My impression is Varonis is an incredibly difficult sale. Last quarter, the CEO sounded frustrated. They hired a bunch of new sales reps earlier in the year, but the funnel isn’t filling –or closing– as quickly as they want.
Execution remains the primary obstacle, and its not an easy fix. IMHO, it’s asking a lot for a ‘security’ sales person to have the depth (technology), scope (across organizations and sectors), credibility (compliance regs, governance standards) and positioning (multi C- and SVP-level) to span across a distributed organization, create the budget and support necessary to essentially change how enterprises create and access information. (Contrast this with security sales people who are invited to RFPs with the benefit of a specific compliance driver!) It sounds to me like Varonis needs very special, very expensive people with a number of skills that are hard to find in a single package. The ideal candidate would be a former CISO/CIO with healthy BD skills, willing to give up 3/4 their salary for a high-pressure sales quota/commission. That’s a tall order. Can they get those people at the volume they need? Will every sale remain an evangelical one? And if not, when will it change?
And they have competition. Although there may not be someone that lines up *exactly* with what Varonis does, Palantir and likely Autonomy, Titus and Siemens Teamcenter are just a few examples of competition driving from different directions towards the similar end-goal of unstructured data protection. Additionally, Symantec, McAfee, IBM and others offer broadly labeled data security solutions, each doing different things and carrying different TCO price-tags.
While they had a large head start, the industry is aware that legacy controls aren’t doing a great job of protecting what really matters, data. Competitors aren’t sitting still.
My interpretation of the VRNS price action (and the downgrade a few months ago from their lead underwriter) is the market is resetting the probabilities of whether Varonis can achieve scale on its own.
Without the resources of a Cisco channel or an HP, or EMC/RSA-level (now Dell) salesforce, the odds are not with Varonis getting to the promised land on its own. The most probable scenario is it gets cheaper over an extended period as evangelical-mode sales growth levels decline until they finally start seeking strategic alternatives. The best outcome for investors may be that management accepts the end game, embraces reality, and seeks acquisition alternatives sooner rather than later. Or, they make it less of an evangelical sale. They’ve recently integrated with SIEM vendors to get closer to traditional breach monitoring and forensics IR teams. The more of this they do, the better.
Alternatively, VRNS could do a major reset to pivot towards the channel and partner with the Tatas, Accentures, Wipros, PWCs, HPs, Cognizants, etc… These are the companies who have the relationships, ability and interest to deploy this sort of organzational-encompassing solution.
But this would require enabling 3rd party pro-services, something they’ve actively resisted in the past.
Its a difficult task to build and support a services channel, and the thinking to date has been to keep the PS revenue and margin for themselves. But the tradeoff is scale and timeframe. As the growth rate slows, they will quickly start running out of options. (And competitors like Palantir, EMC, Cisco, Siemens and HP are not sitting still.)
Ultimately, what may be needed is new leadership and vision. Is current management up to the task? Maybe they’ll surprise us. Tonight will go a ways towards helping us understand where they are in turning it around.
If they can show signs of progress on this call, I’ll rapidly increase what is, for now, a highly speculative long position. They’re not executing as quickly as the market wants and their head start may rapidly be fading. The stock has been killed since its IPO, losing nearly 72% from its all-time high, trading just 8% or so above its all time low. Sentiment is terrible, expectations are low. Perhaps rightfully so. However, they’re in the right space and there is value in their solution. I can see M&A as a likely possibility.
My conclusion: I’m aware of the risk but the reward is far better here at 3x EV/Rev than it was in the $30’s. (An M&A takeout should be closer to the 10x sales level.) With 29% of the shares held short, it could be in the mid-20’s quickly with a good report.
I’m taking a swing here at $15.64, right after I hit post to the final blog. I’ll let you know how it works out. (This is thinly traded stock, just FYI.)
-g
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sweet call
nice for your first call putting yourself out there. I agree with you on their sales though. Long term they’ve got a really tough proposition if they continue to go it alone. Most co’s don’t realize the issue they have unless they’ve already been affected and once they realize it they don’t know what they need. So you have to get them at least to that point, then you have to convince them to buy from some small company they never heard of instead of going with one of the more well known bigger vendors. Unless the company has someone really knowledgeable they’ll likely go with whatever the bigger vendor tells them.