Summary
Varonis reported second quarter fiscal 2023 revenue of $115.4 million, up 3.6% from the prior-year quarter. Subscription revenue grew 8%, while maintenance and services revenue declined as customers converted existing licenses to subscriptions and newer products needed less professional services time. For the six months ended June 30, 2023, revenue was $222.8 million, up 7.2%.
Annual recurring revenue reached $497.0 million, up 17% year over year. SaaS accounted for roughly 10% of total ARR at the end of June 2023. The sharper signal came in the mix of new business, where SaaS made up 58% of new business and upsell ARR in the quarter against a guidance figure of 35% for the period. Management pointed to that adoption as the driver behind improvements in ARR, free cash flow and ARR contribution margin.
Profitability stayed deeply negative. The GAAP operating loss was $39.7 million and the net loss was $38.7 million, both wider than the prior-year quarter. GAAP diluted loss per share was $0.35, down $0.02 from the prior-year quarter. Gross margin rose to 84.9%, up 0.9 percentage points, helped by lower salary and stock-based compensation costs inside cost of revenue. On a non-GAAP basis, operating income was $0.9 million, down from $1.7 million a year earlier, and non-GAAP net income was $1.1 million against a non-GAAP net loss of $0.1 million in the second quarter of 2022. The distance between the two views of the business remains wide, and stock-based compensation is the main reason.
Cash generation was the standout. Operating cash flow for the six months ended June 30, 2023 was $42.6 million, up from $10.1 million a year earlier. Free cash flow, a non-GAAP measure, was $40.0 million against $3.9 million in the prior-year period. Capital expenditures for the six-month period were $2.6 million, down 57.6%. Deferred revenue, current portion, rose 32.9% to $130.7 million, and remaining performance obligations were $195.8 million at June 30, 2023. The share repurchase program has $36.0 million of capacity left and expires on October 31, 2023.
Guidance sets a slower near-term top line. For the third quarter of 2023, Varonis expects revenue of $123.5 million to $127.0 million, or year-over-year growth of 0% to 3%, non-GAAP operating income of $1.0 million to $2.0 million, and non-GAAP net income per diluted share of $0.02 to $0.03 on 127.1 million diluted shares. For the full year 2023, the company models ARR of $529.0 million to $535.0 million, or growth of 14% to 15%, free cash flow of $40.0 million to $45.0 million, non-GAAP operating income of $19.0 million to $22.0 million, and non-GAAP net income per diluted share of $0.21 to $0.23 on 126.8 million diluted shares. Management raised its full-year SaaS mix expectation to 50% of new business and upsell ARR, from 35% previously, and expects 45% in the third quarter.
The transition itself is the main risk. Management warns that rising SaaS mix and existing customer conversions produce revenue recognition headwinds, because SaaS revenue is recognized ratably while on-premises subscription licenses are recognized up front. Macro conditions add pressure, including higher inflation and interest rates, a general economic slowdown, a weaker Euro and Pound Sterling, longer sales cycles, tighter customer budgets and the exit of the Russia business. Other named risks include competition and pricing changes, the ability to close large transactions consistently, international expansion execution, cybersecurity and data security breaches, and the convertible notes and capped call transaction. Varonis is also subject to tax audits in Israel and a U.S. state tax audit. The renewal rate stayed above 90% for the six months ended June 30, 2023, which supports the recurring base while maintenance revenue declines.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $115.4M | $107.3M | +7.5% | $111.4M | +3.6% |
| Gross profit | $98.0M | $89.7M | +9.3% | $93.6M | +4.7% |
| Gross margin | 84.9% | 83.6% | +1.4 pp | 84.0% | +0.9 pp |
| Research & development | $46.1M | $44.7M | +3.2% | $44.8M | +3.0% |
| Sales & marketing | $70.3M | $68.4M | +2.8% | $68.7M | +2.3% |
| General & administrative | $21.3M | $19.7M | +8.1% | $17.7M | +20.3% |
| Total operating expenses | $137.7M | $132.8M | +3.7% | $131.2M | +5.0% |
| Operating income (loss) | -$39.7M | -$43.1M | +7.9% | -$37.6M | -5.7% |
| Operating margin | -34.4% | -40.2% | +5.8 pp | -33.7% | -0.7 pp |
| Net income (loss) | -$38.7M | -$38.3M | -1.0% | -$36.3M | -6.6% |
| Net margin | -33.5% | -35.7% | +2.2 pp | -32.6% | -1.0 pp |
| Diluted EPS | -$0.35 | -$0.35 | ±$0.00 | -$0.33 | -$0.02 |
Risks
MD&A states operations were negatively impacted by broader macroeconomic conditions, including higher inflation and interest rate environment, a general economic slowdown, weakening Euro and Pound Sterling, and the exit of the Russia business. It notes changes in customer buying patterns such as budgetary tightening and longer sales cycles, which may continue.
The company plans to transition to a predominantly SaaS-based business model, and MD&A expects revenues to be negatively impacted by revenue recognition headwinds from an increase in SaaS mix and existing customer conversions to SaaS. SaaS was approximately 10% of total ARR as of June 30, 2023.
In 2022 and for the six months ended June 30, 2023, channel partners fulfilled substantially all of the company's sales, and agreements are generally non-exclusive and allow termination on 30 days notice. Loss of key channel partners could materially reduce revenues.
Risk factors state the company may face increased perceived and real competition as it expands classification capabilities and cloud coverage. A more established company targeting its market could have greater resources and lead to price cuts, reduced gross margins, longer sales cycles, lower renewal rates, and loss of market share.
The SaaS transition and platform selling increase complexity in finding, hiring, and retaining qualified sales force members. MD&A says international expansion depends on hiring, integrating, and retaining local sales personnel, and new sales force members can take up to 12 months to reach expected productivity.
A principal research and development facility is in Israel, which is experiencing significant social unrest over judiciary reform, alongside risks from armed conflicts, terrorism, military reserve duty, and boycotts of Israeli companies. Operations were also affected by the Russia-Ukraine war and the exit of the Russia business.
Rapidly evolving privacy and data protection laws, including CCPA/CPRA, GDPR, and data localization requirements, may increase compliance costs or restrict cloud offerings. Non-compliance could lead to fines and require changes to products or business practices.
As a leader in the cyber industry, the company may be an attractive target for cyber attackers. A breach or a third-party cloud provider incident could impair SaaS platform availability, harm reputation, and expose the company to liability.
The tax benefit for the Israeli subsidiary has terminated. If the company does not meet conditions for the 16% rate under the Investment Law, its Israeli operations will be subject to the standard 23% corporate tax rate, which could increase tax expense and effective tax rates.
SaaS KPIs
All quarters →Remaining Performance Obligations (RPO)
Non-GAAP Operating Income
Annual Recurring Revenue (ARR)
SaaS mix of new business and upsell ARR
Summary, forecast, risks and KPIs are extracted from VARONIS SYSTEMS INC's SEC filings for Q2 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.