Accelerated SaaS Transition And AI Demand Will Drive Customer Acquisition By 2025

Key Takeaways

• Accelerated transition to a SaaS model boosts customer retention and sales efficiency, positively impacting revenue and cash flow.
  
• Expansion into diverse data stores and growing demand for AI products is driving robust ARR growth and enlarging the market.
  
• Transitioning to SaaS strains resources and could dilute growth, impacting revenue, sales efficiency, net margins, and long-term ARR growth.

Catalysts

Provides software products and services that continuously discover and classify critical data, remediate exposures, and detect advanced threats with AI-powered technology in North America, Europe, APAC, and rest of world.

• The accelerated transition to a SaaS model, expected to complete in 2025 instead of 2027, is anticipated to improve customer retention and enhance sales efficiency, with a positive impact on revenue and cash flow generation.
  
• Growing demand for the MDDR (Managed Detection and Response for Data) and AI-related products, like Copilot, is driving significant new customer acquisition and expansion opportunities, which supports robust ARR growth.
  
• The expansion into securing data across an increasing array of data stores including hyperscalers (AWS, Azure, Google Cloud), Salesforce, and on-prem solutions is enlarging their total addressable market, leading to potential future revenue increases.
  
• Investment in strategic sales and customer success efforts to speed up the SaaS transition is expected to improve sales productivity and enable upsell opportunities post-transition, benefiting revenue growth.
  
• Increased leverage from the SaaS model is ahead of projections, with operating margin and free cash flow improvements contributing to stronger earnings potential in the long term.

Varonis Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Varonis Systems's revenue will grow by 14.4% annually over the next 3 years.
• Analysts are not forecasting that Varonis Systems will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Varonis Systems's profit margin will increase from -17.4% to the average US Software industry of 11.8% in 3 years.
• If Varonis Systems's profit margin were to converge on the industry average, you could expect earnings to reach $97.7 million (and earnings per share of $0.85) by about April 2028, up from $-95.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 78.5x on those 2028 earnings, up from -48.0x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

Varonis Systems Future Earnings Per Share Growth

Risks

• The transition to SaaS is resource-intensive, leading to potentially diluted growth rates and requiring significant investment and effort, which may impact net margins and overall earnings.
  
• The inherent headwinds of SaaS revenue recognition create a temporary drag on revenue growth due to a shift from upfront to ratable revenue, which impacts overall reported revenues.
  
• There is a risk that the sales focus on converting existing customers to SaaS could detract from new business development and upsell opportunities, potentially affecting ARR growth.
  
• Customer conversion to SaaS is legally and procedurally complex, which could strain resources and lengthen sales cycles, affecting sales efficiency and net income.
  
• Although they expect better upsell opportunities post-transition, there remains uncertainty about the ability to significantly increase net retention rates once all customers are converted to SaaS, potentially impacting long-term ARR growth.

Valuation

• The analysts have a consensus price target of $52.867 for Varonis Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $825.2 million, earnings will come to $97.7 million, and it would be trading on a PE ratio of 78.5x, assuming you use a discount rate of 8.0%.
• Given the current share price of $40.83, the analyst price target of $52.87 is 22.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.