Data security company Varonis Systems (NASDAQ:VRNS) fell short of the markets revenue expectations in Q3 CY2025, but sales rose 9.1% year on year to $161.6 million. Next quarter’s revenue guidance of $168 million underwhelmed, coming in 1.2% below analysts’ estimates. Its non-GAAP profit of $0.06 per share was in line with analysts’ consensus estimates.
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Varonis Systems (VRNS) Q3 CY2025 Highlights:
- Revenue: $161.6 million vs analyst estimates of $166.1 million (9.1% year-on-year growth, 2.7% miss)
- Adjusted EPS: $0.06 vs analyst estimates of $0.05 (in line)
- Adjusted Operating Income: $161,000 vs analyst estimates of $2.60 million (0.1% margin, 93.8% miss)
- Revenue Guidance for Q4 CY2025 is $168 million at the midpoint, below analyst estimates of $170.1 million
- Management lowered its full-year Adjusted EPS guidance to $0.13 at the midpoint, a 26.5% decrease
- Operating Margin: -22.2%, down from -16% in the same quarter last year
- Annual Recurring Revenue: $718.6 million vs analyst estimates of $720 million (17.8% year-on-year growth, in line)
- Billings: $180.2 million at quarter end, up 13.8% year on year
- Market Capitalization: $7.06 billion
StockStory’s Take
Varonis Systems’ third quarter results were met with a significant negative market reaction, as the company’s revenue and operating income missed Wall Street expectations. Management pointed to a sharp and unexpected decline in renewal rates within its on-premises subscription (OPS) business, especially during the final weeks of the quarter, as a key factor behind the underperformance. CEO Yakov Faitelson described the on-prem subscription segment as a drag on overall growth, acknowledging, "the reduction in the renewal rate that happened in the final weeks of Q3 was unexpected." Management also announced cost controls, including a 5% workforce reduction, to address these challenges.
Looking ahead, Varonis’ forward guidance reflects increased caution due to ongoing unpredictability in its legacy on-premises segment and the decision to end support for self-hosted solutions by December 2026. Management is shifting focus toward accelerating SaaS adoption and deepening integration with cloud partners, particularly through new products and partnerships. CFO Guy Melamed emphasized, "we are baking in additional conservatism to our guidance and have assumed even lower renewal rates in our OPS business for the fourth quarter." The company expects its SaaS platform to remain the primary driver of growth, capitalizing on automation and expanded cloud data protection use cases.
Key Insights from Management’s Remarks
Management attributed the quarter’s performance to the continued strength of SaaS adoption, offset by weaker-than-expected renewals in the on-prem subscription segment and ongoing federal sector headwinds.
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SaaS momentum continues: Varonis completed its multi-year transition to a SaaS-first model, with 76% of annual recurring revenue (ARR) now generated from SaaS—a milestone achieved ahead of schedule. Demand for the SaaS platform remains robust, driven by automation, ease of deployment, and expanded use cases in cloud data protection.
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On-prem subscription renewal decline: Unexpected softness in renewal rates for the on-prem subscription business, particularly in the federal vertical and among single-use customers, significantly impacted results. Management cited a lack of clear themes behind the nonrenewals, suggesting both sales process challenges and increased customer budget scrutiny played a role.
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Federal business underperformance: The federal segment continued to lag, prompting a reduction in federal team headcount. Although Varonis recently achieved FedRAMP authorization for its SaaS platform, CEO Yakov Faitelson noted ongoing difficulty “figuring out why the federal [segment] continued to underperform.”
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End-of-life for self-hosted solutions: Varonis announced it will sunset its on-premises (self-hosted) solution by the end of 2026, aiming to consolidate resources and fully focus on SaaS. This strategic shift is expected to introduce further renewal uncertainty in the legacy OPS base in the near term.
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Product and partnership investments: The company launched new offerings including Next-Gen Database Activity Monitoring (DAM) and Interceptor (an AI-driven email security solution). It also deepened its partnership with Microsoft to better serve customers adopting Copilot and other cloud-based tools, positioning Varonis for growth in data security and compliance for AI-driven environments.
Drivers of Future Performance
Varonis expects future performance to hinge on SaaS upsell opportunities, renewed focus on automation, and the pace of legacy OPS customer migration.
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SaaS platform expansion: Management believes SaaS will drive double-digit ARR growth, fueled by new customer acquisition, upselling existing users, and continued investment in features for cloud and hybrid environments. The completion of the SaaS transition allows more sales focus on expanding within the existing customer base.
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Legacy OPS renewal risk: The decision to end support for self-hosted solutions increases near-term uncertainty. Management is embedding additional caution into guidance, assuming lower renewal rates for the remaining on-prem customers and recognizing that some may not migrate to SaaS.
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Cost controls and resource reallocation: A 5% headcount reduction and tighter expense management are intended to preserve margins and redirect resources to high-return SaaS initiatives. Management cited these actions as necessary to address unpredictability in the legacy business and to support future growth.
Catalysts in Upcoming Quarters
In the coming quarters, the StockStory team will be monitoring (1) the pace at which legacy on-prem customers migrate to the SaaS platform, (2) progress on upselling and cross-selling new SaaS modules to existing customers, and (3) early adoption and integration milestones for new offerings like Database Activity Monitoring and Interceptor. Ongoing cost control measures and the impact of ending support for self-hosted solutions will also be key areas to watch.
Varonis Systems currently trades at $43.05, down from $63 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).
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