Varonis - Another Solid Quarter, Buy The Weakness

Summary

• Following another solid beat and raise quarter, Varonis stock is indicating weakness after market. Management continues to be bullish on Varonis’s growth prospects.
• Varonis's business is driven by data sprawl within the enterprise, remote office locations, multiple hyperscale public clouds, and cloud-native SaaS applications.
• Securing data at various locations, modeling user behavior, and identifying rogue behavior is one of the most complex undertakings for an enterprise, and Varonis excels at it.
• Varonis is targeting a billion-dollar revenue business, and we expect the company to meet its goal due to solid execution on both product and sales sides of its business.
• Following Varonis's solid results and ensuing weakness in shares after market, we continue to remain bullish on the stock. We urge investors to buy the weakness.

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As expected, Varonis (NASDAQ:VRNS), a datacentric-security software company, delivered yet another strong quarter. The company beat estimates on all the crucial metrics and guided up. Some investors may have viewed the guidance as lackluster. The weakness in shares provides an excellent opportunity to own a unique security asset. Despite guiding up, we still believe the estimates are conservative. A repeat beat and raise are in the offing when the company reports results in November, making the stock a compelling buy, in our opinion.

Varonis is ideally positioned to benefit from data sprawl that has worsened due to COVID-19 as well as digital transformation. Now data resides on-prem and remote offices, in various clouds and other SaaS applications such as Salesforce (CRM), Workday (WDAY), etc. We believe securing this data that's scattered in multiple locations is what is driving Varonis' growth. Securing the data at various locations is complex. Varonis has the first-mover advantage, and no single vendor has the platform that secures data at all the places concurrently. We remain buy-rated on the stock and would be buying shares as opportunities are presented.

Another beat and raise quarter

As usual, Varonis reported an excellent quarter beating on revenue and EPS and guiding up for both F3Q and the full year. Varonis reported revenue of $88.4 million, which was above the consensus estimate of $83.7 million. EPS was a loss of a penny, again better than consensus loss of 3 pennies. EPS outperformance was driven by higher than expected revenue and good Opex control. Total revenue grew 33% Y/Y, and Subscription revenue grew 70% Y/Y, and the company generated $11.1 million operating cash. ARR was $328.2 million and was up 39% Y/Y. Both North America and EMEA grew north of 30%+ during the quarter. The company noted that 68% of its clients have four or more licenses, and 35% of the install base have deployed six or more licenses. The following chart illustrates the growth of license adoption.

The following chart illustrates the company's performance versus our estimates.

Conservative guidance set for a repeat beat and raise

Varonis is known for issuing conservative guidance. The company issued Q3 revenue guidance in the range of $96-98 million versus prior consensus revenue of $94.7 million. Varonis guided EPS of $0.01-0.02 versus consensus of $0.01. For FY2021, revenue is expected to be in the range of $375-379 million, versus the prior consensus of $370 million. EPS is expected to be in the range of $0.03-0.05 versus the previous consensus of $0.02. The following chart illustrates guidance for F3Q and FY2021.

Varonis continues to be ignored despite solving a very complex problem

In our opinion, Varonis solves one of the most complex data security problems in the enterprise. Many enterprises do not even know the extent of the problem until it is too late. Yet, many investors continue to ignore Varonis as an investment. According to Varonis CEO Yaki Faitelson, "Data protection is an immensely difficult problem to solve, and in conversations with our customers and prospects, we ask three simple questions:

• One – do you know where your important data is stored?

• Two – do you know that only the right people have access to it?

• And Three – do you know that they are using it correctly?

To keep data safe, you have to be able to answer "yes" to ALL of these questions. Still, most organizations that turn to us can't answer "yes" to ANY of them." Mr. Faitelson elaborates further by saying, "First, identifying important data takes sophistication, given the complexities of data storage. Second, to understand accessibility, most companies don't realize just how many millions of folders, files, records, and groups need to be analyzed to discern permissions and how many functional relationships there are between them. And lastly, in terms of data usage, every system is different; many lack fidelity or granularity, and all lack important context. Without the significant enrichment that we offer, companies can't build a baseline of normal user behavior."

Mr. Faitelson also says what it is to be truly secure, "For data to be secure, you need to be able to answer yes to all three questions, all the time. This is why our platform and underlying technology provide such a durable competitive advantage, and why we believe we have a 15-year head start."

Compelling Valuation

Varonis is one of the most interesting companies in our coverage universe. Varonis technology is an effective antidote against insider threat actors as well as against ransomware attacks. Varonis continues to be ignored by investors, despite making a stellar transition to a subscription business. Varonis subscription grew 70% during the quarter, and the ARR grew 39% Y/Y. Varonis revenue grew 33% during the quarter and is expected to grow in line with the subscription peer group average of 25%. Yet, Varonis is getting a lower multiple. Varonis stock is trading at 10.4x EV/C2023 sales versus the peer group average of 13.6x. The following chart illustrates the valuation of the subscription/SaaS and security peer groups.

What to do with the stock

Varonis is one of the only companies in our coverage universe focused on securing the data – or data-centric security. Varonis is well-positioned to catch inside threat actors such as Edward Snowden. Now data resides on-prem in various clouds and other SaaS applications such as Salesforce, Workday, Box (BOX), Slack (WORK), GitHub, G Suite, etc. We believe securing this data that's scattered in multiple locations is what is driving Varonis' growth.

Varonis is a very conservative company, and the CFO Guy Melamed is not known for issuing overly optimistic guidance. Given this, we expect Varonis to report solid numbers in October and guide up for the December quarter. We are very confident Varonis will exceed its guidance, compelling risk-reward profile, and high growth prospects for many years; we would be buying shares opportunistically.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VRNS either through stock ownership, options, or other derivatives. 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.