VRNS Q1 Earnings Call: SaaS Transition Drives Outperformance and Raises Profit Outlook

Data protection and security software company Varonis (NASDAQ: VRNS) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 19.6% year on year to $136.4 million. The company expects next quarter’s revenue to be around $147.5 million, close to analysts’ estimates. Its non-GAAP profit of $0 per share was significantly above analysts’ consensus estimates.

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StockStory’s Take

Varonis' first quarter results reflected strong customer momentum for its data security SaaS platform, with management attributing growth to accelerated adoption of its automated threat detection capabilities and expansion into new cloud data storage environments. CEO Yaki Faitelson emphasized that companies are increasingly prioritizing automated, data-centric security as generative AI tools and ransomware threats underscore the risks of data exposure, noting, "The automated value proposition of the Varonis SaaS platform and MDDR offering resonates with security teams."

Looking ahead, management reaffirmed its full-year revenue outlook and raised non-GAAP EPS guidance, citing confidence in its SaaS transition and ongoing customer expansion. CFO Guy Melamed highlighted that the company expects the transition to SaaS to be completed by year-end, which should enable improved operating leverage and free cash flow. While noting macroeconomic uncertainty, leadership pointed to a robust pipeline and consistent demand from both new and existing customers as key factors supporting their updated guidance.

Key Insights from Management’s Remarks

Varonis' management credited the company's Q1 performance to broad-based demand for its SaaS platform, customer expansion, and advancements in product innovation. The team provided additional context around drivers of revenue growth, margin changes, and the evolving security landscape:

• SaaS Transition Momentum: The accelerated shift to a SaaS delivery model is enabling Varonis to offer more automation and faster innovation. Management reported that SaaS annual recurring revenue (ARR) now represents about 61% of total ARR, with SaaS customers expanding their spend more rapidly than legacy on-premises users.
• Automated Threat Detection (MDDR): The Managed Data Detection & Response (MDDR) offering continues to see rapid adoption, providing customers with automated data breach prevention and forensics. CFO Guy Melamed described it as the fastest-adopted platform launch in company history, and management believes this product will become standard for all customers over time.
• AI and Cloud Security Demand: Organizations adopting generative AI tools such as Copilot are increasingly engaging Varonis to secure sensitive data across both on-premises and multiple cloud environments. Management noted healthy demand for expanded coverage, including support for platforms like Salesforce and Snowflake.
• Cyral Acquisition: Varonis acquired Cyral to bolster its capabilities in database activity monitoring, allowing unified monitoring of structured (like SQL databases) and unstructured data. Management expects this to open new compliance and auditing use cases and expand the company’s addressable market, though no near-term revenue contribution is anticipated.
• Customer Wins and Expansion: The quarter saw new customer wins, including a large healthcare system post-ransomware attack and an existing global consumer products customer expanding coverage to cloud and SaaS data stores. These examples highlight the breadth and relevance of Varonis’ platform in critical data environments.

Drivers of Future Performance

Looking ahead, management’s outlook for the rest of the year is shaped by continued SaaS adoption, growing demand for automated security, and expanding use cases driven by cloud and AI trends.

• SaaS Completion and Margin Normalization: Management expects the SaaS transition to be completed by year-end, which should lead to more predictable revenue and margin improvement as the business shifts away from upfront license sales to recurring subscription revenue.
• Expansion in Cloud and AI Security: The company is prioritizing product development to address new risks emerging from generative AI adoption and the proliferation of data across cloud platforms, aiming to capture increased security budgets in these areas.
• Macro and Competitive Risks: Leadership acknowledged macroeconomic uncertainty and a more crowded competitive landscape, but remains focused on executing within its control, citing strong free cash flow and ARR growth as confidence markers for future performance.

Top Analyst Questions

• Matt Hedberg (RBC): Asked what gives management confidence in achieving over 20% ARR growth post-SaaS transition. Management pointed to strong SaaS net revenue retention and healthy new customer momentum as key factors.
• Joel Fishbein (Truist Securities): Inquired about MDDR adoption and its competitive positioning. Management highlighted MDDR’s fast uptake, automation, and its role in helping customers prevent data breaches and conduct forensics.
• Saket Kalia (Barclays): Questioned when operating margins will reach their trough during the SaaS transition. CFO Guy Melamed indicated that margin volatility will continue through this year but should normalize post-transition.
• Roger Boyd (UBS): Asked about traction with new customers using expanded cloud and AI security offerings. Management noted increasing demand for coverage of cloud applications and the necessity of automated security as AI adoption grows.
• Jason Ader (William Blair): Sought color on gross margin outlook during the transition. Management explained that SaaS revenue recognition creates near-term volatility, but long-term margins are expected to recover as the transition completes.

Catalysts in Upcoming Quarters

In future quarters, the StockStory team will be watching (1) progress toward a full SaaS ARR mix and whether customer adoption drives ARR growth above 20%; (2) continued uptake of MDDR and expansion into database activity monitoring following the Cyral acquisition; and (3) new customer wins tied to cloud and AI security use cases. Execution on unifying security for structured and unstructured data, as well as resilience in free cash flow, will also be important signs of business health.

Varonis currently trades at a forward price-to-sales ratio of 8.1×. In the wake of earnings, is it a buy or sell? Find out in our free research report.

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