Varonis Systems' Q3 2025 Earnings Call: Contradictions on Federal Strategy, SaaS Transition, ARR Growth, and Conversion Challenges

Date of Call: October 28, 2025

Financials Results

• Revenue: $161.6M, up 9% YOY (ARR $718.6M, up 18% YOY)
• EPS: $0.06 per diluted share, down from $0.10 in Q3 2024 ($8.4M net income vs $13.8M prior year)
• Gross Margin: 79.4%, compared to 85.0% in Q3 2024
• Operating Margin: 0.1%, compared to 6.1% in Q3 2024 (operating income $0.2M vs $9.1M prior year)

Guidance:

• Q4 2025 revenue expected $165M–$171M (growth 4%–8%); non‑GAAP operating income breakeven to $3M; non‑GAAP net income per diluted share $0.02–$0.04 (assumes 133.4M diluted shares).
• Full‑year 2025 ARR $730M–$738M (growth 14%–15%); total revenue $615.2M–$621.2M (growth 12%–13%); free cash flow $120M–$125M; non‑GAAP operating loss $(8.2M)–$(5.2M); non‑GAAP EPS $0.12–$0.13 (assumes 134.8M shares).
• Company baked in conservatism on on‑prem renewal rates, announced self‑hosted end‑of‑life Dec 31, 2026, 5% headcount reduction, and authorized $150M repurchase program.

Business Commentary:

* SaaS Transition and Revenue Growth: - Varonis Systems reported that 76% of its total company ARR is now from SaaS, indicating the completion of its SaaS transition in less than 3 years, more than 2 years ahead of plan. - The growth in SaaS is attributed to its automated outcomes and strong demand from customers seeking to secure data in the cloud.

• On-Prem Business Challenges and Renewal Rates:
• ARR increased by 18% year-over-year to $718.6 million, but weakened renewals in the federal and nonfederal on-prem subscription businesses led to Q3 missing expectations.

• The decline in renewal rates is attributed to account management issues, budgetary scrutiny, and underperformance in the federal vertical, leading to a 5% reduction in headcount.

• New Product Launches and Strategic Partnerships:

• Varonis introduced Varonis Interceptor and Next-Gen Database Activity Monitoring, expanding its total addressable market and connecting data, identity, and email security solutions.

• These product and partnership advancements are aimed at capitalizing on the increasing need to secure data in the AI era.

• Budget Allocation and Customer Demand:

• Customers are allocating more budget to data security, driving demand for Varonis's SaaS platform and other data security solutions.
• This increased budget allocation is due to the growing need for data security measures to ensure compliance and protect against breaches.

Sentiment Analysis:

Overall Tone: Neutral

• Management stated they are "disappointed" with on‑prem performance and are "baking in additional conservatism," while also noting the SaaS business is "very healthy" and ARR grew 18% YOY to $718.6M. They announced cost actions (5% headcount reduction) and end‑of‑life for self‑hosted by Dec 31, 2026, balancing near‑term caution with long‑term SaaS optimism.

Q&A:

• Question from Meta Marshall (Morgan Stanley): Maybe a question for me is just in terms of kind of you guys had just received FedRAMP high authorization for the SaaS platform. And so I guess just what went into kind of some of the decision to kind of terminate some of the people on the federal team. And just how do you kind of pursue that opportunity going forward?
  Response: Federal renewals underperformed with no clear cause; company is reducing federal headcount, reevaluating federal strategy, and prioritizing moving federal customers to SaaS where automation delivers stronger value.

• Question from Matthew Hedberg (RBC Capital Markets): Yaki, was there anything you heard that was consistent for why the on-prem deals didn't renew? I mean, I guess, was there anything competitively? And then, Guy, you noted SaaS NRR trends remain at healthy levels. I wonder if you could put a finer point on what level that might imply.
  Response: No single competitive factor identified—many on‑prem customers were single‑threaded and suffered account management lapses; SaaS NRR is 'very healthy' and company will disclose SaaS NRR in Q4.

• Question from Fatima Boolani (Citigroup): Guy and Yaki, you've sort of identified that this nonrenewal or rather churn on an enterprise customer presumably was maybe more of an isolated event, but you are being prudent and you are frankly, taking a hatchet to your ARR guidance for the year. So I'm wondering, in the 24% of the ARR base that is not SaaS. What are some of the granular assumptions or thought processes you're reflecting to give us a better sense that, hey, we've kind of hit the floor on something like this happening again and frankly, for most of next year, ahead of which maybe customers are going to have an air pocket in terms of their decision-making. So can you help us through some of that in terms of how you're putting parameters on the risk to the 24% of ARR that is not SaaS?
  Response: They baked conservatism into Q4 guidance by assuming lower on‑prem renewal rates and factoring in the self‑hosted EOL; they will reassess 2026 assumptions after observing Q4 results.

• Question from Joshua Tilton (Wolfe Research): I'm still a little confused on the why. Like do we -- like from your perspective and like what happened, what was the reason as to why you saw some of these lower-than-expected renewals in the on-prem business, both for Fed and non-Fed? And was it related to the shutdown? And on the non-Fed side, were these customers aware that the end of life was going to happen? Or is this announcement of end of life kind of post quarter?
  Response: Multiple factors contributed—late‑quarter budget scrutiny, sales/process issues and federal underperformance; no evidence of broad competitive shift; many customers were single‑threaded; EOL was announced post‑quarter so visibility on prior awareness is limited.

• Question from Joseph Gallo (Jefferies): Should we expect you to ease on that 25% to 30% ASP uplift for conversions? Or is there anything you can do to further incentivize the on-premise customers remaining to move to SaaS? And then just in your conversations with customers, is there any sense of the number or percentage of business that maybe would never be willing to or can't move to SaaS?
  Response: No immediate change to conversion pricing; company is investigating causes before adjusting incentives and believes historically conversions worked well.

• Question from Brian Essex (JPMorgan): On the SaaS business, it sounds like that business is still very healthy and kind of as expected. Can you give us a sense of where you think ARR could shake out for the end of the year? And then as a follow-up, contribution from SlashNext Cyral what you expect that could contribute for the rest of the year?
  Response: SaaS is expected to grow 20%+ and management plans to finish the year with ~83% of ARR in SaaS; SlashNext and Cyral are seen as complementary additions with positive early customer reaction.

• Question from Rudy Kessinger (D.A. Davidson): The end of life for self-hosted by the end of next year, and you just had lower renewal rates than you were expecting in Q3. Do you feel at all that this push to migrate to SaaS is in any way alienating a certain portion of your customers who are just never going to move to SaaS? And if so, why do that? Why not let them have a longer time frame to migrate to SaaS or remain on term license if they want to?
  Response: Company believes SaaS delivers far greater customer and operational value; to avoid dual code/ops and to focus sales attention they will enforce a Dec‑2026 EOL while working with customers on migration.

• Question from Roger Boyd (UBS): Just to go back to Josh's question for a minute to just be clear, was there any change to how you're approaching renewals on maintenance and term license in the quarter relative to the second quarter or last year and whether that maybe led to some of this unpredictability? Were you more heavily encouraging on-prem customers to move to SaaS?
  Response: No single change in renewal approach caused the issue; multiple factors (sales process gaps, budget scrutiny, federal renewals) explain the Q3 decline and sales teams have been actively trying to convert customers.

• Question from Jason Ader (William Blair): If customers are not renewing their on-prem subscriptions with Varonis and not going to your SaaS, then what are they doing? And separately, is there an element of compression in term contract duration at all because we saw that with another software company this morning?
  Response: Most customers remain in discussions rather than defecting outright; many were limited‑use on‑prem customers; management saw no evidence of contract duration compression affecting Q3.

• Question from Michael Cikos (Needham): Was there anything unusual about this OPS renewal cohort in the final weeks of the third quarter? Was the cohort small/skewed and have the OPS renewal rates persisted into Q4?
  Response: The decline occurred in the back‑end late‑quarter cohort (last 2–3 weeks); because the business is back‑end loaded it's too early to judge Q4 trends and they are treating Q3 as one data point while baking conservatism into guidance.

• Question from Erik Suppiger (B. Riley): Can you remind us what your contribution from Fed was and maybe what the contribution from the on-premise Fed business because I think all the Fed is probably on-premise. Was there a difference in terms of the decline in renewal rates between those 2 categories?
  Response: Federal comprises ~5% of ARR and caused a several‑million dollar renewal headwind; renewal declines occurred in both federal and non‑federal on‑prem segments.

• Question from Shrenik Kothari (Robert W. Baird): Now that the conversion phase is largely complete and with the end of life, can you triangulate the underlying growth cadence going forward from the $545M SaaS ARR—how much is early stage with upsell runway vs more mature?
  Response: SaaS momentum (new customers + healthy NRR) supports 20%+ growth and management sees significant upsell/cross‑sell runway across platforms, though no granular split was provided.

• Question from Junaid Siddiqui (Truist): As you expand your platform to cover adjacent use cases like SaaS and cloud infrastructure, where is the source of that incremental budget coming from—reallocation or net new spend?
  Response: Management sees customers increasing budget for data security—incremental/net‑new spend is supporting adoption of SaaS and adjacent use cases.

Contradiction Point 1

Federal Business Strategy

It reflects a shift in strategy regarding the federal business, which may impact revenue projections and market focus.

What factors led to the decision to terminate some federal team members? How will you pursue federal opportunities moving forward? - Meta Marshall (Morgan Stanley)

2025Q3: The FedRAMP moderation doesn't meet investment needs. The federal business does not behave like the enterprise business. The focus is now on moving these customers to SaaS. - Yakov Faitelson(CEO)

What was the headcount added through the recent acquisition, and have there been any federal market developments? - Shaul Eyal (TD Cowen)

2025Q1: We remain focused on federal market potential, with FedRAMP certification expected later this year. - Guy Melamed(CFO)

Contradiction Point 2

Transition to SaaS and Customer Management

It involves the company's approach to transitioning to SaaS and managing customer relationships, which are critical for revenue growth and customer retention.

Was the OPS renewal cohort skewed? Have renewal rates changed since Q3? - Mike Cikos (Needham & Co.)

2025Q3: The business is back-end loaded, making it difficult to predict Q4 renewal rates. Our guidance assumes lower renewal rates, with additional conservatism for the on-prem subscription business. - Guy Melamed(CFO)

How is the macro environment affecting your guidance this year, and are any macro expectations included? - Joshua Tilton (Wolfe Research)

2025Q1: We believe in growing customer demand despite macro challenges...Our guidance reflects confidence in our business model. - Guy Melamed(CFO)

Contradiction Point 3

SaaS Revenue and ARR Growth

It involves differing perspectives on the growth and financial impact of the SaaS business, which is a key focus for Varonis Systems, Inc.

What is the expected SaaS ARR for the year-end? What are the contributions from SlashNext and Cyral? - Brian Essex(JPMorgan)

2025Q3: We plan for SaaS ARR to be 83% of total ARR by year-end, with a continued growth rate of 20% or more. - Guy Melamed(CFO)

How should we model SaaS revenue given recent strong performance? - Andrew Nowinski(Wells Fargo)

2025Q2: The focus is on ARR, ARR contribution margin, and free cash flow as key North Stars during transition. Revenue and SaaS revenue may be noisy during the transition, with a focus on ARR growth. - Guy Melamed(CFO)

Contradiction Point 4

Customer Conversion Challenges and Strategies

It involves the company's approach to converting on-prem customers to SaaS and the challenges faced, which impact the transition's effectiveness and revenue projections.

Are there additional incentives to transition on-premise customers to SaaS? Are there any customers unwilling to transition? - Joseph Gallo(Jefferies)

2025Q3: We're addressing every stone and attempting to uncover issues. The goal is to move all customers to SaaS. We are reducing headcount but focusing resources where there's high ROI. - Yakov Faitelson, Guy Melamed

How can investors be assured that increased incentives for SaaS platform migration won't lead to accelerated attrition, and what do those conversations typically involve? - Brian Essex(JPMorgan)

2024Q4: We definitely took a lot of the learnings from our previous transition. We're focusing on the benefit for the customer and finding the best approach. We have seen that SaaS is a better product for customers, offering better protection and automation. - Guy Melamed(CFO & COO)

Contradiction Point 5

SaaS Transition Strategy and Impact on Sales Efficiency

It involves the company's approach to transitioning customers from on-prem to SaaS and the expected impact on sales efficiency, which are critical for understanding the transition's effectiveness and revenue projections.

What remained consistent with non-prem renewals? Is there any evidence of compression in term durations? - Matthew Hedberg(RBC Capital Markets)

2025Q3: The focus is now on ensuring quality account management. Term durations are not impacted by this. - Yakov Faitelson, Guy Melamed(CFO & COO)

Are you accelerating renewal deals to drive SaaS adoption among existing customers? And post-SaaS transition costs largely behind you, how confident are you in sustaining mid-teens growth? Is it driven by AI momentum or another product cycle? - Hamza Fodderwala(Morgan Stanley)

2024Q4: Conversions are challenging but required to move customers to SaaS, which dilutes sales efficiency during the transition. Our view is that once we're fully converted, we'll be more productive. - Guy Melamed(CFO & COO)