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VARONIS SYSTEMS INC (VRNS)·Q3 2025 Earnings Summary

Executive Summary

  • Mixed quarter: revenue grew 9% YoY to $161.6M but missed consensus, while non-GAAP diluted EPS of $0.06 beat; management cited late-quarter weakness in on‑prem subscription renewals (Federal and non‑Federal) as the main shortfall driver . Q3 revenue est $166.2M* vs actual $161.6M; EPS est $0.054* vs actual $0.06.
  • SaaS transition effectively complete: SaaS ARR reached 76% of total, and ARR grew 18% YoY to $718.6M; however, full‑year ARR guidance was cut to $730–$738M from $748–$754M on weaker on‑prem renewals and the end‑of‑life decision for the self‑hosted solution .
  • Guidance reset: Q4 revenue $165–$171M and non‑GAAP EPS $0.02–$0.04 bracket Street near‑in‑line; FY25 revenue $615.2–$621.2M (slightly lower), non‑GAAP op loss widened, and non‑GAAP EPS raised vs Sep update on higher interest income .
  • Capital allocation: Company announced share repurchase authorization; 8‑K states $150M while CFO referenced $115M on the call—management should reconcile this discrepancy with investors .

Values retrieved from S&P Global for consensus estimates.*

What Went Well and What Went Wrong

What Went Well

  • SaaS momentum: SaaS revenues rose to $125.8M (from $57.8M YoY), with SaaS ARR at 76% of total ARR; management said the SaaS transition is “complete…in less than three years,” and SaaS NRR remains “at very healthy levels” .
  • Strategic expansion: Closed the SlashNext acquisition and launched Varonis Interceptor (AI‑native email security); also introduced Next‑Gen Database Activity Monitoring (from Cyral acquisition) and deepened the Microsoft Copilot/Purview integration—broadening TAM and attach potential .
  • Profitability resilience ex‑headwinds: Non‑GAAP operating income was positive at $0.2M despite revenue softness and integration spend; ARR contribution margin improved to 16.3% (from 15%) YoY, and YTD free cash flow reached $111.6M (vs $88.6M) .

What Went Wrong

  • Late‑quarter renewal shortfall: In the final weeks of Q3, lower renewals in Federal and non‑Federal on‑prem subscriptions drove a top‑line shortfall vs expectations; management flagged sales process issues and tighter customer budgets, while noting no change in competitive win rates .
  • Margin compression: Gross margin was 79.4% vs 85% last year, partly reflecting mix and transition dynamics; non‑GAAP operating margin fell to 0.1% from 6.1% YoY .
  • Guidance reduction and uncertainty: FY25 ARR was cut to $730–$738M (from $748–$754M) and management assumed lower on‑prem renewal rates for Q4 given the decision to end‑of‑life the self‑hosted product by 12/31/2026, increasing near‑term variability .

Financial Results

Revenue, EPS and Margins (Actuals)

MetricQ3 2024Q2 2025Q3 2025
Revenue ($M)148.1 152.2 161.6
Non-GAAP Diluted EPS ($)0.10 0.03 0.06
Gross Margin %85.0% (call) 79.5% (GAAP, calc. from PR) 79.4% (call)

Note: Q2 2025 GAAP gross margin approximated as gross profit/revenue from press release .

Current Quarter vs. Consensus (S&P Global)

MetricQ3 2025 ActualQ3 2025 ConsensusDelta
Revenue ($M)161.6 166.2*-4.6
Non-GAAP Diluted EPS ($)0.06 0.054*+0.006

Values retrieved from S&P Global for consensus estimates.*

Revenue Mix (Q3 2025 vs Q3 2024)

Revenue Component ($M)Q3 2024Q3 2025
SaaS57.8 125.8
Term License Subscriptions68.8 24.8
Maintenance & Services21.5 10.9
Total Revenue148.1 161.6

Selected KPIs and Balance Sheet

KPIQ1 2025Q2 2025Q3 2025
ARR ($M, end of period)664.3 693.2 718.6
SaaS as % of Total ARR61% 69% 76%
YTD Cash from Operations ($M)68.0 89.3 122.7
YTD Free Cash Flow ($M)65.3 82.7 111.6
Cash & Investments (Cash, Mkt Sec, Deposits)~$1.2B (3/31) ~$1.2B (6/30) ~$1.1B (9/30)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($M)Q4 2025N/A165–171 New
Non-GAAP Op Income ($M)Q4 2025N/A0–3 New
Non-GAAP Diluted EPS ($)Q4 2025N/A0.02–0.04 New
ARR ($M)FY 2025748–754 (Sep 2) 730–738 Lowered
Revenue ($M)FY 2025616–628 (Sep 2) 615.2–621.2 Lowered (modestly)
Free Cash Flow ($M)FY 2025120–125 (Sep 2) 120–125 Maintained
Non-GAAP Op Income (Loss) ($M)FY 2025(7)–(2) (Sep 2) (8.2)–(5.2) Lowered
Non-GAAP Diluted EPS ($)FY 20250.11–0.12 (Sep 2) 0.12–0.13 Raised vs Sep update

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2025)Current Period (Q3 2025)Trend
SaaS Transition & MixSaaS ARR mix 61% in Q1; 69% in Q2; raised SaaS mix expectation (82%) 76% of ARR now; transition “complete,” stronger SaaS NRR highlighted Accelerating mix shift to SaaS
Federal VerticalAchieved FedRAMP Authorization in Q2 Federal underperformed; team reduced; late‑quarter on‑prem renewal shortfall Weakness; restructuring
End-of-Life (Self-Hosted)Not previously announced in Q1/Q2 disclosuresEOL of self‑hosted by 12/31/2026 to focus on SaaS, expect lower OPS renewals near‑term New, accelerates SaaS
Microsoft Partnership & CopilotStrategic partnership announced July 1; focus on secure AI adoption Continued investment; demand from companies deploying Copilot; deeper integration roadmap Strengthening integration tailwind
Product Expansion (DAM, Email Security)Acquired Cyral (Q1) to power Next‑Gen DAM; roadmap signaled Launched Next‑Gen DAM; acquired SlashNext, launched “Interceptor” email security Broader platform, higher attach
Sales/NRR MotionConfidence in upsell motion as transition nears completion SaaS NRR “very healthy”; refocus reps on remaining OPS accounts and upsell Positive for SaaS, OPS fix in progress

Management Commentary

  • “We finished the third quarter with 76% of our total company ARR coming from SaaS…our SaaS business…drives our momentum…our on‑premises subscription business…drags on total company ARR growth” — CEO Yaki Faitelson .
  • “In the final weeks of the quarter, we experienced weaker than expected renewals in our federal business and our non‑federal on‑premises subscription business” — CEO .
  • “We are baking in additional conservatism…to account for…weaker Q3 results and the decision to end‑of‑life our self‑hosted solution” — CFO/COO Guy Melamed .
  • “We plan to end the year with 83% of our total ARR coming from SaaS” — CFO/COO .
  • “Our board has authorized a $115 million share repurchase program” — CFO/COO (call) ; 8‑K press release states $150 million authorization (company should clarify) .

Q&A Highlights

  • Federal strategy and team resizing: Despite FedRAMP authorization, Federal renewals underperformed; management is reducing the Federal team footprint and reevaluating strategy .
  • On‑prem non‑renewals “why”: No single theme; cited sales process gaps (account management/POCs), some budget scrutiny; competitive win rates unchanged; still in conversations with some churned accounts .
  • SaaS NRR and growth cadence: SaaS NRR is “well ahead of total company NRR” and healthy; confidence in 20%+ SaaS growth driven by new logos and upsell .
  • EOL pushback risk: Management acknowledged some OPS customers are “single‑threaded,” but reiterated strategic need to be 100% SaaS and will work with customers through migration .
  • Guidance conservatism: Q4 assumes lower OPS renewals and potential EOL impact; will revisit 2026 after Q4 datapoints .

Estimates Context

  • Q3 2025: Revenue missed ($161.6M vs $166.2M*), while non‑GAAP diluted EPS beat ($0.06 vs $0.054*), reflecting strong interest income and opex control offsetting top‑line shortfall from late‑quarter OPS renewals . Values retrieved from S&P Global for consensus estimates.*
  • Q4 2025: Guidance revenue $165–$171M brackets consensus $168.7M*, and EPS $0.02–$0.04 brackets $0.032*, suggesting broadly in‑line expectations with conservative OPS renewal assumptions . Values retrieved from S&P Global for consensus estimates.*
  • Revisions: FY25 ARR guide cut to $730–$738M (from $748–$754M) likely drives downward ARR estimate revisions; FY25 non‑GAAP EPS raised vs Sept update to $0.12–$0.13 on higher interest income, but non‑GAAP operating loss widened given mix and investments .

Key Takeaways for Investors

  • The quarter’s narrative is a tale of two businesses: robust SaaS momentum (76% of ARR; healthy SaaS NRR) versus volatile, shrinking on‑prem renewals that increased near‑term uncertainty and forced an ARR guide cut .
  • Revenue miss vs consensus stemmed from late‑quarter OPS renewals (Federal and non‑Federal) rather than competitive dynamics; management flagged sales process fixes and lower renewal assumptions into Q4 .
  • Platform expansion (Microsoft Copilot integration, Next‑Gen DAM, SlashNext/Interceptor) broadens use cases and attach, supporting medium‑term growth once conversion noise subsides .
  • FY25 outlook reflects conservatism on OPS renewals and EOL impacts; watch Q4 on‑prem renewal behavior as the main swing factor for 2026 setup .
  • Capital return added, but clarify repurchase size ($150M in 8‑K vs $115M on call) before modeling buyback effects .
  • Short‑term trading: stock likely trades on ARR guide cut and EOL risk vs SaaS strength; any evidence of stabilized OPS renewals or faster SaaS upsell should re‑rate the narrative .
  • Medium‑term thesis: with 80%+ ARR likely SaaS exiting FY25 and expanded product suite, structural growth and margin leverage potential remain intact once transition drag ends .

Guidance and Estimate Bridges

Q4 2025 vs Street

MetricCompany GuideStreet ConsensusRead
Revenue ($M)165–171 168.7*In‑line at midpoint
Non-GAAP Diluted EPS ($)0.02–0.04 0.032*In‑line at midpoint

Values retrieved from S&P Global for consensus estimates.*

FY25 Guide Evolution

  • ARR: 748–754 (Sep 2) → 730–738 (Oct 28) .
  • Revenue: 616–628 (Sep 2) → 615.2–621.2 (Oct 28) .
  • FCF: 120–125 maintained .
  • Non‑GAAP Op Income (Loss): (7)–(2) → (8.2)–(5.2) .
  • Non‑GAAP EPS: 0.11–0.12 → 0.12–0.13 (raised vs Sep update) .

Values retrieved from S&P Global for consensus estimates where applicable.*

Additional Notes

  • Non‑GAAP definitions and reconciliations are provided in the 8‑K; non‑GAAP excludes stock‑based comp, related payroll taxes, amortization of acquired intangibles, FX differences on leases, amortization of debt issuance costs, and acquisition‑related taxes .
  • Cash & investments totaled ~$1.1B at 9/30/25; YTD CFFO $122.7M and FCF $111.6M demonstrate strong liquidity supporting ongoing buybacks and integration investments .

Values retrieved from S&P Global for consensus estimates.*