Summary
Varonis reported third quarter revenue of $122.3 million, down 0.8% from $123.3 million in the prior-year quarter. Management attributes the decline to the SaaS transition rather than soft demand. Under SaaS delivery, revenue is recognized over the contract term instead of up front, so conversions from self-hosted licenses create a reported revenue headwind even when bookings grow. The nine-month view supports that argument. Revenue for the nine months ended September 30, 2023 was $345.1 million, up 4.2% from $331.0 million in the prior-year period. Annual recurring revenue reached $517.5 million at quarter end, up 16% year over year, and roughly 15% of total ARR now comes from SaaS.
Profitability was mixed. Gross margin was 85.8% for the quarter, down 0.3 percentage points from 86.1% a year earlier. The operating loss widened to $29.1 million from $25.6 million, and operating margin slipped to -23.8% from -20.7%. Below the operating line the picture improves. Net loss was $23.0 million, narrower than the $28.7 million loss in the third quarter of 2022, and diluted loss per share was $0.21, compared with $0.26. General and administrative expenses grew 18.6%, the fastest of the three operating expense categories, on headcount and stock-based compensation. Sales and marketing expenses declined 1.7%. Non-GAAP operating income was $4.9 million, down from $9.8 million, while non-GAAP net income rose to $10.4 million from $6.7 million on higher interest income. Non-GAAP diluted earnings per share was $0.08, up from $0.05.
Cash generation was the standout. Operating cash flow was $6.3 million for the quarter, compared with negative $1.6 million a year earlier. For the nine months, operating cash flow was $49.0 million, up from $8.4 million. Capital expenditures were $0.3 million, down from $1.5 million. Deferred revenue, a rough proxy for billings momentum, rose 54.4% to $145.5 million. Remaining performance obligations were $259.6 million as of September 30, 2023. Free cash flow for the nine months was $46.0 million, compared with $0.8 million last year. The company ended September with $731.5 million in cash, cash equivalents, short-term deposits and marketable securities.
It repurchased 1.2 million shares at an average price of $30.10 for $35.9 million, which completed the intended share repurchases under its program. The $70.0 million secured revolving credit facility matured on August 21, 2023 and was not renewed. Contractual commitments include a $58.7 million minimum purchase commitment with a service provider through December 31, 2026.
Guidance points to a stronger fourth quarter of 2023. Varonis expects fourth quarter revenue growth of 5% to 8% year over year, non-GAAP operating income of $25.0 million to $27.0 million, and non-GAAP net income per diluted share of $0.22 to $0.24 on 126.1 million diluted shares. For the full year 2023, the company guides to revenue growth of 5%, ARR of $535.0 million to $539.0 million, non-GAAP operating income of $26.5 million to $28.5 million, and non-GAAP net income per diluted share of $0.31 to $0.33 on 126.6 million diluted shares. Full-year free cash flow is guided to $40.0 million to $45.0 million. The company raised its expected full-year SaaS mix to 55% of new business and upsell ARR from 50%, and expects 60% in the fourth quarter.
Risks cluster around the transition and the macro backdrop. Management flagged continued revenue recognition headwinds from SaaS conversions, expected declines in maintenance and services revenue as perpetual licenses fade, and longer sales cycles tied to customer budgetary tightening. The war that began in Israel on October 7, 2023 has put a portion of employees on active reserve duty, and the company warns that operations in the region could be disrupted if the situation continues or deteriorates. Competition, potential cybersecurity breaches and reliance on channel partners also appear in the risk list. The renewal rate remained above 90% for the nine months, and days sales outstanding was 75 in the quarter, a sign the installed base is holding up.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2023 | Q2 FY2023 | QoQ | Q3 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $122.3M | $115.4M | +6.0% | $123.3M | -0.8% |
| Gross profit | $104.9M | $98.0M | +7.0% | $106.1M | -1.1% |
| Gross margin | 85.8% | 84.9% | +0.9 pp | 86.0% | -0.3 pp |
| Research & development | $44.8M | $46.1M | -2.9% | $44.5M | +0.8% |
| Sales & marketing | $68.6M | $70.3M | -2.4% | $69.8M | -1.7% |
| General & administrative | $20.6M | $21.3M | -3.0% | $17.4M | +18.6% |
| Total operating expenses | $134.1M | $137.7M | -2.7% | $131.7M | +1.8% |
| Operating income (loss) | -$29.1M | -$39.7M | +26.6% | -$25.6M | -13.9% |
| Operating margin | -23.8% | -34.4% | +10.6 pp | -20.8% | -3.1 pp |
| Net income (loss) | -$23.0M | -$38.7M | +40.5% | -$28.7M | +19.8% |
| Net margin | -18.8% | -33.5% | +14.7 pp | -23.3% | +4.5 pp |
| Diluted EPS | -$0.21 | -$0.35 | +$0.14 | -$0.26 | +$0.05 |
Risks
The company is transitioning to a predominantly SaaS-based business model, and MD&A says this creates revenue recognition headwinds that may cause significant variation in reported revenues. For FY2023 Q3, total revenues were $122.3 million, down 0.8% from the prior-year quarter, and SaaS was approximately 15% of total ARR as of September 30, 2023, a percentage expected to increase.
The filing adds Middle East instability as a specific risk: due to the war that began October 7, 2023, a portion of employees in Israel have been called to active reserve duty and additional employees may be called, potentially disrupting operations. The company's principal R&D facility is located in Israel.
MD&A attributes negative impacts to higher inflation and interest rates, a general economic slowdown, weakening of the Euro and Pound Sterling, and the Russia exit, and says it has seen increased budgetary tightening and longer sales cycles. These conditions may continue and pressure customer spending.
Risk factors state a majority of sales typically occur in the last three weeks of each quarter and that large transactions have longer, less predictable sales cycles. Missing expected quarter-end closings could disproportionately hurt quarterly results given relatively fixed short-term expenses.
The SaaS transition and expanded platform selling have increased demands on the sales force, and risk factors say the sales force may struggle with the transition, leading to increased turnover and lower headcount. Finding, hiring, and retaining qualified sales personnel remains challenging.
The company relies on channel partners for substantially all sales, and those agreements are generally non-exclusive and terminable on 30 days' notice. Loss of a substantial number of channel partners or failure to recruit additional partners could materially adversely affect results.
Privacy and data protection obligations are expanding, with the CPRA and Virginia, Colorado, and Connecticut laws effective in 2023 and the Utah Consumer Privacy Act set to take effect on December 31, 2023. Non-compliance could result in fines, lawsuits, changes to data handling practices, or limits on product features.
As of September 30, 2023, $253.0 million aggregate principal amount of 2025 Notes was outstanding, and risk factors say the debt may limit flexibility, require substantial cash for service, and expose the company to refinancing and dilution risk upon conversion.
SaaS KPIs
All quarters →Remaining Performance Obligations (RPO)
Annual Recurring Revenue
Renewal Rate
SaaS mix of new business and upsell ARR
Summary, forecast, risks and KPIs are extracted from VARONIS SYSTEMS INC's SEC filings for Q3 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.