Release Date: July 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ARR grew 18% year-over-year to $584.2 million.
- SaaS ARR now represents approximately 36% of total ARR.
- Generated $67.3 million of free cash flow year-to-date, up from $40 million last year.
- Achieved federal In Process designation, enabling SaaS platform benefits for federal customers.
- Strong new customer additions and healthy conversion activity from existing customers.
Negative Points
- Gross margin decreased to 84.1% from 87.1% year-over-year due to increased SaaS sales and hosting costs.
- Operating expenses increased to $107.5 million, impacting operating income.
- Revenue growth rate faced a 6% headwind due to increased SaaS sales in the booking mix.
- Macro environment remains challenging with elevated levels of bill scrutiny.
- Q4 revenue guidance suggests a deceleration in revenue growth due to more conversions.
Q & A Highlights
Q: Yaki, can you maybe just talk about the success that you're having in converting your on-prem customers to SaaS? And Guy, maybe as part of that discussion, can you talk us through just anecdotally how the economics are looking on some of those conversions?
A: (Yaki Faitelson, CEO) The SaaS conversions are working very well because of the offering. Customers are benefiting tremendously while moving to SaaS. (Guy Melamed, CFO) From a pricing perspective, there's a 25%-30% price uplift on a like-for-like basis. We're seeing deal sizes increase in excess of that uplift, which is working really well for us.
Q: Yaki, I wanted to ask a question to you on what you talked about with generative AI not expecting contribution this year. When do you think Varonis could start to benefit from some of these deployments?
A: (Yaki Faitelson, CEO) Customers using Gen AI tools are immediately exploring the problem of excessive permissions. We believe that over time, we will benefit from it, and we believe that slowly but surely, this is something that will be in the hands of every business user.
Q: Guy, sustainability of profitability and cash flow here on out, how should we think about it, both in terms of the sustainability and level of potential margin expansion that we might expect?
A: (Guy Melamed, CFO) We're focused on increasing the top line while ensuring some of it comes to the bottom line and generating more meaningful cash generation. We're seeing shorter sales cycles on SaaS and healthy new logo activity, which should drive top line growth and free cash flow going forward.
Q: Yaki, you mentioned the hospital system that deployed Varonis during the quarter. Can you elaborate on the competitive landscape around that deal?
A: (Yaki Faitelson, CEO) We don't see more competition in the pipeline. Our data-first solution is essential for protecting data, and this value proposition is working very well. (Guy Melamed, CFO) The deal was several hundred thousand dollars in size, including the full package with MDDR.
Q: Can you give us an update on the penetration within the Office 365 opportunity?
A: (Guy Melamed, CFO) We've seen a steady increase in the percentage of total ARR coming from Office 365. Customers are now consuming more of the platform together with MDDR, making it more appealing and helping in the overall conversation with customers.
Q: Guy, can you help with numerical contours around MDDR and its influence on SaaS momentum and broader metrics?
A: (Guy Melamed, CFO) MDDR has been very well received, with customers adopting it quickly. We're seeing ASP go up as customers buy the extended package. It's one of the fastest-adopted platforms, and we believe it should be part of every customer’s journey.
Q: Yaki or Guy, have you seen any heightened interest following the global CrowdStrike IT outage?
A: (Yaki Faitelson, CEO) Not really. CrowdStrike is a great company, but organizations understand they need a data security platform. Security is important, but without a data-first solution, breaches are inevitable.
Q: You talked about expecting more conversions in Q4, which creates a revenue headwind. What prompted this change in assumptions this quarter?
A: (Guy Melamed, CFO) Q4 is the largest quarter, so we’re taking advantage of renewals to convert them into SaaS. The strong revenue beat in Q2 was due to perpetual maintenance customer conversions and early on-prem customer conversions, which will impact revenue in Q3 and Q4.
Q: Can you talk about the momentum you're seeing with the database SKUs, including for Snowflake?
A: (Yaki Faitelson, CEO) We’re starting to see a lot of momentum for these products. Organizations are taking their security very seriously, and our data-first solution is essential for protecting data.
Q: How was the new logo business this quarter? Any quantitative metrics you can share?
A: (Guy Melamed, CFO) The majority of new ACV in Q2 was driven by new logos. We’re seeing shorter sales cycles on SaaS deals, which is opening up new markets for us. The new business was very strong in Q2.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
