Should You Think Twice Before Investing In Varonis?

Mar. 3.14 | About: Varonis Systems (VRNS)

Varonis (NASDAQ:VRNS), developer of data management software solutions, had an extremely good initial public offering last Friday. The company saw overwhelming demand for its stock, driving the price up 100% from its initial offering of $22 to $44 at the end of the trading day, reflecting a $173M market capitalization for the company. Varonis appeals to investors as it provides a service that seems almost impossible to live without these days, and that is expected to become more important in the future: "big data" technology that enables enterprises to extract value from the large amount of data already stored in its servers.

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The term "big data" was first introduced by Meta Group (now Gartner) analyst Doug Laney to define an amount of data so large and complex that it can hardly be accessed and used efficiently. Laney referred in his article to the three Vs as the catalysts for data growth: volume (amount of data), velocity (speed and frequency of data in and out), and variety (types of data). In the last few years, life has become more digitized as we use smartphones to update our Facebook status, tablets to read the newspaper, laptops to create a spreadsheet, and smart TVs to watch our favorite YouTube channel. All these examples use data generated by users and shared with other users.

According to the IDC publication "The Digital Universe In 2020," digital data created, replicated, and consumed in the world will grow from 130 exabytes (1 exabyte = 1 million terabytes) in 2005 to 40,000 exabytes in 2020 (as shown in the graph above on the left). Infrastructure investment will increase by 40% between 2012 and 2020 to support that (see the graph above on the right).

This increasing amount of data creates growing demands for storage and cloud computing services (which require even more storage) that are being addressed by infrastructure companies such as NetApp (NASDAQ:NTAP) and EMC (EMC). IDC's big data study (mentioned above) was sponsored by EMC, the world's largest infrastructure provider. However, the biggest challenge in handling big data is not maintaining a storage capacity for all the data or keeping enough computing power to support the demand, but rather mapping and tagging the data in a way that will allow users to find and use the data. In the IDC study, they mention that in 2020 only 30% of the digital universe will be available for use (as can be shown in the above graph on the right). In order to achieve that 30% and manage it efficiently, enterprises all around the world would need to adopt big data management platforms that Varonis -- or one of its competitors -- can provide.

The advantage of Varonis is its unique technology. All Varonis products use Varonis proprietary Metadata Framework technology. The unique technology allows enterprises to gain actionable insights from their human-generated data by extracting critical data from an organization's IT infrastructure and constructing a map of functional relationships among employees, data objects, content, and usage. Varonis currently offers five products (as presented in the table below). The vast majority of Varonis customers are using DatAdvantage; however, only ~20% use DataPrivilege or the IDU classification framework and a very small fraction use the latest solutions, introduced in 2012, called Data Transport Engine and DatAnywhere. The Varonis business model seeks to keep a high rate of DatAdvantage license renewals while looking for new markets and customers for that solution, as well as offering new solutions to existing customers.

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Currently, Varonis' competitors are Symantec and Dell Software, which provide standalone solutions in the big data market. Oracle, SAP, and SAS have some big data solutions; however, those are not as comprehensive as Varonis' solutions and not as big-data-focused as Varonis' products.

In its financial reports, Varonis presents constant improvement from 2011 to 2013: Revenues increased from $39M in 2011 to $53.4M in 2012 and $74.6M in 2013. Gross margins remained flat at 91%, and spending per customer is a flat $63K. However, the growing investment in research, development, sales, and marketing drove up the operating loss from $1.5M in 2012 to $5.8M in 2013, and the loss per share from $1.29 in 2012 to $1.93 in 2013. Although Varonis presents solid revenue growth year after year, it is a relatively new player to the market and lacks the operational excellence exhibited by giants such as Symantec, Oracle, and SAP to translate investment in development and sales operations into revenues. Varonis' advantage is that it operates in the big data market, which gets a lot of traction these days.

However, the company still needs to invest in its customer engagement and improve its operations worldwide to be able to attract more customers and increase revenue per customer. This additional investment will probably impact Varonis financials and increase operational loss in the short term. In the long term, either Varonis will turn its financials positive and present a net profit or it will be acquired. Candidates to acquire Varonis can vary from EMC or NetApp, which by acquiring Varonis will own a big data solution from end to end (infrastructure to software), or a software giant such as Oracle or SAP, where the Varonis acquisition will enable them to expand their big data product portfolio.


It's clear that Varonis can deliver big data software solutions, and customers are willing to pay. As evidence, Varonis revenues are increasing each year while keeping the cost of revenue relatively small without affecting the gross margin. However, right now it looks like a very long-term investment. Those who are in it for the long run should go long with VRNS; the rest should add it to their watch list and wait until the company ends its additional investments in development and sales before investing in this exciting company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.