Varonis (VRNS) Q3 2025: SaaS Mix Hits 76% as On-Prem Drag Prompts End-of-Life Pivot
Varonis reached a pivotal SaaS milestone this quarter, with SaaS now at 76% of ARR, but a sharp late-quarter drop in on-prem renewal rates forced a reset in guidance and an accelerated end-of-life for its legacy self-hosted solutions. The company’s “two-company” narrative is now explicit: SaaS is the growth engine, while on-prem is a shrinking drag. With the SaaS transition complete, execution focus and investor scrutiny shift to SaaS upsell velocity, federal sector recovery, and unlocking value from recent platform expansions.
Summary
- SaaS Transition Completion: SaaS now dominates ARR, shifting the company’s operational and strategic center of gravity.
- On-Prem Weakness Forces Reset: Unpredictable renewal rates in legacy on-prem triggered a conservative outlook and resource reallocation.
- Strategic Focus Realignment: Execution now pivots to SaaS upsell, federal turnaround, and monetizing new platform capabilities.
Performance Analysis
Varonis delivered 18% ARR growth year-over-year, but this headline strength masked a pronounced divergence between its SaaS and on-prem segments. SaaS ARR now comprises 76% of the total, up significantly from prior quarters, and is recognized as the primary growth engine. However, late-quarter softness in on-prem renewals—particularly in the federal vertical—drove total company ARR and revenue below expectations and prompted a downward revision to full-year guidance.
Revenue grew 9% YoY, with SaaS revenue ($125.8M) far outpacing term license and maintenance streams. Gross margin compressed to 79.4% from 85% last year, reflecting mix shift and ongoing investments, but remains above long-term targets. Free cash flow generation remains robust, supporting a new $150M share repurchase authorization. Operating margin fell sharply to near breakeven as the company absorbed both revenue shortfall and transition costs. The on-prem drag is now explicit: management cited it as the sole reason for guidance reduction, with SaaS NRR (net revenue retention) described as “very healthy.”
- Federal Vertical Underperformance: Federal ARR (~5% of total) was a multi-million-dollar headwind, leading to team downsizing and a strategic reset.
- Late-Quarter Renewal Volatility: The on-prem renewal shortfall occurred in the final weeks, with no single root cause identified, driving management to build in additional conservatism for Q4 and 2026 outlooks.
- Cash Flow and Liquidity Strength: Free cash flow rose to $111.6M YTD, supporting capital returns despite margin compression.
The quarter crystallized the “two-company” dynamic: SaaS is scaling and healthy, while the on-prem legacy is now a managed decline with an explicit sunset timeline. Investors should now evaluate Varonis primarily as a SaaS growth business, with legacy drag being systematically wound down.
Executive Commentary
"We finished the third quarter with 76% of our total company ARR coming from SaaS, which means that we have now completed the SaaS transition in less than three years and more than two years ahead of plan... However, in the final weeks of the quarter, we experienced weaker than expected renewals in our federal business and our non-federal on-prem subscription business, which resulted in Q3 coming below expectations."
Yaki Fidelson, Chief Executive Officer
"Our SaaS business remains very healthy, even when excluding the impact of conversion, and we continue to see the SaaS NRR trend at very healthy level. We expect that this demand will continue to be the growth driver of our business going forward."
Guy Malamed, Chief Financial Officer & Chief Operating Officer
Strategic Positioning
1. SaaS-First Operating Model
Varonis has now structurally shifted to a SaaS-centric business model, with SaaS ARR at 76% and expected to reach 83% by year-end. This shift allows for unified codebase, lower support costs, and greater salesforce focus, while also unlocking upsell and cross-sell opportunities across its platform. The decision to end-of-life on-prem by December 2026 accelerates this transition and will eventually eliminate dual-code maintenance drag.
2. On-Prem Drag and Risk Management
The on-prem subscription business is now treated as a managed sunset, with renewal unpredictability prompting a more conservative approach to guidance and resource allocation. Management is actively reducing federal headcount and reallocating resources to SaaS, acknowledging that the legacy business is both a revenue and operational risk until fully wound down.
3. Platform Expansion and Upsell Levers
Recent product launches—including Next-Gen Database Activity Monitoring (from the CYREL acquisition) and the AI-native email security solution Interceptor (from SlashNext)—expand Varonis’ addressable market and create new upsell vectors within its SaaS base. Deepening integration with Microsoft and focus on AI security use cases further differentiate the platform and align with evolving CISO priorities.
4. Federal and Large Enterprise Strategy Reset
Despite FedRAMP authorization, federal sector performance remains a weak spot, with the segment underperforming and triggering a strategic regroup. Management is prioritizing rapid SaaS migration for federal customers, but is cautious about further investment until traction improves.
5. Capital Allocation and Financial Flexibility
With $1.1B in liquidity and strong free cash flow, Varonis has authorized a $150M share repurchase—a signal of confidence in long-term SaaS cash generation, even as near-term margins compress due to transition costs and on-prem volatility.
Key Considerations
This quarter marks the inflection point where Varonis is judged primarily as a SaaS growth company, but the legacy business’s unpredictability remains a near-term overhang. Investors should focus on SaaS upsell velocity, customer migration execution, and the ability to capitalize on new platform investments.
Key Considerations:
- SaaS NRR and Upsell: Management describes SaaS net revenue retention as “very healthy,” but will only disclose the metric annually. The pace of SaaS upsell and cross-sell is now the primary growth lever.
- On-Prem Renewal Volatility: No single cause identified for late-quarter renewal misses; management is “baking in conservatism” until patterns stabilize.
- Federal Segment Execution: Federal underperformance is both a drag and a risk, with team reductions and a reset in go-to-market strategy underway.
- Platform Expansion ROI: Early customer wins for new AI and cloud security modules signal potential, but the scale and monetization of these investments will be a key watchpoint through 2026.
- Resource Reallocation: A 5% headcount reduction and expense discipline signal a pivot to higher-ROI areas, but also reflect the operational cost of transition.
Risks
Renewal unpredictability in the on-prem segment introduces near-term ARR and revenue volatility, especially as the company approaches the end-of-life deadline. Federal sector weakness, lack of clear renewal patterns, and potential customer resistance to forced migration may weigh on growth and margins. The company is exposed to execution risk as it reallocates resources and seeks to monetize recent product and platform expansions.
Forward Outlook
For Q4 2025, Varonis guided to:
- Total revenues of $165M to $171M (4% to 8% growth)
- Non-GAAP operating income of break-even to $3M
- Non-GAAP net income per share of $0.02 to $0.04
For full-year 2025, management lowered guidance:
- ARR of $730M to $738M (14% to 15% growth)
- Free cash flow of $120M to $125M
- Total revenues of $615.2M to $621.2M (12% to 13% growth)
- Non-GAAP operating loss of $(8.2)M to $(5.2)M
Management emphasized that guidance now assumes lower on-prem renewal rates and added conservatism, with SaaS expected to end the year at 83% of ARR. Upsell focus and platform expansion are expected to drive SaaS growth above 20% in 2026, pending stabilization of legacy renewal patterns.
- On-prem volatility and end-of-life may pressure ARR through 2026
- SaaS upsell and cross-sell velocity are the primary drivers for future growth
Takeaways
Varonis has reached a SaaS inflection, but legacy on-prem unpredictability and federal weakness remain the key near-term risks. Strategic focus has shifted to SaaS upsell, platform expansion, and resource discipline, with the sunset of the on-prem business now explicit. Investors should watch for stabilization in renewal rates, traction in new modules, and tangible SaaS NRR disclosure next year.
- SaaS Now Dominates, Legacy Drag Winding Down: Execution is now about SaaS upsell and platform leverage, not just migration.
- Guidance Reset Reflects Realism, Not Weakness in SaaS: The on-prem drag is isolated, but will take several quarters to fully exit the model.
- Future Watch: SaaS NRR, Federal Rebound, and New Platform Monetization: These will determine if Varonis can sustain premium SaaS growth rates post-transition.
Conclusion
Varonis’ SaaS transition is complete, but the full benefits will only be realized once legacy on-prem volatility is behind it. Execution now depends on SaaS upsell, platform expansion, and resource discipline, with investors advised to watch for stabilization in renewal patterns and early returns from new product investments.
Industry Read-Through
Varonis’ experience offers a playbook for security vendors navigating SaaS transitions: expect late-cycle renewal volatility, the need for explicit end-of-life deadlines, and the operational cost of running dual models. The company’s investment in AI-native security and platform breadth reflects broader customer demand for unified data protection in the age of cloud and AI. Other security vendors with legacy on-prem bases should anticipate similar renewal unpredictability and margin compression as SaaS mix rises. The importance of SaaS NRR and upsell velocity as the new growth benchmarks is a key industry signal for the next phase of cybersecurity platform evolution.