Release Date: October 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ARR grew 18% to $610 million, with SaaS now representing approximately 43% of total ARR, reflecting strong momentum in SaaS platform and MDDR offering.
- Year-to-date, Varonis Systems Inc (VRNS, Financial) generated $88.6 million of free cash flow, up from $46 million last year, indicating improved cash flow generation.
- The SaaS transition is gaining momentum, offering benefits such as shorter sales cycles, larger initial lands, and margin benefits over time.
- MDDR is becoming a key driver of new business wins in SaaS conversions, with customers seeing immediate and impactful benefits.
- The company has a strong liquidity position with $1.2 billion in cash, cash equivalents, short-term deposits, and marketable securities, bolstered by $394.1 million from convertible notes issuance.
Negative Points
- The federal business underperformed expectations by several million dollars, prompting changes in the management team.
- Gross margin decreased to 85% from 87.3% in the third quarter of 2023, due to a higher mix of SaaS sales and increased hosting costs.
- Operating expenses in the third quarter totaled $116.7 million, including $6.7 million of acquired in-process R&D expenses, impacting operating income.
- The macro environment remains stable, but the transition to SaaS creates headwinds to traditional income statement metrics.
- Despite early contributions from Gen AI, the company remains cautious about its material impact on financial results, not baking in significant Gen AI contributions into guidance.
Q & A Highlights
Q: Yaki, there's a lot to unpack. It's hard to think about one question here, but I guess if I were to focus on one. I couldn't help but hear you talk about Gen AI, although early positively impacting results. I guess I just wanted to put a finer point on what aspects of the portfolio are contributing to customer Gen AI spending. And if we look forward another couple of years, I mean how do you think the products that attribute to Gen AI spending could expand over time?
A: Matt, so it's primarily now related to copilot and you see there are on the 365. But eventually, obviously, you have unstanding sales growth and you have 4 (inaudible) I think that it's going to be part of every work of life. The reality is that at the beginning, we saw just the smaller POCs in the hands of IT that immediately exposes the problem, the data security problem, you have this massive blasters. But what we're starting to see now is that it's more knowledgeable are using it. And once they are using it, is just solving the problem becomes almost inevitable.
Q: Yaki, you and Guy teased this a bit with a lot of the Jenai contribution commentary, but didn't quite size the opportunity at least today. I know it's early innings, but we're seeing some of the problems in terms of over permissioning and data leakage with Copilot. You've had some customer case studies already where customers are using Varonis for there's Gen AI readiness program with some of your partners like ePlus. So there seems to be some momentum there. I'm just curious if you're not willing to sort of give ARR revenue contribution today, what percentage of your pipeline would you say is Gen AI related customers coming to you and trying to prepare themselves for this for Gen AI going forward?
A: Hamza, we've been talking about copilot for about a year now. This time is slightly different. I think you kind of noted that, and here's why. This quarter, we finally started to see some deals close. But as you said and as we've talked a lot about it, it's still early on, which is why we're not baking in any material amounts closing into our Q4 guidance.
Q: To Matt's earlier point, a lot to unpack, particularly in Gen AI, but maybe I could switch gears a little bit. Guy, I've gotten the question from investors just around how much of the net new ARR generally through this process has come from conversion. And of course, that isn't something that we disclose but I think that what a lot of people are trying to figure out is, how does demand look excluding that conversion activity. So is there a way that you can talk to us about that qualitatively. Just as we think about sort of base net new ARR next year plus any conversions plus a lot of the other good things that you talked about with Gen AI.
A: Saket, I think one of the biggest misconceptions and we've talked a lot about the string a lot of the conversations that we've had with investors is this conception that the conversion, you just plug it in the Excel and it happens very quickly and very easily. When you look at what drove the momentum and the strength this quarter, it definitely came from the SaaS platform and the MDDR. We continue to see shorter sales cycles on SaaS and very strong new logo activity, which was really driven by the MDDR offering.
Q: Maybe Yaki, I think last quarter, we caught up in terms of talking about the transition, I thought you had a great analogy where I don't know if it was either you or guy talked about Stage 1 of the transition with the (inaudible) phase and then Phase 2 is the stick. And then you said that there phase is going so well. You don't feel like you need to use the stick. Is that still the case? I mean, how much visibility do you have in that transition pipeline?
A: In terms of the overall value proposition and our ability to get to outcomes, the SaaS is second to none. The reality is that bad actors, many times were not breaching in their login. And once you have an identity, there is no perimeter anymore, and we are your best bet. So data-centric -- data security platform is the first thing you need to do and the last thing that really will save you. So anytime our customers or this testing the value, this automated -- the automated outcomes that we provide, it's just -- it's a game changer.
Q: Yaki, you mentioned on the call that the federal business underperformed. Just curious there, whether or not that was sort of self-inflicted execution or if there's something going on there. It's been a good area of business. I know you're still on track for FedRAMP. I'd love to get a little bit more color there.
A: So that's a great question. I'll take that. The federal business did underperform by several million dollars. But let's keep things in perspective. That vertical accounts for mid-single-digit percentages out of total ARR. So when we look across the remaining 95% of the business, this was the best quarter we've had since the start of the transition and that momentum was driven by continued strength in the enterprise segment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
