between $748 million and $754 million by the end of 2025, representing growth of 17%.

Free Cash Flow: Free cash flow for the full year 2025 is projected to be between $120 million and $125 million.

SaaS Transition: The company is progressing towards completing its SaaS transition, with SaaS ARR now representing 69% of total ARR. This transition is expected to unlock further growth opportunities and focus on upselling existing customers.

Market Trends and Growth Drivers: The adoption of AI, growing awareness of data-centric cloud security, and the expansion of the data security market are expected to drive increased momentum in the business. The company is also seeing strong demand for its SaaS platform and MDDR offering.

Investments and Strategic Focus: The company is prudently increasing investments to capture growing demand and sees a clear path to durable growth post-SaaS transition.

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Shareholder Return Plan

Share Repurchase Program: During the second quarter, we repurchased 1 million shares at an average purchase price of $38.59 for a total of $38.7 million. Over the course of the program, we repurchased 2.5 million shares at an average purchase price of $40.32 for a total consideration of $100 million.

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Key Q&A

Q:How does Varonis compete against privately held competitors like Cyera, and how is their move to SaaS changing the competitive landscape?

A:Varonis views DSPM vendors like Cyera as expanding the total available market and generating awareness for data security. Varonis differentiates itself by offering a comprehensive data security platform that includes automated outcomes, remediation, and forensics, unlike DSPM vendors that focus on data discovery and sampling. Varonis emphasizes scalability and automation, making data security easier for customers. They also highlight their ability to deploy quickly and handle production data, which DSPM vendors often avoid.

Q:Can you size the opportunity in terms of revenue contribution from the expanded Microsoft partnership and discuss go-to-market initiatives?

A:Varonis sees significant synergies with Microsoft, particularly in securing Microsoft's Copilot productivity tool. They are working on technical integrations and pipeline development efforts with Microsoft. While it's still early, the partnership is progressing well, and Varonis is optimistic about its potential.

Q:What metrics or data instill confidence in over 20% ARR growth, and how is SaaS ARR performing?

A:Varonis attributes its ARR growth to strong new customer acquisitions and SaaS conversions. SaaS NRR is higher than the reported NRR, and the company sees opportunities to focus on upselling within SaaS customers. Investments in R&D and new product adoption are also contributing to growth.

Q:How does the current macro environment compare to the previous quarter, and how is the SaaS conversion progressing?

A:The macro environment in Q2 was similar to Q1, with continued deal scrutiny. SaaS conversion is progressing well, with the SaaS mix increasing from 80% to 82%, ahead of the initial guidance of 78%. Varonis is pleased with the lessons learned and improvements made in their SaaS strategy.

Q:What is the competitive landscape like, and how does Varonis view the convergence between traditional backup and data security?

A:Varonis rarely sees competition from infrastructure and backup vendors in POCs. They emphasize that data security cannot be a side gig and highlight their focus on POCs and scalability. Varonis views the convergence of backup and data security as limited, with DSPM companies acquired by larger firms not posing significant competition.

Q:Can you expand on the trend of customers consolidating their data security budgets to Varonis?

A:Varonis sees customers consolidating budgets for security, compliance, insider threat, and labeling around their platform. They emphasize their ability to protect data comprehensively and address insider threats, user behavior analytics, and credential elevation. Their SaaS platform's scalability and automated outcomes drive natural expansion within customers.

Q:How does Varonis view the opportunity in the federal sector following FedRAMP Authorization?

A:Varonis sees significant long-term opportunities in the federal sector, which currently accounts for about 5% of ARR. FedRAMP Authorization allows them to offer their SaaS platform to federal customers and demonstrates their commitment to security. While it's too early to see immediate benefits, the certification is also valuable for commercial customers.

Q:What details can you provide about the healthcare-related win with 25,000 seats?

A:The healthcare win involved a mix of AWS, Azure, databases, and 365 services, with a focus on protecting critical data. Customers are increasingly adopting Varonis for its ability to secure diverse data environments, including on-prem and cloud platforms.

Q:Can you provide more commentary on new logo acquisition and SaaS ARR growth?

A:Varonis has seen an acceleration in new logo acquisition, with larger initial lands and strong adoption of their SaaS platform and MDDR. SaaS NRR is significantly higher than reported NRR, and customers are expanding to additional platforms after realizing the value of Varonis' automated solutions.

Q:How should we view the revenue opportunity for the next-gen Database Activity Monitoring (DAM) offering?

A:Varonis sees the DAM offering as part of their broader data security strategy, addressing a market ripe for disruption. They aim to replace legacy vendors like Imperva and Guardium while providing user behavior analytics and security as part of a unified platform. The opportunity includes both new customers and replacement cycles.

Q:What differentiates Varonis' identity protection suite from other identity vendors?

A:Varonis focuses on identity from a threat perspective, identifying abnormal behavior and enriching identity data streams. They emphasize that attackers often compromise identities, and Varonis provides comprehensive data security to protect against such threats.

Q:How is SaaS creating opportunities to sell to additional customers, and are these greenfield opportunities or displacements?

A:SaaS is opening new opportunities by increasing Varonis' TAM and enabling them to address new verticals and customers. While there are some displacement opportunities, most of the growth comes from greenfield opportunities and capturing new budgets.

Q:Review of Unclear Management Responses

A:Management avoided providing specific revenue contribution details for the Microsoft partnership, instead focusing on synergies and early progress. They also did not provide clear metrics for SaaS revenue, emphasizing ARR as the key metric. Additionally, they avoided quantifying the contribution of protecting cloud environments and SaaS applications, only stating that it is improving.

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Earnings Word Cloud

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