Summary
Varonis Systems reported first quarter revenue of $107.3 million, up 11.5% from the prior-year quarter. ARR reached $478.1 million as of March 31, 2023, up 18% year-over-year. The company said SaaS represented 37% of new business and upsell ARR in the quarter, compared with its earlier guidance of 15%. Management described the SaaS transition as resonating with customers and the sales force, while noting that an economic slowdown is affecting customers. The renewal rate remained above 90%. Varonis also said it was named a Leader in The Forrester Wave for Data Security Platforms and released automated posture management and least privilege automation for Microsoft 365, Google Drive, and Box.
Profitability improved. Gross profit rose 14.3% to $89.7 million, and gross margin expanded 2.1 percentage points to 83.6%. GAAP operating loss narrowed to $43.1 million, and operating margin improved 9.8 percentage points to negative 40.2%. Net loss narrowed to $38.3 million, and diluted EPS loss narrowed to $0.35. On a non-GAAP basis, operating loss was $4.3 million, compared with $7.9 million in the prior-year quarter. The company said it continues to tie investment in the business to planned sales and actively manage expenses. It also expects the first quarter to remain the lowest gross margin period due to seasonality, though that seasonality should decrease as SaaS grows.
Cash generation was strong. Operating cash flow rose 50.1% to $36.8 million. Free cash flow was $35.7 million, compared with $21.0 million in the prior-year quarter. Capital expenditures fell 68.2% to $1.1 million. Current deferred revenue rose 10.7% to $109.3 million. Days sales outstanding was 64. The company had $41.0 million of capacity remaining under its share repurchase program, which expires October 31, 2023. Management said it expects ARR to continue to increase in absolute dollars.
Guidance points to a stronger second half. For the second quarter, management guided year-over-year revenue growth of 6% to 8%, non-GAAP operating income of $0.5 million to $1.5 million, and non-GAAP net income per diluted share of $0.01 to $0.02. For full year 2023, the company guided ARR of $520.0 million to $528.0 million, free cash flow of $20.0 million to $25.0 million, revenue growth of 8% to 10%, non-GAAP operating income of $29.0 million to $34.0 million, and non-GAAP net income per diluted share of $0.30 to $0.34. Management raised its full-year SaaS mix expectation to 35% from 15% for both the second quarter and the full year.
Risks remain centered on the SaaS transition and the economy. Management flagged a general economic slowdown, higher inflation and interest rates, longer sales cycles, and budgetary tightening that may continue. EMEA operations were hurt by macroeconomic conditions, a weaker Euro and Pound Sterling, and the exit of the Russia business. The transition to SaaS shifts revenue recognition and mix, which can cause significant variation in reported revenues. The company also faces risks related to cybersecurity and data security breaches, competition, reliance on channel partners, the ability to close large transactions, and the need to hire and retain sales personnel. Maintenance and services revenues are expected to decline as newer solutions require less professional services time.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2023 | Q4 FY2022 | QoQ | Q1 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $107.3M | $142.6M | -24.7% | $96.3M | +11.5% |
| Gross profit | $89.7M | $125.6M | -28.6% | $78.5M | +14.3% |
| Gross margin | 83.6% | 88.1% | -4.5 pp | 81.5% | +2.1 pp |
| Research & development | $44.7M | $45.0M | -0.6% | $43.6M | +2.7% |
| Sales & marketing | $68.4M | $71.8M | -4.7% | $64.8M | +5.6% |
| General & administrative | $19.7M | $18.8M | +4.8% | $18.2M | +8.3% |
| Total operating expenses | $132.8M | $135.6M | -2.0% | $126.5M | +5.0% |
| Operating income (loss) | -$43.1M | -$10.0M | -331.5% | -$48.1M | +10.3% |
| Operating margin | -40.2% | -7.0% | -33.2 pp | -50.0% | +9.8 pp |
| Net income (loss) | -$38.3M | -$10.7M | -256.4% | -$48.8M | +21.4% |
| Net margin | -35.7% | -7.5% | -28.1 pp | -50.7% | +15.0 pp |
| Diluted EPS | -$0.35 | -$0.10 | -$0.25 | -$0.45 | +$0.10 |
Risks
MD&A states that during 2022 EMEA operations were negatively impacted by higher inflation, the weakening of the Euro and Pound Sterling, and the exit of the Russia business, and that North America was impacted in Q4 2022 by higher inflation and interest rates and a general economic slowdown. These conditions have led to budgetary tightening and longer sales cycles, which may continue for the foreseeable future.
The company plans to transition to a predominantly SaaS-based model over the next several years, and MD&A warns that shifts in SaaS mix, ratable revenue recognition, and existing customer conversions may produce significant variation in reported revenues. Maintenance and services revenues declined 10.7% for the three months ended March 31, 2023, and are expected to continue to decline.
Substantially all sales are fulfilled through channel partners, and MD&A confirms that channel partners fulfilled substantially all sales in 2022 and Q1 FY2023. Partner agreements are generally non-exclusive and can be terminated on 30 days notice, so loss of key partners could materially reduce revenues.
The majority of sales typically occur in the last three weeks of each quarter, and large transactions are less predictable. MD&A notes that macroeconomic conditions have caused longer sales cycles, so failure to close expected deals in this short window could disproportionately affect quarterly results.
Operations in Israel, Ukraine, and Brazil expose the company to geopolitical instability, military reserve duty, and the Russia and Ukraine conflict; as of March 31, 2023, the company has no employees or contractors in Russia. Israel also houses principal research and development, and regional hostilities could disrupt operations.
The Israeli subsidiary's Beneficiary Enterprise tax benefits terminated as of March 31, 2023, and eligible income may be taxed at 16% or the standard 23% rate if conditions are not met. International tax changes under BEPS, MLI, and Digital Service Tax may increase the worldwide effective tax rate.
As of March 31, 2023, $253.0 million aggregate principal amount of 2025 Notes remained outstanding, and the Credit Facility contains restrictive and financial covenants. Debt obligations may limit flexibility, and the capped call counterparty risk and conversion dilution features could adversely affect the stock.
The SaaS transition increases complexity in finding, hiring, and retaining qualified sales force members, and competition for highly skilled engineers in Israel is intense. Failure to hire and integrate sales personnel could materially impact projected growth.
New and evolving data privacy laws, including the CPRA and Virginia Consumer Data Protection Act effective January 1, 2023, plus Colorado, Utah, and Connecticut laws set to go into effect in 2023, impose additional compliance costs and could require changes to data handling practices.
As of March 31, 2023, options, RSUs, and PSUs outstanding could result in the issuance of approximately 9.6 million shares, all of which have been registered for public resale. These shares could be freely sold upon vesting and may depress the market price of the common stock.
SaaS KPIs
All quarters →Annual Recurring Revenue
Renewal Rate
Non-GAAP Operating Loss
Free Cash Flow
SaaS mix of new business and upsell ARR
Summary, forecast, risks and KPIs are extracted from VARONIS SYSTEMS INC's SEC filings for Q1 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 6, 2026.