Varonis Has Ample Upside Backed By SaaS Service And DataAdvantage Cloud, Analyst Says Post Q4

  • JMP Securities analyst Erik Suppiger reiterated a Market Outperform on Varonis Systems, Inc VRNS and a $63 price target.
  • The 4Q22 results exceeded estimates after management lowered expectations in Q3, and management confirmed the economic environment deteriorated from Q3 levels, although the decline was in line with expectations
  • The sales cycles got extended, and the company’s net retention rate fell to 115%, down from 120% one year ago due to increased deal scrutiny.
  • Economic weakness expanded from Europe to NA, and management assumed the economy would remain weak throughout FY23. 
  • As a result, the company guided FY23 revenue approximately in line with consensus, despite the upside in the quarter.
  • Varonis completed its first 100 days of selling its SaaS service, which will be a core product line for the company. 
  • Initial signs were encouraging, with the SaaS service generating ~10% of new and add-on ARR. The 10% contribution was ahead of the target, and management raised its FY23 contribution target from 5% to 15%. 
  • The analyst believes the SaaS service represents an attractive catalyst. Meanwhile, the analyst noted that the go-to-market strategy is early in its development, and the transition will create headwinds in 1Q23 and 2Q23 due to expected longer sales cycles, some sales turnover, changes in sales incentives, and overall lower productivity. 
  • Revenue recognition for the SaaS service also creates a headwind to growth. Still, once the transition is completed, Varonis should benefit from faster sales cycles, better margins, and more significant deals. 
  • Another critical product, DataAdvantage Cloud, generated an ARR of $3.5 million in 4Q22, which fell short of management’s target of $5 million.
  • Management attributed the shortfall to sales force distraction as it focused on the SaaS service. 
  • The analyst believes DA Cloud is synergistic with the Varonis SaaS service and estimates DA Cloud will sustain rapid growth and exceed the $5 million ARR target in 2023.
  • Price Action: VRNS shares traded higher by 6.86% at $28.03 on the last check Tuesday.
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