Is Varonis An Acquisition Target?

Recent IDC reports suggest that the global Big Data technology and services market will be worth $41.5 billion by the year 2018, recording a growth of 26.4% annually. The proliferation of smartphones and other connected devices is leading to a significant growth in both structured and unstructured data. New York-based Varonis Systems (NASDAQ: VRNS) is helping manage this massive data explosion.

Varonis Systems’ Offerings
Varonis was founded in 2005 by Ohad Korkus and Yaki Faitelson to help provide software services for organizations to better manage unstructured data. Their platform provides organizations with the capability to map, analyze, manage, and migrate unstructured data that is generated in the form of spreadsheets, word processing documents, presentations, audio files, video files, emails, text messages, and any other data forms created by the employees. The platform leverages a proprietary Metadata Framework to extract critical metadata from an enterprise’s IT infrastructure and then uses this contextual information to map functional relationships among employees, data objects, content, and usage. The use of this Metadata Framework helps even unstructured data to appear as searchable data structure, thus providing management with access to real-time intelligence.

Varonis’s tools also help organizations manage data security. Organizations can keep track of how people are using files and reports to ensure that only the right people are accessing the information.

They continue to upgrade and improve data offerings and recently announced several upgrades to the Varonis Metadata Framework platform. The latest product recognizes the importance of cloud computing and is being made compatible with Microsoft Office 365. Other new features include the ability of users to manage SharePoint data alongside the file share data without requiring the involvement of the organization’s IT helpdesk. They have also improved detection capabilities that will let users detect group policy changes in Active Directory and show IT staff details of what policy settings were changed. The tool will now capture additional log-on information for improved security.

Varonis Systems’ Financials
Varonis is improving their product features and revenues, but investments continue to hurt margins. For the first quarter this year, Varonis reported revenues of $23 million with an adjusted loss of $0.44 per share. Revenues improved 32% over the year. The market was looking for a loss of $0.41 per share for the quarter.

By segment, license revenues increased 26% to $10.2 million and maintenance and services revenues grew 36% to $12.8 million.

During the quarter, sales and marketing expenses grew 41% over the year to $20.2 million and R&D spend increased 20% to $7.7 million.

For the quarter ended June this year, Varonis is expecting revenues of $28.5 million-$29.3 million with a loss of $0.31-$0.28 per share. They are expecting to end the current year with revenues of $123.6 million-$126.7 million and a loss of $0.73-$0.68 per share. Analysts were modeling a loss of $0.36 per share for the June quarter.

Last year, Varonis went public and raised $106 million by selling 4.8 million shares at $22 each on the Nasdaq. Their stock is currently trading at $21.81 with a market capitalization of $542 million. It touched a high of $38.48 in February this year. Prior to listing, Varonis had been venture funded with $29 million in investments from EMC, Accel Partners, Evergreen Venture Partners, and Pitango Venture Capital. The weaker than expected financial performance for the last quarter dragged the stock downwards.

At its current valuation, Varonis is a good acquisition target. EMC has already invested in Varonis and they have also partnered with them to offer a solution that lets organizations better manage files that are stored on EMC’s network-attached storage (NAS) devices. An acquisition would imply that EMC would own the complete infrastructure and software capabilities for Big Data analytics, storage and security.