What happened

Shares of cybersecurity company Varonis Systems (VRNS -0.83%) were going up on Tuesday, after the company reported strong results for the second quarter of 2020. Total revenue was up 12% year over year, but the numbers look even better if you dig a little deeper. 

As of 11:30 a.m. EDT today, Varonis stock was up 9%, and even hit a new all-time high of $120 per share.

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So what

As already mentioned, total quarterly revenue for Varonis Systems increased 12% to $66.6 million. But like many technology companies, Varonis sells subscription services, and these take time to show up in results. Therefore, to provide color, companies break out a metric called annual recurring revenue (ARR). For Varonis, ARR increased a whopping 52% year over year to $236 million.

Another helpful metric for companies like this is the dollar-based net retention rate, which measures spending by existing customers. In Q2, the retention rate for Varonis Systems increased 120%. This shows that not only is the company growing recurring revenue through new customers, it's also growing via additional service purchases from existing customers.

The fiscal quarter for Varonis Systems ran from April through June, a period when some technology companies noted that enterprise customers delayed spending while attempting to understand the impact of the coronavirus pandemic. Varonis bucked that trend. Granted, the 52% ARR growth was slower than the 62% growth it posted in 2019, but it was still strong. Its customers likely view its products as an essential cost, since they provide important security in a work-from-home situation.

A dollar bill folded into the shape of an upward pointing arrow.

Image source: Getty Images.

Now what

Varonis management felt confident enough with current trends to provide third-quarter guidance. For Q3, it expects revenue of $68 million to $71 million, and a net loss per share between $0.11 and $0.14 on an adjusted basis. For perspective, in the third quarter of 2019, it reported total revenue of $65.6 million, and an adjusted net loss of $0.16 per share.

This guidance only projects modest revenue growth. But investors should keep in mind that a higher percentage of Varonis Systems' revenue will be subscription-based than last year. Therefore, the "slow" growth in total revenue isn't concerning since the shift to subscription skews the comparison.

It's much more important for Varonis shareholders to notice the trend in its operating expenses. For Q2, total operating expenses only increased 4% year over year. When ARR growth outpaces increases in operating expenses, a company is on the path to profitability. That certainly seems to be the case for Varonis Systems, and it's good reason for investor optimism.