Varonis Q2 Revenue Tops Estimates

Varonis Systems (VRNS -0.04%), a data security software provider, reported its Q2 FY2025 financial results on July 29, 2025. The most notable news was GAAP revenue of $152.2 million, which outpaced analyst expectations and reflected growing demand for its cloud-based solutions. GAAP revenue reached $152.2 million, above the $149.0 million estimate, while non-GAAP earnings per share were $0.03, better than the $0.01 analyst forecast. Despite progress, profitability slipped as the company invested heavily in its ongoing shift to a Software-as-a-Service (SaaS) model, leading to a non-GAAP operating loss. Overall, the period marked continued solid top-line momentum and subscription growth, alongside cost and margin pressures typical of a business in technology transition.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q1 2025 earnings report.

What Varonis Does and How Its Business Is Changing

Varonis Systems offers software to help organizations protect their most sensitive data. Its flagship products identify, monitor, and secure information stored both on company servers and in the cloud. Customers range from large corporations in regulated industries like healthcare and finance to growing tech businesses.

The company is in the midst of a major transformation, shifting from traditional software sold as perpetual licenses to cloud-based, subscription (SaaS) offerings. This model allows for automatic updates and easier scaling for customers, while providing Varonis with more predictable, recurring revenue. Key to its future success is the ability to drive this SaaS transition efficiently while continuing to enhance the technology and expand the customer base.

Highlights and Trends from the Quarter

One of the most notable achievements was the acceleration of Varonis’s SaaS transition in Q1 2025. SaaS annual recurring revenue reached 69% of total ARR, up from 61% in Q1 2025. SaaS revenue surged 136.5% year over year. This growth came as more customers adopted cloud-delivered security tools, prompting a decline in old-style term licenses and maintenance revenue. While these legacy segments fell -- with term license subscriptions down 48.3% and maintenance/services down 39.0% year over year -- this trend is consistent with the broader industry shift to subscription models.

The shift to subscription revenue also caused some expected turbulence in gross margins and profit metrics during FY2025. Non-GAAP operating income turned negative, with research and development expenses up 25.2%, sales and marketing up 9.3%, and general and administrative expenses up 13.2% compared to Q2 2024. These costs reflect the company’s focus on innovation, expanding product features, and driving customer conversions to SaaS. Management pointed out that operating margins may remain volatile until the SaaS transition completes, with more stability expected after 2025.

In terms of innovation, the company made several announcements targeting the rapidly evolving field of data security for artificial intelligence (AI) and cloud environments. During the period, it launched protection for OpenAI’s ChatGPT Enterprise, addressing compliance and monitoring as large organizations adopt AI tools. The company also achieved FedRAMP Authorization for its unified SaaS platform -- a key milestone for selling cybersecurity software to U.S. federal agencies. In addition, Varonis deepened its partnership with Microsoft, integrating more closely with the software giant’s security offerings, and received new certifications in France to address health data requirements. Its Managed Data Detection and Response (MDDR) product, introduced only five quarters ago, continued to see the fastest adoption rate of any of its platform features to date.

Growth in annual recurring revenue (ARR) shows continuing positive traction with both new and existing customers. ARR climbed 19.0% to $693.2 million, reflecting successful new sales and the conversion of current customers to subscription-based offerings. Free cash flow -- the money a company has left after paying its bills and investing in its business -- also improved year on year, reaching $82.7 million in the first six months of the year, up from $67.3 million. The company’s strong cash position allows it to invest in future growth: as of June 30, 2025, it held $1.2 billion in cash and investments. The period also saw share repurchases, with 1.0 million shares bought back for $38.7 million, completing its current authorization.

Looking Ahead: Guidance and Investor Considerations

Management provided updated financial guidance for the third quarter and for the full fiscal 2025 year. For Q3 2025, the company expects revenue between $163.0 million and $168.0 million, non-GAAP operating income of $4.0 million to $7.0 million, and projected non-GAAP EPS of $0.07 to $0.08. For FY2025, the outlook includes ARR of $748 million to $754 million (a 17% increase), free cash flow of $120 million to $125 million, and revenue of $616 million to $628 million. The company also raised its target for the mix of SaaS ARR to 82% by year-end 2025, up from the previous 80% goal. Non-GAAP EPS guidance moved up to $0.16–$0.18 for FY2025.

As the SaaS transition completes, volatility in gross margins and GAAP profitability is likely to persist in the short term. The key trends for investors to monitor over the coming quarters are progress in customer migration to SaaS, the ongoing pace of AI and cloud security product launches, and the ability to manage operating expenses as revenue composition shifts. Management highlighted that operating margins should normalize in later periods, specifically after 2025, as the mix of recurring revenue stabilizes. No explicit dividend changes or new dividend policy were announced.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.