Varonis Systems - No Compelling Value Despite A Recent 50% Sell-Off

| About: Varonis Systems (VRNS)


Varonis operates in the unstructured data growth market.

The company is showing solid topline growth, while losses are modest.

Yet, despite a 50% sell-off, the company has a lot to prove.

Varonis Systems (NASDAQ:VRNS) has developed an innovative software platform which allows businesses to map, analyze, manage and migrate unstructured data.

Shares were sold to the general public at the end of February. After witnessing a hugely successful public offering, shares have been cut in half ever since. Despite the significant correction, I don't believe that shares offer compelling value at current levels.

The Public Offering

Varonis focuses on the management of unstructured data, with a specialization in human-generated data. Data which is covered by the solutions of Varonis includes spreadsheets, presentations, emails, etc.

Its software platform extracts critical metadata from the IT infrastructure of the business. This contextual information is used to map relationships between employees, data and usage.

Varonis sold 4.8 million shares for $22 apiece, thereby raising nearly $106 million in gross proceeds. All shares are offered by the company, with no shares being offered by selling shareholders.

The offering was a success. Initially, the firm and its underwriters aimed to sell shares in a $17-$19 price range. This range was latter upped to $19-$21 per share, while the public offering finally took place at $22 per share.

Nearly 20% of the shares outstanding were offered in the public offering. Shares exploded to levels as high as $56 in the days following the offering, but quickly lost half their value to current levels at $28 per share. This still results in healthy gains for first-day investors, with the business being valued at $690 million.

The major banks that brought the company public were Morgan Stanley (NYSE:BJI), Barclays (OTC:BCBAY), Jefferies (JEF), RBC Capital Markets and Needham & Company.


Since being founded in 2005, Varonis has developed and introduced five major products. The company aims to benefit from the rapid growth in both data volume as well as complexity. The International Data Corporation estimates that the amount of digital information will grow at a rate of 39% per annum between 2012 and 2020. An incredible 90% of this data will be of an unstructured nature.

The solutions by Varonis allow structure in this unstructured data, providing real-time and searchable intelligence on the huge volumes of enterprise data. Some 2,400 customers across a range of industries already make use of the company's solutions.

For the year of 2013, Varonis has reported a 39.7% growth in revenues, which came in at $74.6 million over the past year. Net losses rose from $4.8 million towards $7.5 million.

Varonis operated with roughly $14 million in cash ahead of the offering, while outstanding convertible preferred stock has been exchanged for common shares. Factoring in the $106 million in gross proceeds, and the company will operate with a net cash position of little over a $100 million.

This values operating assets at roughly $590 million, the equivalent of 8 times annual revenues.

Investment Thesis

As noted above, Varonis has seen a very successful public offering. Shares were priced 22.2% above the midpoint of the initial preliminary offering range. Shares peaked at little over $56 per share, which implies that they have roughly tripled from the midpoint of the preliminary offering range.

Ever since, shares have lost half their value, which marks a huge pullback. Yet, initial investors are still making money on their investment.

There are quite a few risks in this offering. Key risks include topline growth, increased competition, reliance on key personnel and the fact that the company relies on a single product. The fact that the company's R&D facilities are located in Israel poses some political risk, as does the fact that shareholder EMC Corp. (EMC) is a key channel partner.

What is reassuring to see is the fact that growth continued in the final quarter of last year as revenues rose by 8.4% to $25.7 million, maintaining a steady pace. Despite this, earnings in the cyclically strong quarter fell from $2.2 million to $1.5 million.

While growth is impressive, Varonis is still bleeding money, and multiples on revenue metrics are steep as well. This makes it easy for me to stay on the sidelines. I will await the next quarterly report on May 5th before possibly reconsidering my investment stance.

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.