Varonis Q1 2025 slides: 19% ARR growth amid accelerating SaaS transition

Introduction & Market Context

Varonis Systems (NASDAQ:VRNS), a leader in data security solutions, presented its Q1 2025 corporate overview on May 6, showcasing strong annual recurring revenue (ARR) growth while continuing its strategic transition to a Software-as-a-Service (SaaS) model. The company’s stock responded positively, rising 5.94% in aftermarket trading to $46.90, following a 0.96% gain during regular trading hours.

Founded in 2004 and public since 2014, Varonis has positioned itself at the intersection of several powerful market trends, including exponential data growth, accelerating AI and cloud adoption, and increasing cyber threats. The company noted that data creation is expected to grow at a compound annual rate of 24% by 2028, with unstructured data accounting for more than 90% of total data generated.

Quarterly Performance Highlights

Varonis reported ARR of $664.3 million for Q1 2025, representing a 19% year-over-year increase from $560.3 million in Q1 2024. This growth demonstrates consistent quarterly expansion over the past two years, as shown in the following chart:

The company’s SaaS ARR now constitutes approximately 61% of total ARR, highlighting significant progress in its transition from on-premise solutions to cloud-based offerings. This shift has created short-term headwinds for reported revenue and operating margins due to differences in revenue recognition, but is driving positive business momentum.

As illustrated in the revenue breakdown below, SaaS revenue more than doubled year-over-year from $34 million in Q1 2024 to $89 million in Q1 2025, while term license subscriptions declined from $56 million to $31 million:

Despite these transitional headwinds, Varonis demonstrated improved cash generation, with year-to-date free cash flow increasing to $65.3 million from $56.4 million in the same period last year. The company’s Q1 2025 financial highlights are summarized in the following slide:

Strategic SaaS Transition

Varonis has made the strategic decision to transition to a SaaS-first business model, recognizing the long-term benefits of recurring revenue, improved customer experience, and enhanced platform capabilities. While this transition creates near-term pressure on reported operating margins, the company emphasized that SaaS is "purely a better product" for customers.

The presentation explained how SaaS revenue recognition differs from on-premise term licenses. For a $100,000 ARR deal delivered on January 1, an on-premise term license would recognize approximately 80% ($80,000) upfront in Q1, with the remaining 20% spread across subsequent quarters. In contrast, a SaaS subscription would recognize revenue evenly at $25,000 per quarter.

This accounting difference explains why increased SaaS sales are temporarily suppressing reported operating income, as shown in the following comparison:

Expanding Market Opportunity (SO:FTCE11B)

A key focus of Varonis’ presentation was its expansion into new data security domains, increasing its total addressable market (TAM). The company has evolved from primarily protecting on-premises file storage to securing a broader range of data repositories, including cloud infrastructure, databases, and SaaS applications.

The following diagram illustrates how Varonis has expanded its protection capabilities:

This expansion is supported by Varonis’ unified data security platform, which offers comprehensive protection across multiple use cases, including insider risk management, ransomware prevention, compliance management, and AI security:

The company’s approach to data security follows a "Find, Fix, Alert" methodology, which involves identifying overexposed sensitive data, automatically remediating vulnerabilities, and alerting on unusual data exposure:

Forward-Looking Guidance

For Q2 2025, Varonis expects ARR between $688.0-$695.0 million, representing 16-17% year-over-year growth. For the full fiscal year 2025, the company projects:

• ARR of $742.0-$750.0 million (16-17% YoY growth)
• Total (EPA:TTEF) revenues of $610.0-$625.0 million (11-13% YoY growth)
• Free cash flow of $120.0-$125.0 million
• Non-GAAP operating income of $0.5-$10.5 million
• Non-GAAP net income per diluted share of $0.14-$0.17

The company articulated its long-term vision as "building a billion-dollar business that grows meaningfully with expanding profit and cash flow." Management remains confident in the company’s ability to return to 20%+ ARR growth as it completes its SaaS transition, which is targeted for completion by the end of 2025.

During the earnings call, CEO Yaki Feitelson emphasized the fundamental importance of data security, stating, "People will eat, sleep and create data. The world is completely dependent on data." This perspective underscores Varonis’ strategic positioning in a market driven by increasing data volumes, cloud adoption, and evolving cyber threats.

As Varonis continues its transformation into a predominantly SaaS business, investors appear to be recognizing the long-term value creation potential, despite near-term financial headwinds from the transition.

Full presentation:

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