VARONIS SYSTEMS INC Q4 FY2024 earnings call

• SaaS transition progress: Introduced Varonis SaaS over two years ago, added over $200 million of SaaS ARR in 2024, ending with ~$340 million (53% of total ARR). Originally expected to complete transition by end of 2027, now expects to complete by end of 2025, a year earlier than previous outlook. • Fourth quarter results: ARR grew 18% to $641.9 million, SaaS ARR majority; new customer momentum driven by SaaS platform simplicity, MDDR, and GenAI interest. • MDDR offering: Fastest-adopted new product launch, driving new business and customer conversions. • Customer wins: Large hospital system and bank became customers in Q4, leveraging Varonis SaaS with MDDR and GenAI. • Margin improvement: 2024 free cash flow $108.5 million vs. $54.3 million in 2023; ARR contribution margin ended 2024 at 16.6%, ahead of long-term target of 20% by 2027.

In 2024, Varonis added over $200 million of SaaS ARR and ended the year with approximately $340 million of SaaS ARR, which is 53% of total company ARR. In the fourth quarter, ARR grew 18% to $641.9 million, with SaaS ARR representing the majority of the ARR base. New customer momentum was a key driver, with SaaS platform simplicity, MDDR offering, and customer interest in deploying GenAI contributing to growth. For the fourth quarter, total revenues were $158.5 million, up 3% year-over-year. SaaS revenues were $72.2 million, term license subscription revenues were $66.8 million, and maintenance and services revenues were $19.5 million.

• 2025 initial guidance: First quarter 2025 total revenues expected $130.0 million to $135.0 million (14%-18% growth); non-GAAP operating loss negative $14 million to negative $11 million; non-GAAP net loss per share negative $0.06 to negative $0.04. • Full year 2025: ARR expected $737 million to $745 million (15%-16% growth); free cash flow $120 million to $125 million; total revenues $610 million to $625 million (11%-13% growth); non-GAAP operating income $0.5 million to $10.5 million; non-GAAP net income per diluted share $0.13 to $0.17. • Accelerated transition: Now expects 78% of total ARR from SaaS by year-end 2025, completing transition two years earlier than initial target.

• Revenue recognition headwinds: SaaS revenue recognized ratably vs. on-prem subscription upfront recognition, leading to temporary revenue headwinds during transition. • Transition challenges: Conversions of self-hosted customers require significant time and effort due to legal, procurement, and security checklist processes, acting as a headwind to sales efficiency during transition.

Q: Could you talk about conservative assumptions around Copilot uptake or conversions of the base and how you're accelerating Phase 2?

A: Yaki Faitelson mentioned natural expansion due to customer need to avoid data breaches and protect data effortlessly; Guy Melamed discussed making strategic investments in sales, customer success, support, and legal to support transition, starting renewal conversations earlier.

Q: Are you seeing resistance from customers in converting to SaaS?

A: Yaki Faitelson stated transition moved faster than expected, MDDR is strong offering, and customers value frictionless value, so resistance is minimal.

Q: How does revenue miss in the quarter relate to transition to SaaS?

A: Guy Melamed explained revenue miss due to SaaS revenue recognition being ratable vs. on-prem upfront, with faster transition leading to revenue headwind but being positive for long-term.

Q: What's the traction with different data stores for Varonis?

A: Yaki Faitelson mentioned demand from various data stores like Salesforce, ServiceNow, Databricks, Snowflake, file shares, etc., due to data breach risks and need for automated data security.

Q: How does GenAI contribute to Varonis' business?

A: Guy Melamed noted GenAI drives customer interest in data security, with new customer ARR growth accelerated by MDDR and Copilot, and Microsoft 365 offering seeing increased user protection.