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.

Is now the time to buy VRNS? Find out in our full research report (it’s free for active Edge members).

While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.

Our Top 5 Analyst Questions From Varonis Systems’s Q3 Earnings Call

• Meta Marshall (Morgan Stanley) asked about the rationale behind federal team reductions despite recent FedRAMP authorization. CEO Yakov Faitelson responded that persistent underperformance in federal renewals prompted the move, and future investments will target migrating these customers to SaaS.

• Matthew Hedberg (RBC Capital Markets) pressed on reasons for weak OPS renewals and competitive dynamics. Faitelson stated there was no single cause, but acknowledged sales process issues and a lack of proactive account management for legacy customers.

• Fatima Boolani (Citigroup) questioned the conservatism in guidance for the non-SaaS base and how management assessed the risk of further renewal declines. CFO Guy Melamed explained that guidance assumes lower renewal rates, reflecting recent unpredictability and the end-of-life announcement for on-prem solutions.

• Joseph Gallo (Jefferies) asked if the move to SaaS could alienate legacy customers and how Varonis is incentivizing migration. Faitelson argued the SaaS model offers far greater value and efficiency, while Melamed emphasized financial and operational benefits to fully committing to SaaS.

• Jason Ader (William Blair) inquired about what nonrenewing on-prem customers are doing if not migrating to SaaS. Melamed noted that many have not adopted alternative solutions and that Varonis is still engaged in discussions with those customers.

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 $35.71, down from $63 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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