Q3 2022 Varonis Systems Inc Earnings Call
Yeah.
Greetings welcome to furnace systems incorporated third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This call is being recorded I will now turn the conference over to Tim Perz Investor Relations. Thank you you may begin.
Thank you operator good afternoon. Thank you for joining us today to review <unk> third quarter 2022 financial results.
With me on the call today are Yaqui vital Sen, Chief Executive Officer, and Guy Melamed, Chief Financial Officer, and Chief operating officer of Brooks.
After preliminary remarks, we will open the call to a question and answer session.
During this call we may make statements related to our business that will be considered forward looking statements under federal securities laws, including projections of future operating results for our fourth quarter full year, ending December 31, 2022, as well as the full year ending December 31 2023.
Due to a number of factors actual results may differ materially from those set forth in such statements.
These factors are set forth in the earnings press release that we issued today under the section caption forward looking statements and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission.
We encourage all investors to read our SEC filings.
These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
<unk> expressly disclaims any application or undertaking truly publicly any updates or revisions to any forward looking statements made herein.
Additionally, non-GAAP financial measures will be discussed on this conference call.
A reconciliation to the most directly comparable GAAP financial measures is also available in our third quarter 2022 earnings press release, and Investor presentation, which can be found at www Dot <unk> dot com in the Investor Relations section.
Lastly, please note that an updated investor presentation as well as the webcast of today's call are available on our website in the Investor Relations section with that I'd like to turn the call over to our Chief Executive Officer, Dr. Carlson Yockey.
Thanks, Kim and good afternoon, everyone today marks an important milestone and evolution of our company and I want to talk about our short and long term vision.
I will walk you through the challenges and opportunities we see to date.
Next out but.
Our third quarter results analog was 26% year over year to $447 8 million or 30% year over year.
When adjusting for FX and the impact of exiting our Russia business.
Even when adjusting for the $9 $2 million of a headwind.
Our reported results caused by the weakening of the euro on the phone are organically, we'll see below expectation. The final reason and yes segment economic uncertainty and additional scrutiny led software than anticipated outcome.
We did some we.
Last quarter, but the continued effect of the all new clean energy crisis, and general economic slowdown was more impactful than we expected.
The second factor.
Or are you instead of a business, where our close rates.
In fact.
Approximately 4 million to $5 million against our expectation however.
Despite the challenges we faced in the quarter.
<unk> business, we've seen no change in our long term view that these should both be strong contributors to our business.
Although revenue grew 23% people get used to $123 3 million below the 27% adjusting for FX in Russia no.
Erica.
70% year over year.
A strong performance in our commercial business was somewhat overstated, but he won't than expected results in the federal Realty.
We posted revenue was down 3%, but grew 16% after adjusting for FX in Russia.
Cause if a QC these dogs and expectation that these headwinds will persist in Q4, we are adjusting our full year guidance specifically.
I don't see them economic conditions continue.
To deteriorate yeah.
But this also begins to moderate the effect.
It's also part of incremental headwind due to unfavorable changes you will understand this.
These factors will impact our full year revenue guidance is win and Guy will walk you.
Who knows detail as a result of our updated top line guidance.
We're taking a thoughtful and prudent steps to manage expenses across the business, which include a 5% reduction in head count in addition to other cost reduction initiatives.
I've always said that we stick to our living.
It's meant to the revenues, we plan to achieve and giving the data show them uncertainty in the macro environment. We believe this is the prudent approach at this time now I would like to take a step back from our near term results and discussed our vision.
We found this belongs to help organizations solve the biggest data protection challenges. Thank.
Thank you, Dave and strategic plan with even more critical and it's more challenging than ever.
Well it makes data protection so hot.
Well see growth of data across clouds and on Prem data store.
We have expanded the attack surface, which open organization integrating.
The growing sophistication spread hospitals has made the funding by almost more dangerous, making that kind of information. He provides critical to protect against those attacks and the penalties for help secure data continued to go because of increasing government regulation.
These trends generate challenges for organizations all over the world, but also create opportunity for voice since our founding we have invested heavily.
Vision to address these problems.
Going to a comprehensive data security platform.
Our platform provides visibility into who can and does occur.
Sensitive data.
And where it's at least we automatically shaved the blast radius.
Oh diamond, but the single compromised user machine can cause while also announcing an unusual behavior and importantly, stopping before any home with them.
All about technological innovation wisdom of knee.
No.
Our business model and do it as we grow the platform we lead with.
But the customer could utilize additional licenses with lower upfront cost if we the levels in that subscription. So in 2019, we announced the transition of our own planning system catch your old model to a term base subscription licensing model used to be.
The upfront cost to consumable and he says it platform and increase the total lifetime value customers.
To complete this transition in the fourth quarter, because the demand for most customers increased significantly as our subscription offering made the buying process easier.
Today's introduction of our flagship data security platform is the stock the next stage.
Loosening of our company and Phoenix on the success, we had with a perpetual.
Term license transition what does the success of the obvious transition was primarily defined by a record pace.
Performance, we expect to take a more measured approach to make this transition a lot of success with.
SaaS delivery model, there's been no wasn't it for many years in part because we had seen the company additional flexibility in how they consume the platform.
While the last two plus Hugh we have invested over $100 million and a significant part of the engineering group.
Well relentlessly to transform the features.
Claims subscription offering into subtle thing to be clear, we will continue to sell.
Our existing pega cloud product.
Which I believe will solely as a SaaS alongside of black sheep data security platform.
For the time being will be also ease as SaaS Oh.
Tell them based on subscription licenses.
I would like to review in more detail some of the benefits, we expect to realize by offering our flagship data security platform.
First is consistent.
Call of ourselves.
Sales motion.
Expected to be quick to deploy which.
Each one our salesforce to get past the initial ramp up phase and.
Is fully trained on the new selling motion should help show than in the same site.
In customer will be able to more quickly and easily deploy and maintain our solutions significantly reduce infrastructure requirements.
Of course, we expect that this will have the effect of customers realizing the faster time to value, which should ultimately be beneficial to us.
<unk>.
Third lowest we'd have more visibility into usage behavior and the ability to spot rates more quickly, which will better inform our product innovation first customer will benefit from continuous threat model and classification updates that will help them stay prepared for new and evolving threats and regulation.
We expect that this will also help the renewal rate is customer engagement and value for more potent.
Finally, the SaaS model will allow us to deliver additional features and functionality to customers more efficiently.
Second to get out of these enhancements to create significant value for our customers and in turn.
We expect them to continue driving meaningful growth for us.
Macroeconomic situation was not meaningful.
In closing we found him to along these two customers solve their most urgent data protection need today launch marks an important milestone in helping them achieve that goal with additional flexibility. We believe the introduction of haul SaaS lever flagship Dave.
Our security platform you guys significant long term value for our shareholders. As we continue our March towards 1 billion and a deal with that let me turn the call over right.
Thanks, Jackie and good afternoon, everyone.
I'd like to start today's call by providing you with additional thoughts on the current operating environment, how it impacts our business and the ways, we are responding to it.
I'd also like to provide you with a framework on how to think about our new SaaS offering and a review of our third quarter results.
In the third quarter total revenue grew 23% year over year to $123 3 million or 27% adjusting for FX in Russia.
Well this was within our guided range our reported revenue did not meet our expectations.
As Jackie mentioned reported revenue in our EMEA business was down 3%, reflecting additional currency headwind and a continued worsening of the economic climate.
Let me take a minute to separate the two headwinds that I'm discussing the impact of foreign currency fluctuation does not impact demand for our products, but it does impact the translation of revenue in our reported results because we sell in local currency.
The significant weakening of the euro and the pound was at $3 3 million dollar headwind to reported results in the third quarter.
Adjusting for the impact of foreign currency as well as Russia, EMEA revenue grew 16% year over year.
That said the economic slowdown in the region does impact short term demand for our products.
In North America, our commercial business drove growth of 30%. Despite results from our federal team that were below our expectations.
To remind you.
The third quarter is the seasonally strongest one for our federal business, which currently represents a mid single digit percentage of total a R.
Although our current results don't reflect this we remain confident that this number can grow considerably and over the past couple of years, we have made significant investments in the business to make that goal a reality.
Unfortunately, those investments have not yet generated the returns that we expect.
As a result of these near term challenges and our expectations that there will likely be some spillover from the economic weakness we've seen in EMEA into our North America operations, we are adjusting our full year guidance.
Let me take a moment to review the impact of each of these factors to help you better understand the numbers.
First the significant weakening of the euro and the pound against the dollar accelerated since our last earning call.
This is relevant given that we price both our new business and renewals in local currency and as such this trend impact a R R and revenue.
For the full year this headwind impacts our previous <unk> guidance by approximately $2 million.
Second due to the deterioration of the macro environment, we are reducing our full year ALR and revenue expectations.
This assumes continued worsening of economic conditions in Europe , and the slowing of business conditions in North America well.
While we have not seen softness in the metrics, we track for North America commercial business given the prevailing global macroeconomic backdrop. We believe it is prudent to plan for a wider range of outcome than we foresaw last quarter.
Taken together the reduction in our guidance is primarily related to the impact of the macro environment and the additional headwinds from currency, which reduced our total <unk> and revenue guidance by $25 million and 16 million respectively.
The $9 million difference between the reduction in our a R. R and revenue guidance can be attributed to the timing of FX headwind as well as the maintenance component of deals that we previously expected to close in 2022, which were included in our previous 2022, our guidance, but would not have been recognized as revenue in.
Till 2023.
As a reminder, FX rate used to translate a R. R. N revenue sold in foreign currencies into U S dollars. Our book as of the date of deal is closed.
The deferred revenue in a our balance associated with each deal are not revalued at subsequent quarters during the duration of the contract.
The head count reduction and other cost savings initiatives. The Yaqui mentioned should result in approximately $7 million of savings during the fourth quarter as reflected in our updated guidance.
This was not an easy decision to make we felt it was the right thing to do given our updated outlook and our strategic philosophy to balanced top line growth operating leverage and cash flow generation.
For many years, you've heard us talk about our goal to get to $1 billion in a R. And today is the right time to take the next strategic step towards that target by offering our flagship data security platform as a service.
That has a number of compelling operational and financial benefits.
First we expect it will improve the customer time to value allow us to better protect our customers and in turn shorten our sales cycles and benefit renewal rate.
It also will allow us to service customers, who only want to consume rone is a sac, which broadens our market opportunity.
We know that SaaS will provide us with better visibility into how our customers use and interact with our platform.
It will also provide us with improved visibility and predictability into our business overtime and will enable us to better address our underpenetrated market opportunity.
New and existing customers may now choose to consume our platform through SaaS delivery or through term based on premise subscription licenses.
In this transition period, a key point to understand is that on a quarterly basis revenue recognition of the same deal is materially different if sold as on prem subscription or sad because an on prem subscription deals we recognized approximately 80% of the deals value upfront, whereas in a SaaS deal.
The revenues are fully ratable from the outset.
It's important to note however that each deal is measured exactly the same way for a R. R.
At this early stage in our rollout it is very difficult to predict the pace by which our customers will choose to adopt that but we expect our visibility to improve over time, and we will do our best to let you know how the transition is progressing.
Is yockey mentioned, we do expect this transition to take some time with our current base assumption of four to six years.
As a reminder, our transition from perpetual licensing model to an on Prem term based subscription model was primarily a financial exercise while their transition to SaaS as additional operational components.
This is why we expect to take a more measured approach this time around.
This means that our forward looking metric of a R. R. Along with free cash flow will be the key metrics, we focus on the discuss the health of our business and our progress towards achieving our target.
During this transition period, the shift of our business from term licenses, where approximately 80% of the deals value is recognized upfront to a SaaS model with fully ratable revenue will make our reported revenue and operating income metrics somewhat less indicative of the health of our business than they have been in the past.
This is exacerbated by SaaS rollout that will be both measured and optional for our customers.
Until we have several quarters of experience it will be difficult to predict the pace of which both our new and existing customers transition to this new ratable model.
And throughout this transition similar to our previous one we are committed to providing you with as much transparency as possible to understand the progress we are making towards our goal and expect to provide both a framework, but the way in which revenue and profits will play out under various scenarios as well as some new kpis to help you gauge.
On our program.
As a reminder, a R R and cash flow will be the cleanest metrics to follow throughout our journey.
We expect to deliver more color a new kpis in early 2023, but the general framework to think about for next year include free cash flow levels of 20 million to $25 million for the full 2023 year with similar seasonality to previous year.
As a reminder, we generate the largest amount of free cash flow in Q1 with Q2 being the lowest of the year followed by a moderate improvement throughout the second half of the year.
A R and revenue growth of 10% to 12% for the full year, which assume further deterioration in the European economy slowing of business conditions in North America, and then initial ramp up phase for our sales team in the first half of the year.
This also assumes a 5% SaaS mix of sales from new licenses in the first half of 2023.
We plan to provide our full year SaaS mix assumption next quarter.
Now, let's turn to our third quarter results in more detail.
<unk> grew 26% year over year to $447 8 million.
After adjusting for the FX in Russia headwind AOR growth was 30%.
As I mentioned earlier total revenues grew 23% or 27% after adjusting for FX in Russia.
This includes subscription revenues of $96 1 million, which grew 37% year over year.
Maintenance and services revenues were $27 3 million.
With renewal rates again over 90%.
Looking at the business geographically North America had another strong quarter as revenues grew 30% to $98 million or 79% of total revenue.
EMEA revenues declined 3% to $22 $1 million or 18% of total revenue.
Lastly, rest of World revenues grew 63% to $3 2 million or 3% of total revenue.
As of September 32022, 76% of our customers with 500 or more employees purchased four or more licenses up from 70% a year ago and 60% two years ago at.
At the same time, 47% of those customers purchased six or more licenses up from 37% a year ago and 26% two years ago.
Our bundles are helping simplified the pricing discussion and continue to be well received by both new and existing customers.
Turning back to the income statement I'll be discussing non-GAAP results going forward.
Gross profit for the third quarter was $108 9 million.
Representing a gross margin of 88, 3% compared to 88% in the third quarter of 2021.
Operating expenses in the third quarter totaled $99 1 million.
As a result third quarter operating income was $9 8 million or an operating margin of seven 9%.
This compares to operating income of $8 1 million or an operating margin of eight 1% in the same period last year.
After accounting for the 200 basis points of headwind related to our shekel hedging program. The expansion was 180 basis points.
During the quarter, we had financial income of approximately $2 $5 million, primarily due to interest income, which was partially offset by interest expense on our convertible notes.
Net income for the third quarter of 2022 was $6 $7 million or income of five cents per diluted share compared to a net income of $5 7 million or income of five cents per diluted share for the third quarter of 2021.
This is based on $126 9 million and $119 1 million diluted shares outstanding for Q3, 2022, and Q3 2021 respectively.
As of September 32022, we had approximately $719 million in cash cash equivalents short term deposits and marketable securities.
For the nine months ended September 32022, we generated $8 $4 million of cash from operations compared to $6 $8 million generated in the same period last year.
We ended the third quarter with 2270 employees, an increase of 89 net new employees from the second quarter.
In a moment I will review, our fourth quarter and full year guidance in full but first let me take a moment to remind you of our expense exposure to the new Israeli shekel, which we have partially mitigated through our hedging program for 2022.
For the fourth quarter of 2022 and full year of 2022. This headwind is expected to be 50 basis points and 200 basis points respectively.
Turning to our guidance for the fourth quarter of 'twenty 'twenty. Two we expect total revenues of 139 million to $142 million representing growth of 10% to 12% or approximately 16% growth at the midpoint adjusting for FX in Russia.
non-GAAP operating income of 22 million to $24 million and non-GAAP net income per diluted share in the range of 17 to 18 set.
This assumes a $127 3 million diluted shares outstanding.
For the full year 2022, we now expect.
<unk> of 460 million to $463 million, representing year over year growth of 19% to 20% or approximately 24% growth at the midpoint adjusting for FX in Russia.
Total revenues of 470 million to 473 million representing growth of 20% to 21% or approximately 25% growth at the midpoint adjusting for FX in Russia.
non-GAAP operating income of $25 5 million to $27 5 million and non-GAAP net income per diluted share in the range of 14 to 15 cents.
This assumes the $126 7 million diluted shares outstanding.
Lastly, as we announced today our board has authorized a $100 million share repurchase program for the first time we.
We are able to make this announcement because of our strong balance sheet that has nearly $800 million in cash and an expectation to be free cash flow positive beginning next year.
Our main use of capital will continue to be investing in our business over the long term, but to date, we want the ability to act in order to maximize shareholder value.
In summary, we have never shied away from challenges and today is no different we will continue to thoughtfully manage our business to not only navigate the near term uncertainty, but also position us for success in our transition to a SaaS model, which will allow us to continue our durable growth as we capture our significant long term off.
The charity and ultimately create value for all of <unk> stakeholders.
Thanks for joining us today and with that we would be happy to take questions operator.
Thank you yeah, if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that you. Please only ask one question.
Our first question is from that Heath Byrd with RBC capital markets. Please proceed.
Oh, Hey, guys. Thanks for taking my question.
So on the macro side, I guess, maybe a little bit more color. It sounds like it was mostly Europe .
But you know Youre embedding some additional concern for North America, but I guess I'm curious as the quarter played out did you progressively get worse and has it continued to deteriorate through October and is that sort of the run rates that you've used to sort of forecast the balance of Europe .
Maybe a little bit more color on how youre sort of discounting the European business.
Oh excuse me the North America business here for <unk>.
I'm at a.
Couple of components there so.
Try and give some color last quarter, we talked about the uncertainty in Europe . When we talked about additional deal scrutiny that was going on there.
And as you know a significant portion of our business is in the last two weeks of the quarter.
In Q3, there were three things that really Didnt go as expected.
EMEA deteriorated faster than we expected with longer sales cycles and work closely.
The second thing that happened is the U S dollar strengthened even further.
Third federal really came in about $4 million to $5 million below our expectations.
It had good pipeline, but they didn't close as we expected.
We haven't changed our long term view for EMEA and federal but as we look at our Q4 guidance, we want to take a prudent approach and we expect economic conditions to worsen in Europe .
And then longer sales cycles, and lower close rates may impact our U S business as well.
Thank you.
Our next question is from Joseph Gallo with Jefferies. Please proceed.
Hey, guys really appreciate the question Guy or any color you can provide on D. A cloud it's been nine months since we've gotten a quantitative update there are we still on track for the 5 million and then maybe separately ignoring the deployment model, but rather focus on the location of the data you protect if we include office through 65, how much of your business is protecting data on prem today versus in the cloud.
Thanks.
So regarding the data advantage cloud it's yockey.
Nothing change everything walk so father according to plan, we see just massive opportunity you know just thinking about these three positive.
Salesforce Dot com.
User identity Depositaries like Okta Gita, we just see tremendous opportunity and we invest heavily in the product the data on Prem is not going anywhere. So did they don't play musical and relentlessly and there's just a lot of risk there its a big targets for every form of <unk>.
And a lot of a lot of fun somewhere but.
A tremendous milestone that we announced this deal but one is called platform as a SaaS model. This was the lion's share of Bobs engineering investments.
It will last.
The last two years most of the engineering engineering efforts will it there just to build it.
They're very modern architecture for the vote.
One is called platform and.
Just a tremendous game changer long term.
The meta data that we have there and it's just golden it give us the ability to analyze thousands.
Okay.
Customers and give tremendous network effects and primarily all about automation automation installation automation and remediation of our ability to deliver a feature request faster changing the company completely actually accept except of the first well.
The product that was the burst in Milan as we see the biggest technological milestones we hit.
And just to add a data advantage clouds the expectations for the year is still $5 million.
It hasn't changed.
Okay. Thank you.
Our next question is from the team at <unk> with Citigroup. Please proceed.
Hey, good afternoon, and thank you for taking my questions and either for Guy or Yaqui.
Actually maybe first for Guy just with respect to the federal deals that you can tell.
Talked about that essentially slipped can you give us a little bit more context as to some of the reasons behind why those deals didn't necessarily make it to the finish line and and you know where are these engagements competitive and then just generally around the SaaS transition I know you mentioned that it's going to be.
Very measured but how are you going to plan to manage maybe a demand air pocket or confusion between customers who are electing between the term and the SaaS form factors. Thank you.
Well I'll start with the federal performance.
Like we said in the prepared remarks, they were about $4 million to $5 million below our expectations.
We came into the quarter with strong pipeline, but they just we just didn't close the deals.
We don't.
Specced all of those deals to close in Q4, but we do expect some of them to close and the fed business is really behaving today like the thoroughness enterprise business behaved about four to five years ago, which is much more oven jellicoe, it sometimes takes longer than than one would anticipate but we do believe in the long.
The term opportunity because the fed customers face the exact same problem as our enterprise customers do if not more.
Yeah.
It's a <unk> you need to understand that in terms of the.
The data the federal customers, maybe have the most critical data in it.
In terms of the data that we are protecting and it's just a top priority for them, but you know how things are working in the programs and the other thing you're starting to see on the zero Trust a lot of specifications that are related to data and data protection.
Two notes to three large deals in the in Q3 can can be the difference and sometimes they will see note the embedded the EMA in the programs like other products categories. So this is why you can see fluctuation and this is why you can see healthy pipeline that sometimes not materialize the way that it will work.
The commercial.
A signal of the business.
And regarding what was the question regarding the Susquehanna remind me.
Just how to manage customer confusion or education around the term options versus now the SaaS options. You know why now I recognize you just launched the gold and silver in platinum bundles for your term based licenses and modular. So how do you expect to just manage maybe the confusion.
Or education for customers around that without it impacting your business on the term side.
Okay.
So firstly just announcing Ethan.
And yet to be seen so this is why we are.
A bit careful here, but you need to understand that.
Relatively the same product is much much better deliberately so today with the on Prem It didn't stop us thankfully, we've done very well, but you know you need the hardware and it takes time and all of this kind of stuff. So today with 365 immediately SaaS to SaaS. It's immediate time to value will also in the starting in the first.
Version, we provided then the automation engine for 365 and 365 in terms of the blast radius because of the fact that the data is in the hands of the end user. So the same amount of data on Prem and in the cloud and the SaaS. It's opening much more and also the best service that we give to our customers.
The incident response, one and we can give you.
Mattikalli form form the stocks, so I think that the fourth.
Initially a conversation that we had with customers in the way that the seasonal walking so far it's exceeding our expectation.
And this is how it works, but you know we know how to do transitions very well and and and we have a careful because yes, well in the short term.
And can he could that can introduce some confusion, but most probably in the long term to complete game changing this is how people consume.
Consumer software today in SaaS model and they in.
Every well formed the deployment to the maintenance to the automation that we provide.
Tremendous friction reduction we believe that in the next 18 months the value proposition literally can be an order of magnitude better than you know we just stopped the time it takes to deploy the time that it takes to remediate to classify to provide incident response the time with it we are spending on support is just changing the company complete.
And just to add one more thing the way we plan to initiate the rollout of the SaaS offering is that we will start with new customers first on the smaller side. Then we will go upstream with those new with new customers and as we gain more confidence with the platform. We will go to our existing customers.
Yes.
Our next question is from Rob Owens with Piper Sandler. Please proceed.
Great. Good afternoon. Thanks for taking my questions just one more on the transition to SaaS, realizing it's going to take some time, but two questions really is that a are neutral. So it's going to be like for like relative to customer pricing and then how should we think about potential gross margin pressure and the operating margin pressure with shift to SaaS.
Thanks.
So we have said over the last couple of quarters that <unk>.
Is really the leading metric.
In order to gauge the strength and the health of the business.
And that should continue throughout the transition because from an <unk> perspective, there is no different accounting treatment. So that's really the way to look at it in.
In terms of kind of the operating margin.
We're giving a or are in free cash flow is the north star because SaaS will cause a headwind for gross margins and operating margins really due to the upfront costs and during the transition the accounting treatment of that and the operating metric income metric will be less indicative of the health of our <unk>.
And this.
And they have been in the past because of the difference in accounting treatment of stock versus on Prem subscription.
So putting all of that together and Theres, one more component to keep in mind, which is the faster the transition the more negative impact on the income statements in the shorter term, but this will be a positive longer term.
Thank you.
Our next question is from socket Telia with Barclays. Please proceed.
Okay, Great Hey, guys. Thanks for taking my question here, maybe just just a couple of short housekeeping questions for you.
Maybe first I think we said about $25 million cut to AOR guide for the year can you just walk us through how much of that is from incremental FX headwinds since the last time, we spoke versus additional macro headwinds.
That's the first question and then the second question is as you've sort of looked at the results. These last few quarters. How is the competitive win rates kind of kind of changed if at all.
So I will start with this.
The competition so the the competitive situation leading change you know in the in data advantage cloud you know here and there we just see that companies try to do what we are doing on one use case for one platform, but in terms of the.
The breadth and the coverage that we have for the three use cases and really a company that can integrate the three streams, which the potential access to actual axis in the content.
We are buying largely uncontested in EMEA doing the POC head to head.
We don't really have we don't really have the real competition.
The competitive landscape stay the same.
And secondly in regards to your question about the E R.
And the impact of FX.
The U S dollar continues to strengthen.
In Q3 compared to when we gave guidance that was close to us.
There was a couple of million dollars of.
Headwind.
When we look at the.
The reduction of guidance in Q4, it was really a component of EMEA.
Sales cycle and deal scrutiny.
The federal coming in $4 million to $5 million below expectations, and our expectation that some of the EMEA.
Deal scrutiny will spillover to the U S. Even though we haven't seen it yet.
In any of the metrics we track.
Very clear thank you.
Our next question is from Sean Yeah with Cowen.
Cowen and company. Please proceed.
Thank you good afternoon.
Guy Yoki quick question on the head count rationing is that predominantly.
Sales and marketing and also maybe on the EMEA softness was a country specific or pretty much across the board.
Keith.
So I'll start with EMEA question.
We felt the effects of the macro environment across the board.
We saw deals slip, but we didn't lose them to competition and that really the opportunities continue to be there.
Close some of those deals already not all of them, but they are in the pipeline and the lives.
And regarding <unk> regarding.
Regarding the higher notes, it's just across the company, we hired more than 550 people in the last two years and we just feel that a lot of productivity gains we want to make sure that we are very efficient. So we believe that we are bringing the.
Relatively small cost in the hiring freeze without taking anything from the future.
Can keep investing for the future and we just believe that.
<unk> focus on execution.
We can we can rely.
Material productivity gains and be more efficient.
Thank you.
Our next question is from Andrew Nowinski with Wells Fargo. Please proceed.
Okay. Thank you I was wondering if you know given the Rev. Rec differences between term and SaaS. If you could tell us how much revenue headwind you factored into the Q4 guidance for the SaaS transition and then also I was just wondering if you could just update us on the net retention rate you haven't updated that since I think Q4 of last year. So I'm just wondering if you.
Could you tell us how that's changed throughout the course of this year. Thanks.
So we're not expecting any material contribution of the bonus SaaS offering in Q4, because we're not changing the comp plan that will happen at the beginning of 2023 and in our 2023 color. We're baking in some ramp up time with our sales force in the first six months.
<unk>.
As we have seen in the past and as we have seen in the transition from.
Petrol so on Prem subscription in terms of the MLR. That's an annual number that we provide and will provide color in the next earnings call.
Our next question is from Roger Boyd with UBS Securities. Please proceed.
Hey, Thanks for taking my question, maybe another way to look at that net retention rate question, but if you could just talk about what youre seeing in terms of renewals I mean, it sounds like the plot from adoption metrics continue to trend nicely, but.
I'm just trying to renewal basis, how are you seeing adoption of the bundles how is that impacting.
A dollar net retention either way thanks.
Definitely I'll give some color on that when we look at the bundles that were introduced at the beginning of this year.
We see them being received very well by both customers and our sales force, it's really simplifying the conversation.
Our intention is to continue to offer and go in that direction of more and more.
Licenses that are part of a bundle.
It's actually helping us in landing.
A higher number of licensees with new customer, but it's also allowing us to expand within our customer base.
<unk> customers that have a larger number of licenses.
See more value they have a portion of automation that they really like and and therefore, the likelihood of them coming back and buying more goes up significantly which is part of the reason that we see with the SaaS offering the ability with the automation to have higher renewal rate.
Our next question is from Chad Bennett with Craig Hallum Capital Group. Please proceed.
Great. Thanks for taking my questions. So just in terms of the initial SaaS platform and offering is it going to be like for like capabilities in terms of.
<unk> covered applications covered and you know the number of licenses you have whether it's state of vantage classification and everything underneath.
Like for like in terms of compared to your on Prem product.
Eventually eventually yes now we have this policy, but it's relatively small policy most of the core functionality is there. We also have now a.
365.
Advanced remediation capabilities and the ability to do incident response for moving more to achieve just a complete game changer for most of our new and most of our new customers, but we are moving very fast.
Very fast with the cloud and what you can expect from us.
I want to close the gap.
Fast and then B common stock first comparable so we will move.
Moving with the feature set much more much faster in the cloud and Chad just at midnight.
Just add one more thing to add from a pricing perspective.
For the same product SaaS is 525%, 30% higher compared to the on Prem subscription offering so just to make sure.
That's correct.
And then just one real quick clarification Guy maybe just in terms of a prior question around.
Kind of how this rolls out over the next year from a go to market standpoint, I think you talked about the SaaS offering being focused mainly on new logos.
And kind of expansion and new logos, so if I'm a an existing on prem customer and there is a like for like SaaS product or license.
Am I, a and I'm up for renewal and I am I able to switch over to the SaaS offering next year.
The short answer is yes, we will do what's best for our customers and if a customer wants to move to SaaS, we will allow them to do that obviously was the uplift that that involves.
The intention is to start with our new customers.
And then go upmarket with those new markets.
Those new customers and then later on growth of our existing customer base.
Switch them to <unk>.
Well, we got the case to get to critical mass of small customers to see how how everything works to April since cycle learning curve. This is exactly how we do these days.
We transitioned to Lps and once we have it all.
The production level, which we know how to transition very well then.
We are all in it would be more measured than the Opa's you know its small way.
Technical and then we need to build the some of the migration towards takes time its development.
This is the this is where we're going and we are going to execute on the on the transition because as I said, we really believe that the value will be just an order of magnitude better it's changing the company completely and just.
Reducing friction just in every step of the way so again one.
We have a very good understanding how everything works, we will we are going to execute on the transition and fruitful.
Got it appreciate the color. Thank you.
Our next question is from Hamzah <unk> with Morgan Stanley . Please proceed.
Hey, gentlemen, thank you for taking my question guys.
Two questions for you one following up on the early comment that SaaS is priced I think you said, 25% to 30% higher versus on Prem subscription.
They are our uplift on SaaS should we think about that being maybe you know double.
Double digits after your discount.
Obviously, we need to see how things evolve.
We have a grading system in place that allows our reps to make more money when they sell it at good discounts. They can make $1 20 for every dollar they sell but if they sell it at really high discounts. They in some cases make make 50 cents on the dollar so that allows us to control kind of a discount levels.
Obviously, we want to see how things progress.
But the price list as is and if they keep the same discount levels.
Or a similar discount levels should have a 25% to 30%.
Okay, Alright, so thats, okay with the similar discount levels of 20% to 30% uplift on air or did I hear that correctly.
Yes.
And then on the 2023 got it if I heard correctly, you're guiding to 10.
10% to 12%.
Growth, which implies just about 30% decline in net new air or can you talk a little bit about how you got to that number are you assuming.
Just lower new customer bookings are you, assuming a lower renewal rate and how much did FX factor into that 10% to 12%.
Thank you.
We wanted to bake in a lot of things that can go wrong.
Four quarters of economic softness in 2023 versus just one one and a half this year.
The macroeconomics are very fluid right now so we're building in further slowdown in EMEA.
We expect that to spread into the U S. Although we haven't seen it.
Any of the metrics that.
That we track and there is also two quarters of FX headwinds and two extra quarters of FX headwinds in 2023 versus 2022.
When you look at the <unk> in the 2023 numbers, we also baked in a ramp up period for our sales force in the first half of the year with the introduction of the SaaS and the change to the comp plan. So we wanted to get guidance. We wanted to set the guidance that is appropriately reasonable.
And responsible in light of the uncertainties that we see.
Our next question is from Shelby say air with F. B N. Please proceed.
Oh, yes. Thank you very much so related to the last question.
Guiding for a E. R. R growth at constant currency to decline from 24% in Q4 of this year to 10% to 12% at the end.
Next year.
You know last year in 2021, you grew.
Hum.
Or by three 5%.
And.
My question really is what do you believe is your core growth rate in <unk>.
R R.
In the medium term.
I just want to know whether you think that this kind of low double digit growth rate near 10% to 12% is the new normal or whether you think that.
In broad strokes.
A 20% grower now.
North of 30% in the past, but is your core growth in your opinion.
Around 20, not 10% to 12%.
There's a lot of benefits to the SaaS and we just introduced it today.
But in.
Apart from the fact that initially the unit of economics will decline because of the upfront investments, we expect shorter sales cycles and better in those over time, so once we reach scale.
The unit of economics will be better than then beyond kind of subscription so.
The benefits of all of that.
On top of the fact that it's not just the efficiency of the markets that open up and it's the greenfield opportunities within the markets with the SaaS offering gives us confidence that we will be a rule of 40 company as we exit the transition.
Okay. Thank you.
Our next question is from Joshua.
Okay, then with Wolfe Research. Please proceed.
Yeah. Thanks for thanks for squeezing me in here.
I've got a two parter.
My first one is how much of the weakness in EMEA and connected you have avoided if you had any sense solution in other words does any of the weakness that you saw maybe not just macro but having to do with having the right product fit.
And then my second question is.
The speed of your first transition somewhat benefited from the revenue recognition for term.
Help us understand the timeline for this transition and how the revenue trough will compare to the one we experienced in the first transition and and is there any way that maybe you have a constant currency number for the FY 'twenty three guidance that you gave today.
Thanks, Ed.
In terms of the in terms of the offering not just related to EMEA. The deals in EMEA is guy is guy he mentioned.
They didnt go anywhere just the closing very elusive, which is thoughtful people now to just to commit for a full fun and.
And regarding the overall staff.
If you think about it if you dissect you know 100% of the breaches in the world.
90% of them are real.
<unk> two data people are taking data.
Not saying, we've tapped into your wont close most of the time they are trying to take data in most of the time is the data that we think about the last.
Global Bleach you know.
This is something that only.
Platform like von <unk> skin.
Can detect in the NDA and really.
Identify and remediate so I think that we really see two objections. One is you know I don't have now the hardware and time and stuff like that you know we didn't stop us doing really well, but this is one point of friction and the other thing is the customer split to see no. One is saying the data protection is not a portfolio with the once you can install.
In a frictionless way and you're doing all the remediation of tamoxifen.
<unk> automatically and providing all the incident response now you've taken.
National burden on you and really mitigate all the risk for the customer is a completely game changer, just any way to value <unk>.
<unk> significantly.
Just massive.
But we just we just think if you look at our at our Houston E E.
All very careful with what we'll say you never say something without a lot of empirical evidence we invested more than two years of more than $100 million.
In engineering to get to the cloud. This was a massive massive undertaking multiple engineering work on it and just a lot a lot of benefits and cover the aging automation you know it just egypt completely completely different.
We had you know immature soft with all the automation features.
You just need to pay and don't do anything else without a doubt we're able to take much more of the overall security budgets.
We don't believe that we're at 10% to 12% growth rate company in the longer term and regarding your accounting treatment question, we added a new slide in the investor deck.
Investors better understand it.
But just to give some some color.
When there was an on Prem subscription deal, we recognize approximately 80% of the deal upfront and the remaining 20% is recognized Ratably and SaaS. Obviously revenue is recognized fully ratable. So if a deal is signed on the last day of the quarter.
One day divided by 365, but.
Or are on both of those selling the same price would be that would be the same.
That's why we're talking.
Talking about <unk> and.
Free cash flow is the north stars.
For 2023.
Our next question is from Erik <unk> with JMP Securities. Please proceed.
Yes, thanks for taking the question.
First off.
The lift on the SaaS service.
Why are you charging that kind of premium if you are trying to migrate to a.
To a cloud first architecture and then secondly.
Is this is this going to be disruptive to some of the data advantage.
Sales.
Sales cycles that you have I would imagine that a customer that's buying data data advantage cloud.
Would be.
More inclined to adopt the SaaS versions of the on Prem version.
No it's.
It's not.
Just it's not disruptive it's the same data advantage you just didn't deliver the sales we see just the delivery service.
It is different.
The athletes to just the cost of compute.
And I just wanted to clarify the data advantage cloud that we've talked for a year.
<unk> it.
Covers covers new application and data storage.
Never previously covered the new offering and today's announcement is basically offering the features that we had on prem for our on Prem products, just as a SaaS offering.
That's the big difference between what we had up to date.
We're offering today.
And the 30% is just the additional.
Charge for the staff.
Okay.
Okay. Thank you.
Yes.
Our final question is from Sri Nick <unk> with Robert W. Baird. Please proceed.
Hey, good afternoon. Thanks for taking the question. So you guys mentioned about taking the prudent steps to manage expenses, which includes a 5% reduction in head count. In addition to other cost reduction initiatives that Iraqi Maxine. So all in all that resulted in $7 million of savings you said so what are these other initiatives.
Outside of head count.
And comparatively how much contribution do you expect to overall and if you can talk about that and if those savings would be one time or longer term just some color.
We want to continue to balance the top line growth and cash flow improvements and as you mentioned you can see in our Q4 guidance that we managed to offset half of the revenue reduction.
With cost savings to protect profitability and cash flow, we went through our entire <unk>.
<unk> and try to see where we can cut and be more efficient.
And at the end of the day, we're always looking at ways to be more efficient and today's announcement is really about about continuing to do.
The right thing and that's why we're also giving our free cash flow expectations for 2023, which shows.
Meaningful improvement compared to what we expect to finish in 2022.
Got it thanks.
This concludes our question and answer session I would like to turn the call back over to management for closing comments.
Thanks for joining us today and thank you for your interest in <unk>.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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