On Wednesday, Citi maintained its Neutral rating on Varonis Systems (NASDAQ: NASDAQ:VRNS) shares but increased the price target to $57 from the previous $50. The firm's analyst cited a respectable third quarter, noting a modest acceleration in Annual Recurring Revenue (ARR) which grew 17.7% year-over-year.
The new stock price target reflects a slightly more optimistic view of the company's performance and potential, despite some areas of underperformance.
Varonis Systems reported a revenue beat with its latest results, although the Federal sector did not perform as expected, missing by several million dollars. However, the company's ARR showed a slight quarter-over-quarter increase of 30 basis points.
New Net ARR (NNARR) also experienced a step-up, reaching $26 million, driven by the company's new capabilities in Managed Detection and Response (MDDR) which are supporting the transition to a SaaS model and contributing to an increase in Average Contract Value (ACV) and Average Selling Price (ASP).
The $52 million SaaS NNARR saw a healthier quarter-over-quarter bump, indicating a strong position for Varonis in the competitive data security, Data Security Posture Management (DSPM), and data resiliency market. Moreover, the firm highlighted the monetization of GenAI as a positive narrative for the company's valuation, especially considering the stock's year-to-date outperformance.
Citi's analysis also pointed out that Varonis is showing an upward trend in operating and free cash flow profitability, with the ARR Contribution Margin (ARR-CM) improving by 4 points quarter-over-quarter to 15%. Despite these positive indicators, the analyst expressed continued reservations due to the lack of significant beats in revenue and absolute growth trends, which remain below 20%.
The firm's valuation models place Varonis at 12 times its expected 2025 enterprise value to sales (EV/S) and 10 times its expected 2025 enterprise value to ARR (EV/ARR), compared to its peer and model transition comparison, CyberArk, which trades at 11 times and 10 times, respectively, and is growing approximately 50% faster on a substantially larger base. The raised price target to $57 reflects a higher earnings guide but maintains a cautious outlook on the stock's valuation.
In other recent news, Varonis Systems has reported strong earnings, surpassing consensus estimates, with Net New Annual Recurring Revenue (NNARR) exceeding expectations by $5 million. The company's Annual Recurring Revenue (ARR) demonstrated consistent growth, contributing to an improved Fiscal Year 2025 ARR guidance, projecting growth of 17-18% year-over-year.
Varonis has also announced plans to offer $350 million in Convertible Senior Notes due 2029, with an additional option for initial purchasers to buy up to $52.5 million more.
Varonis Systems has seen positive adjustments in its stock price targets by multiple firms, including DA Davidson, UBS, Baird, FBN Securities, and Truist Securities, following strong financial performance.
The company's robust quarter was driven by significant growth factors and technological advancements, such as the adoption of SaaS solutions and the emerging contribution of General Artificial Intelligence (Gen AI) to its business results.
These recent developments highlight Varonis Systems' ongoing momentum in the data security and analytics sector. The company has also introduced new data security features at Dreamforce 2024, aimed at enhancing data security for Salesforce (NYSE:CRM) customers.
The company's success is attributed to robust enterprise demand, especially from new business, with healthy conversion rates. Despite a slight slowdown in the federal vertical, the overall secular tailwinds for the company remain strong.
InvestingPro Insights
Varonis Systems' recent performance aligns with several key metrics and insights from InvestingPro. The company's impressive gross profit margin of 84.54% for the last twelve months as of Q2 2024 underscores its strong position in the data security market, supporting Citi's observation of the company's competitive stance in DSPM and data resiliency.
InvestingPro Tips highlight that Varonis holds more cash than debt on its balance sheet and that its liquid assets exceed short-term obligations. These factors contribute to the company's financial stability, which is crucial as it transitions to a SaaS model and invests in new capabilities like MDDR.
The recent price target increase by Citi is reflected in InvestingPro data, which shows a significant 86.6% price return over the past year and that the stock is trading near its 52-week high. This aligns with the InvestingPro Tip indicating a large price uptick over the last six months.
While Citi maintains a cautious stance due to growth rates below 20%, InvestingPro data shows a revenue growth of 12.93% in Q2 2024, suggesting some acceleration. Additionally, an InvestingPro Tip notes that analysts predict the company will be profitable this year, which could support the upward trend in operating and free cash flow profitability mentioned in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 8 additional tips for Varonis Systems, providing a deeper understanding of the company's financial health and market position.
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