Varonis Systems, the data security darling of Wall Street, just had its Q1 2024 earnings call, and while the headlines focused on strong ARR growth and impressive free cash flow, something far more significant flew under the radar: the quiet emergence of a service that could catapult Varonis into a whole new league.

The service, innocuously dubbed "Managed Data Detection and Response" (MDDR), might sound like just another security acronym, but it's anything but. It represents a subtle yet profound shift in Varonis' business model, one that could unlock explosive growth and transform the company from a software vendor into a full-fledged data security guardian.

Let's rewind for a moment. Varonis built its reputation by giving companies x-ray vision into their own data. Its software analyzes access patterns, identifies sensitive information, and helps lock down overexposed data. It's like a meticulous librarian who knows exactly which books are in the library, who's borrowing them, and whether they're being handled with care.

But here's the problem Varonis, and the entire data security industry, has faced for years: Most companies, even with sophisticated security stacks, struggle to act on the insights these tools provide. They lack the expertise, the manpower, and frankly, the time to constantly monitor alerts, investigate anomalies, and respond to threats in real-time. It's like having a state-of-the-art security system in your home, but no one to watch the monitors or answer the alarm.

Enter MDDR. With this service, Varonis is saying, "Don't worry, we'll watch your data for you." It's leveraging its deep understanding of data behavior, its years of experience in threat modeling, and its powerful AI engine to proactively detect and respond to threats on behalf of its customers. Imagine a bank offering a service where they monitor your accounts 24/7 and automatically thwart any fraudulent activity before it even hits your statement. That's the kind of peace of mind Varonis is selling with MDDR.

And the early signs are remarkably promising. While still in its infancy, MDDR is driving larger deal sizes and simplifying the sales conversation. Customers, particularly those struggling with security staffing shortages, are clamoring for a solution that takes the burden off their shoulders.

Here's where the hidden signal comes in. While Varonis executives were understandably cautious in their guidance, their underlying enthusiasm for MDDR was palpable. They called it a "game-changer" (VRNS Q4 2023 Transcript) and a "significant benefit" for the business. They emphasized its potential to boost customer lifetime value, improve renewal rates, and even accelerate closing rates.

Now let's crunch some numbers. Varonis' total ARR is expected to reach $625 million in 2024 (VRNS Earnings). If MDDR can achieve even a modest 20% attach rate within the next two years, and assuming an average uplift of just $10,000 per customer (a conservative estimate given the potential for enterprise-scale deployments), that translates to an additional $125 million in annual recurring revenue.

That's nearly a 20% boost to Varonis' top line. And remember, this is recurring revenue with high margins, meaning it flows directly to the bottom line and supercharges free cash flow. Investors love predictable, profitable growth, and MDDR could deliver it in spades.

Moreover, MDDR reinforces Varonis' strategic positioning as the data security vendor of choice for the age of generative AI. As companies rush to deploy powerful AI tools like Copilot, they're realizing that their existing security measures are woefully inadequate. Varonis, with its ability to analyze data usage, identify sensitive information, and now, proactively respond to threats, is perfectly positioned to capitalize on this massive wave.

It's not hard to imagine a future where Varonis becomes the de facto standard for securing generative AI deployments. This would open up a vast new market and propel the company's growth far beyond its current trajectory.

SaaS Revenue Growth

Varonis is rapidly transitioning to a SaaS model. The chart below shows the growth of SaaS revenue over the past four quarters.

In the world of investing, recognizing inflection points is crucial. Varonis' move into managed services with MDDR is just such a point. It's a strategic pivot that could fundamentally alter the company's growth profile and create substantial value for investors.

While Wall Street is still fixated on traditional metrics, savvy investors are already picking up on the hidden signal: Varonis is quietly transforming into a data security powerhouse. And if MDDR takes off as expected, a 200% surge in the stock price might just be the beginning.

"Fun Fact: Did you know that Varonis was founded by two Israeli entrepreneurs who met while serving in the elite Unit 8200 of the Israeli Defense Forces? (Varonis About Us) Their experience in protecting sensitive data for the military laid the foundation for their company's success in the civilian world."