Q4 2022 Varonis Systems Inc Earnings Call
Greetings and welcome to the Veronis Systems, Inc. Fourth quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode. A brief question 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.
As a reminder, this conference is being recorded and it is now my pleasure to introduce to you in Paris with Investor Relations. Thank you Chen you may begin.
Thank you operator good afternoon. Thank you for joining us today to review Veronis. This fourth quarter and full year 2022 financial results with me on the call today are yoki vital send chief Executive Officer, and Guy Melamed, Chief Financial Officer, and Chief operating officer of brownish 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 would be considered forward looking statements under federal securities laws, including projections of our future operating results for our first quarter and 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 captioned forward looking statements and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission.
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 of any as of any subsequent date.
<unk> expressly disclaims any application or undertaking to release 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 for the most directly comparable GAAP financial measures is also available in our fourth quarter 2022 earnings press release, and Investor presentation, which can be found at www dot grown as dot com and the.
The relations section.
Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section with that I'd like to turn the call over to our Chief Executive Officer, Yoki Bartleson Yockey.
Thanks, Steve and good afternoon, everyone. Thank you for joining us to discuss our first quarter and full year 2022 performance.
I would also like to provide an update one of a new SASSA, a feeling and updated outlook.
Well, it's a very exciting time in our story.
As we introduced the only source to the world nearly 100 days ago.
Varney SAS is a big milestone for US is the first version of data advantage the birth of a company.
At the same time.
There is a lot of uncertainty in the world whether it is inflation.
Raising interest rates going layoffs announcements well just general economic slowing.
In the midst of all of this uncertainty one thing is certain.
Whatever would happen in the world people, who eat sleep and Ta data and the data needs to be protected.
Turning to our fourth quarter results. It is still very early but the initial reception to our new SAS platform was encouraging and that business performed better than we expected, though very small sample size.
The same time.
The slowing macro environment continued to impact our customers.
Fourth quarter <unk>.
It came in above the high end of our guidance range, we provided you last quarter.
Our reported gross remains below the goals, we had at the start of the year.
Guy, who will review the quarterly results and our outlook in more detail, but the initial performance of Bologna sauce gives us additional confidence in our ability to whether there'll be quoted economic environment and emerge from this transition with healthy goes in both stability on our path to achieving $1 billion.
Now I would like to take step back and take a moment to remind you of the importance of what we do.
Data is the most valuable assets for any company second only people.
If you have data someone wants it.
Everything depends on it but data is completely out of control.
Companies don't know what data they have already achieved.
Police have too much access to wait too.
Too much data on too many systems.
This is a problem for every organization today, regardless of size industry or geographic location when.
When we started we needed to evangelize. The problem today is we wont know the data security is important but without the harness this target to locate their sensitive data.
Who has access to it and see.
Safely locking down without stopping their business.
The cooling data continues to get harder as it must be one payment and cloud report is going to go.
In the past few years of hybrid cloud.
Cloud and remote device usage exploded into get out expanded the attack surface by order of magnitude.
Whether it is a P T.
Tiger three minute walk inside of there will always be invulnerable.
Vulnerable system somewhere in this massive attack surface and all it takes is one compromised used the old machine to inflict significant amount of damage.
That means that that gives us we've changed.
Is there any target data is always the same you can replace an endpoint you can't really building infrastructure, but once that.
Get to the data. It is all over you can't Unbleached data. This is why data protection is the most important security problem to solve we sauce, we reduced the customer effort needed to solve this problem. We significant automation that is built into this so although there are many benefits.
Customers get from our SaaS platform.
I would like to outline the top thing first and most important customers are much better protected with much less effort.
But when he says much more automation to find and look down exposure.
That's come from over the shedding I needed access and mis configuration we.
We have more visibility into usage and behavior on all data stores that matter the most.
Which enhances our ability to detect and respond to states with enhanced visibility.
Visibility. We now also proactive incident response for SaaS customers, providing another layer of protection.
Reducing customer.
Continue our automatic updates naval customers two things aren't new.
New and evolving threats and regulation and all of this is delivered faster.
Chicken chassis easier to deploy and is significantly lower.
Structural cost and should result in quicker time to value.
And so.
It's easier to maintain and upgrade which saves our customers time and head count.
<unk> simply sources for any seasonal.
I do like to spend another moment diving deeper into our occupancy incident response, which is a key differentiator for the only subtle thing.
As part of developing SaaS subscription customer get air cargo from a world class incident response team, who proactively watch suspicious activity investigate alerts notify customer potential incidents he's really reduced pressure on customer security teams and improve their ability to stop the spread.
And their ability to provide these of course, our entire customer base make the service orders of magnitude more pulp.
On top of these critical benefits, we are making it easier to consume voice as we are doubling down on the bundling strategy we introduced.
At the beginning philosophy.
We have seen great reception from customers, who received voice platform protection upfront and foremost salesforce, who benefit from a simpler pricing discussions both in the initial deal and did any of those.
Okay.
The new strategy is a win win for our customers and content cost.
Customers receive more value from our platform in the initial deal.
For sales force it is an easier story to tell.
Customers know that we're always protect the largest and most important data stolen application.
They know the business outcomes that voice has been achieved.
This is what matters.
The males and why we are doubling down on it.
Platform selling approach.
Updated packaging and ensure the customer let's see.
Turning to state a security platform that will help them achieve their business outcomes on day one.
Now that I have provided you.
With an update of how we are making it easier for customers to see value on the vantage platform.
We've used some of the benefits that we should realize who are fulfilling first we expect stocks will result in a show the cell cycle.
Risk assessment, the Cola for go to market motion.
It could be quicker and easier to deploy.
Cause customer infrastructure requirements are greatly reduced.
This updated product packaging should help simplify the pricing discussion.
Which we also think will result in shorter sales cycles.
Second our new customer launch be loud your briefing by platform selling approach and a 25 to seven people, saying pricing uplift.
Which is justified by the products loyal and total cost of ownership is compelled so on premises subscription awesome.
We expect that quicker time to value and customer satisfaction will lead to greater customer of a life lifetime value and even better than you already on these larger initiatives.
And so that's helped us to innovate faster and support our customers more easily which we expect should benefit the margin profile as we scale.
It is still very early in the transition, but we are beginning to see initial proof of these benefits before I turn the call to Guy I want to briefly discuss a couple of key customer wins from Q4 the illustrated.
The government packaging company over 4000 employees became the only customer this quarter.
This organization wanted to improve its ability to detect and respond to threats and sensitive data and intellectual property and complying with GDP all of them.
Eight five you still requirements.
This deal was originally an O P. S deal that was switched to a SaaS deal during the fourth quarter.
Because of infrastructure and use those cost savings they could really.
The purchase packages to put their windows, Microsoft 365, and active directory and we already discussion to supplement their threat detection capabilities edge.
Take the exchange online and boxing violence.
At the same time, our existing customer base continued to serve as a key growth plans a couple of weeks ago, a healthcare organization originally customer who approaches it double digit number of perpetual and obs licenses upgraded to a SaaS platform and we protect its hybrid windows environment is the power.
Varney sauce.
This renewal was a win win for the customer involved.
Customer, who can benefit from greater automation and reduced its total cost of ownership due to no infrastructure cost we would recognize an uplifting era is the result of the conversion.
We are excited by the initial reception.
The only sauce and look forward to sharing how we see these diving a durable growth in the coming years at our Investor day.
On March 14th.
Finally, I would like to thank our team for their work.
Tireless effort this past year.
And we are excited to make this transition and success in 2023.
With that let me turn the call over to Guy Guy.
Thanks Jackie.
And when everyone.
In addition to providing more color on our fourth quarter performance and updating our 2023 full year outlook I plan to focus my time today on the initial progress of our SaaS transition and updates to our views on how the macro environment is affecting our customers.
Let's start with the early signs, we're seeing from our new SaaS rollout.
Jackie mentioned, while it's still very early in the transition the behavior, we're seeing from our customers and our sales force during the fourth quarter gives us increased confidence in our anticipated trajectory of this transition is compared to when we first made the announcement nearly 100 days ago rigor.
Regarding the macro environment, we did see a deterioration, but it was slightly more benign than what we assumed in our guidance.
Despite the softening of the macro environment, our fourth quarter results came in above the top end of the guidance on both a R R and the bottom line.
We ended the year with a 465 $1 million up 20% year over year or 24% adjusting for FX and rush.
In the fourth quarter, we were approximately free cash flow breakeven, which was up from negative $6 million last year, reflecting the inherent operating leverage in our business model and the measures we took to manage our expenses.
In the fourth quarter SaaS as a whole performed better than we expected and represented approximately 10% of new business and upsell a or for.
For the year, we sold approximately $3 $5 million of D. A cloud, which was slightly below our expectations, but we believe the number was impacted by the announcement of our new SaaS product as reps gravitated towards selling rone is that once we introduce the product.
It's still very early stages, but we are very pleased with the behavior, you're seeing in the fourth quarter, which leaves us cautiously optimistic about our 2023 outlook now.
Now I'd like to elaborate on what we saw in the fourth quarter from a macro perspective.
As we assumed in our Q4 guidance.
Canonic softness continued to negatively impact our European business and worsening of the macro environment began to impact our North America business as well.
Across the board, we saw additional deal scrutiny and longer sales cycles.
Some of the deals that slipped in Q4 have since closed, but we expect deal cycles to continue to lengthen as a result of the ongoing additional budgetary scrutiny.
Fight. This our pipeline continues to build as the deals that have slipped were not lost to competition and remain in the pipeline.
In spite of the uncertainty in the economy and widely publicized focus on optimizing cloud spin, we continued to see healthy new customer interest and engagement from our existing customers.
As of December 31st 2022, 78% of our customers with 500 or more employees purchased four or more licenses up from 73% a year ago and 63% two years ago.
50% of those customers purchased six or more licenses.
From 41% last year, and 30% two years ago.
Due to the SaaS packaging changes that Yoki discussed earlier this will be the last quarter that we provide these metrics.
We plan to introduce new Kpis to help you better understand the trends in our business.
Yesterday next month.
Lastly, our dollar based net retention rate for subscription customers was 115% at the end of 2022 or 117% adjusting for FX in Russia.
Turning now to our fourth quarter results in more detail before.
Before I get into the numbers I'd like to take a moment to remind you of the importance of a R. R. <unk>.
You've heard me talk about <unk> is the leading metrics for the past six quarters.
We talked about this because we saw this with the direction that the company was moving and going forward. This metric will only become even more important.
During the 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 income statement metric less indicative of the health of the business than.
Then they have been in the past.
Throughout this transition period.
And free cash flow will be our and your north stars because they are not impacted by the speed of the transition.
To help you better understand the differences in accounting treatment for SaaS versus on Prem subscription deal. We've included a slide in our investor presentation.
Now onto the numbers Q4, total revenues were $142 $6 million up 13% year over year or 17% adjusting for FX in Russia.
During the quarter as compared to the same quarter last year, we had approximately a 2% headwind to our year over year revenue growth rate as a result of having increased SaaS sales in our booking mix, which I recognize fully ratable versus the upfront recognition of our on Prem subscription products.
Subscription revenues were $116 7 million and maintenance and services revenue was $25 9 million as our renewal rates again, where over 90%.
When looking at our reported maintenance and services growth rate on a year over year basis.
To call out three headwinds, which impact the comparability.
FX was a 200 basis points headwind.
The exit of our Russia business was another 200 basis points of headwind and see the conversion of perpetual maintenance. The on Prem subscription was 100 basis points for a total of approximately 500 basis.
In North America revenues grew 17% to $104 $3 million or 73% of total revenue, reflecting a slowdown in the economy in the region and a headwind from the SaaS mix shift.
In EMEA revenues grew 1% to $34 4 million or 24% of total revenues adjusting for ethics in Russia growth was 16%.
Rest of World revenues grew 19% to $3 9 million or 3% of total revenue.
Moving down the income statement I'll be discussing non-GAAP results going forward.
Gross profit for the fourth quarter was $128 3 million, representing a gross margin of 89, 9% compared to 89, 6% in the fourth quarter of 2021.
Operating expenses in the fourth quarter totaled $102 3 million as a result fourth quarter operating income was $26 million or an operating margin of 18, 2%.
This compares to operating income of $22 4 million or an operating margin of 17, 7% in the same period last year.
After accounting for the 50 basis points headwind related to our shekel hedging program. The expansion was 100 basis points.
During the quarter as compared to the same quarter last year, we had approximately a one 5% headwind to our operating margin as a result of having increased SaaS sales and our booking mix, which are recognized fully ratable versus the upfront recognition of our on premise subscription products.
During the quarter, we had financial income of approximately $5 $2 million driven by interest income on our cash and short term investments.
Net income for the fourth quarter of 2022 with $26 1 million or income of 21 cents per diluted share compared to net income of $18 $5 million or income of 16 cents per diluted share for the fourth quarter of 2021.
This is based on 126 million and $118 6 million diluted shares outstanding for Q4 2022 in Q4, 2021 respectively.
As of December 31, 2022, we had $732 $5 million in cash cash equivalents marketable securities and short term deposits.
For the 12 months ended December 31, 2022 we generated $11 $9 million of cash from operations compared to $7 $2 million generated in the same period last year.
Capex for 'twenty, 'twenty, two was $11 $4 million compared to $10 $5 million last year.
Free cash flow improved from negative $3 $3 million in 2021.
Half a million dollars in 2022 despite an approximate $4 million headwind from the tax cuts and jobs Act capitalization of R&D provision.
During the fourth quarter, we repurchased two 9 million shares at an average purchase price of $19.37 and we have $43 $6 million remaining on our share repurchase authorization.
We ended the year with approximately 2150 employees a decrease from the third quarter, which reflects the 5% head count reduction measures taken which were completed in the fourth quarter.
I will now briefly recap our full year 2022 results.
Total revenues grew 21% to $473 $6 million or 25% adjusting for FX in Russia.
Our full year operating margin was six 2% compared to six 5% for 2020 one.
After adjusting for the 200 basis points headwind from our shekel hedging program. The expansion was 170 basis points.
Turning to our guidance in more detail from a macro perspective, we are factoring in a continued worsening economic conditions across the board, which assumes fourth quarter is the softness in both EMEA and North America versus two to two and a half and one quarter respectively in 2022.
This also continues to factor in additional budgetary scrutiny longer sales cycles, and an increase in unemployment expectations among a worsening of other economic conditions.
From a SaaS transition standpoint, we are factoring in a six month ramp up period, which began in early January when the new sales comp plans was introduced.
Our guidance also assumes increased salesforce turnover in the first half of the year lower sales productivity as our sales force gains comfort and selling the new product as well as longer sales cycles as on Prem subscription deals in the pipeline may convert this huh.
These assumptions will primarily impact the first and second quarters and are based on learnings from our last transition.
While all of these factors create a level of uncertainty this is already contemplated in our guidance.
Before I get into the numbers, our first quarter and full year guidance now assume a 15% SaaS mix of new business and upsell a are up from 5% previously.
This reflects the encouraging initial reception from our customers and our sales force to our new SaaS product in the fourth quarter.
We have a two phase approach to the transition.
In phase, one, which we just initiated we are focused on selling SaaS and new customers and this metric will help you gauge the success of this initiative.
This too which is converting our base of existing customers that will come later on but if an existing customer wants the benefit of our SaaS earlier, we will of course work with them as we always do.
To be clear the SaaS mix calculation SaaS, new business and upsell a are divided by total new business and upsell a or for example, if we had a renewal of $100000 that converts decides that a $150000. Then we would only include the incremental $50000 of up sell.
In the numerator and denominator of the SaaS mix calculation.
Now turning to our guidance for the first quarter of 2023 we expect total revenues of $106 million to $108 million representing growth of 10% to 12% non.
non-GAAP operating loss of negative $7 million to negative $6 million and non-GAAP net loss per basic and diluted share in the range of negative five to negative four cents there.
This assumes a $108 5 million basic and diluted shares outstanding.
For the full year of 2023, we expect.
513 million to 523 million representing year over year growth of 10% to 12% free.
Free cash flow of 20 million to 25 million, which includes the 6 million to $8 million headwind related to the T. C. J a capitalization of R&D provision.
Total revenues of $519 million to 529 million representing growth of 10% to 12%.
non-GAAP operating income of 36 million to $41 million and non-GAAP net income per diluted share in the range of 33 cents to 335.
This assumes $127 3 million diluted shares outstanding and Capex is expected to be 8 million to $10 million.
In summary.
We remain laser focused on execution on our SaaS transition and thoughtfully managing our business for long term growth under any economic condition, which in turn will unlock significant value for all grown our stakeholders.
Thanks for joining us today I look forward to seeing you all in person at our Investor Day on March 14th in New York with that he would be happy to take questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if she was like sort of move to a question from the queue for participants using speaker equipment. It may be necessary to pick up your hand.
Set before pressing the star keys.
And we ask that you please limit yourself to one question today. Thank you.
One moment, please while we poll for questions.
And our first question comes from the line of Matt Hedberg with RBC capital markets. Please proceed with your question.
Yeah. Thank you this is Matt Swanson on for Matt.
Congratulations guys on the quarter and the snack broken, especially outlet SaaS transition.
I guess, one guy you made a comment.
About your guidance that you're using some of the insights you've learned from your subscription transition and I think just given the rapid pace and success of that subscription transition.
Be helpful for us to hear a little more about what you're seeing that's the same and maybe what's different in these early stages of a SaaS transition based on your conversations with customers on what their sales force.
That's a great question I think when we when we look at the introduction of the SaaS offering that we.
Really the only introduced 100 days ago.
The feedback that we're receiving from both our customers and our sales team is very positive with that said, it's very very early in the transition. So there's a lot of lessons that we've taken from the previous transition and that's why when we built the guidance we factored in.
Some deterioration in the macroeconomic environment, and we factored a lot of kind of.
Longer sales cycles, and more deal scrutiny, but from the SaaS perspective, we factored in a six month ramp up period and that really just started in January when we introduce the new complex, but on top of that we also kind of assumed increased salesforce turnover in the first half of the year lower sales productivity.
Ourselves salesforce gains comfort in selling the new product and on top of that.
We also assume that our sales teams are going to try and convert some of the deals that are in the pipe.
As on Prem subscription and try and convert them to SaaS all of these assumptions.
Our baked into our into our guidance and the expectation is that they will impact us mostly in the first six months of the year, but I can tell you that overall the feedback that we've received has been extremely positive.
Thank you and the next question comes from the line of Hamzah Flutter Waller with Morgan Stanley . Please proceed with your question.
Hey, guys. Good evening. Thank you for taking my question I missed a couple of quick clarifying questions.
It seemed like a EMEA.
The growth rate there on a constant currency basis was pretty consistent what you saw in Q3 is it fair to say that.
That region came in a little bit better than you expected and then.
Guy you talked about doubling down on the bundle strategy.
Can you talk a little bit about how you're thinking about discounting into 'twenty three to drive that SaaS adoption or are we thinking about those maybe going up a bit to get that SaaS adoption upfront.
Or are they more or less staying the same versus a year ago. Thank you.
Hi, Neil.
Of all the that the adoption of <unk> in Europe was what we expected and the regarding the regarding the bond is just.
It just all about the value.
He is the bundled customer will get just alert to look a lot of a lot of automation and she smokes extremely well with that we will assess the strategy. The SaaS is still in the in the early innings and there we need to see how it will evolve, but so far the initial reaction.
Very good.
So just to touch on the on the actual percentages EMEA revenue was up 1% in Q4 and yes. As you mentioned when you factor in the FX.
Fact of the FX and the exit of the rest of the business.
When you kind of look at it on a constant currency basis, excluding Russia, we were at 16% with that said, we definitely saw kind of the macroeconomic environment in Europe .
With longer sales cycles, and more deal scrutiny and we when we and we definitely saw that in Q4 as well as in Q3.
And and.
When we look at the 2023 guidance, we baked in kind of continued deterioration from from this point I'm kind of for the rest of the year and the fact that we're ramping up kind of a SaaS transition and taking that into consideration as well.
And the next question comes from the line of so Cat Calia with Barclays. Please proceed with your question.
Okay, Great Hey, guys. Thanks for taking my question here.
Marquee, Oh, Yaqui, maybe I'll, maybe I'll direct it to you.
So a lot of fun stuff here with with South just in the early days, but I was wondering if you could just share some of the early the early customer feedback that you've gotten you went through some of them, but I am curious are our customers are customers buying us because it's easier to support right because because if we're honest is hosting hosting it or is it because is it.
Because for one is cloud maybe covers more applications or something else and again understanding that it's still very early what do you think the main selling points have been early on from a customer perspective.
The main selling both without without a doubt without the outcomes you're talking it's a complete game changer.
Regarding the regarding the outcomes we have it.
When we believed we had the hole and we said 10% of the 10 times more value and and we managed to fulfill the vision you know.
And when you won't comment it's very easy to install but then the ability to classify data automatically and understanding what data is critical and overexposed and we've now reached 365 that <unk>.
The only small but these are doing the right sizing of the permissions completely automatically that we see all the abnormal behavior in our cloud and block the new way of doing it for the customers' customers socket can realize must be value was doing nothing it's completely completely automatic.
Having said that though so the overall time to value you all know how to really quiet months. So yes. There is a lot of data on Prem and it's going to just you know you need to collect so the setup is function of the time.
And the everything that related to our ability to also to find the attacks that are closer to the data says early in the queue chain works extremely well. So we just we were able to fulfill the vision. We are very very excited from everything we see now on the outcomes the automation the stability.
Our ability to solve problems.
Definitely so far are many.
Many very encouraging signs.
Thank you and as a General reminder, we ask that you. Please limit yourself to one question during the question and answer session. Today. Thank you. Our next question comes from the line of team up Bologna with Citi. Please proceed with your question.
Hi, Good evening. Thank you for taking my questions Guy. This one's for you you talked about introducing a new compensation program and sales incentives to drive selling behavior around the SaaS platform. I'm curious does that mean that you've completely de emphasized and more or less okay.
Disincentives around selling term business I mean are you sunsetting that entire program entirely to shift 100% SaaS selling any clarification, there would be great I'd appreciate it. Thank you.
It's a great question, when we build kind of a comp plan, we try and align it to what the company is trying to do from a strategic perspective. So we worked a lot on trying to align them and when you think about where the company is going.
It goes back to the color that we gave about phase one and phase two having kind of phase one targeting new customers and trying to sell them.
SaaS.
So building the complaint is really kind of a it's a combination of an art than the science, we try to align.
Having our reps focused on selling SaaS to new customers and if they do that there's there's a lot of.
There's a lot of carrots there.
Obviously, we want to see how this progresses and we will give more color as we go along but.
The whole concept of the compound is to align where we want the company to go and that's focusing on that phase one selling SaaS to new customers.
And the next question comes from the line of Joel Fishbein with Truth Securities. Please proceed with your question.
Well, thank you and thank you for taking my question and I guess this is for both of you guys.
Yoki you talked about you know that the SaaS is there's really send selling bundles of the platform and I'm. Just curious if you can share I know, it's early but share how the.
It's like for like you know what you are selling on Prem with a SaaS solution that would justify a 70, 525% to 75% uplift in price I think that's on a lot of People's minds with regard to how that transition actually works.
I think that even unrelated to the bundle, it's really easy for us to justify it because just the total cost of ownership on claim.
And you know, we built a very sophisticated and coherent calculator and we can show it to the customer you know so far they understand the understanding really well in terms of buying the bundles.
For the customer because.
Because the end of the day they want automation.
You take if you take a step back and security the ease and the means to an end. The N is always data. The issue is that data protection. He is he's very hard and once you put the lot of automation, you're really taking the you really taking the E. The bottleneck.
Although out of deposits and the only way to get automation you need to buy.
All the all the abundance and with the bundle the licenses, it's one plus one equals five many times.
So in most cases it works very well total cost of ownership a little and just a lot of automation just provides very good oh, why everybody understand that they need to protect data. So so far we see that the offering is very compelling and just to touch on on the bundling like Yoki said work with basic.
We are doubling down on the success that we saw with the on Prem subscriptions bundling so customers they'll see more value in the initial deal and they'll they'll buy more over time, which really increases the initial deal size, but also the retention metrics and the customer lifetime value.
But it also helps us salesforce because really it's a simpler discussion both on the initial deal and on the renewals as well. So we're not trying to sell 40 different products. We're trying to sell the outcomes. We're trying to sell the veronis platform and that really both helps our customers and helps our sales force.
A discussion is about.
You know just about about the value and then you kind of presented with one SKU and I'll just stop and say this is a license and that is a licensed people trying to solve problems and this is what we help them to do.
Okay.
And the next question comes from the line of Brian Essex with J P. Morgan. Please proceed with your question.
Okay, great. Thank you good evening and thank you for taking the question maybe my one question for for Yoki, If you will.
It sounds like guidance is kind of on the conservative side, if you're if you're modeling it have incremental.
Deterioration in and conversations with CIO is that we're having indicate kind of more back half weighted seasonality is they're taking a cautious approach to spending this year could you help us understand you know what your conversations with customers are like with regard to.
Spending intentions for the year it sounds like your backlog is building quite nicely.
And how to think about how they might be prioritizing data security within this.
I guess stratification of security spending that they have where does that fall in the priority scale and are you just assuming that.
Burrows into the back half of the year, and then deterioration on top of that or what might your outlook before like you know better than expected spending environment in the second half is as it relates to customer conversations that you're having.
Most of the customer security efforts.
Jetblue is to protect the digital assets.
And now we have the technological platform, we've decided to do it completely automatically if you're trying to solve something that these and that is how many times they will postpone eats and what we see now is the fast, but it's still early stages, but we.
We see that it's a much easier for us to get there.
To get budgets to show value and customers don't need to put it.
A lot of a lot of effort. So we believe that we this time when the sales folks who know how to sell it when you're in the right way customer who will understand it we really reduced so much friction in.
Every at every.
Every step in the sales motion and in the value journey.
For customers. This is a this is a very exciting the other thing that we so historically is that many times.
I, it's hard times organization that was sitting in really analyzing and scrutinizing, where they need to put the dollars and we always benefit for me because you want to protect data and in this environment after COVID-19.
Very hard for almost very easy for almost every organization.
Very easy to.
To understand where are the critical data and what do you need to do with it. So whether you have clinical data with a lot of collaboration all that I do like do we shall we say so today, we can say, yes on almost all the automation and we support.
All the critical data repositories.
And in the cloud so I think that the overtime. We believe that there are a there is a high probability that more and more budget will come towards us because this is the problem that customer trying to solve and you can do it automatically.
It just should be it took priority for most of them I see many customers and I can tell you that data protection protecting the digital assets is it took priority for almost every organization out there and I also believe that we use time you can see that the two that you.
You will see that it's a strong secular trend and many others.
Security line items are more cyclical than they had been that so you know data is growing and growing in many repositories and this is what bad actors once if it.
<unk> Oh it inside out.
Attacks Dcs. There. This is the objective to get data and once customers get the data. It's all over the weekend Unbleached Unbleached data. So we are just being in the right place and we have the right technology to do it almost effortlessly for the customers.
Thank you and our next question comes from the line of Roger Boyd with UBS Securities. Please proceed with your question.
Great. Thank you for taking my question and congrats on the quarter Guy you'd talked about sales force attention, maybe drifting to the Verona SaaS offering over data advantage cloud in the quarter.
I'm just curious like what what sort of synergies are there for data advantage cloud to be sold now that run a SaaS been launched and is there a broader broader bundling opportunity there and maybe as you think about the 15% SaaS mix for calendar 'twenty three how should we think about deer cloud versus first SaaS contributing there. Thanks.
But I'm trying to just.
The sub questions within the question first of all the we increased the SaaS mix from 5% 100 days ago to 15% I'm going forward, we're going to talk about SaaS sales as a whole we definitely see rests on our account managers trying to sell to come.
<unk>, both the rone SaaS and.
And the D a crowd.
I've talked a lot about the fact that the VA cloud takes time from from an adoption perspective, and we've seen that in the past with other licenses.
Were you know until.
It takes some time and we saw that with the office 365, where it took us some time and then it started becoming a major contributor we feel very positive about the VA cloud.
Being a tailwind for us in the years ahead, I think when you look at kind of the synergies there. The fact that we protect data wherever it resides yeah. It's a great advantage in and you know we can enter into new customers that we had.
The applications that we couldn't couldn't support before and now we can support them.
That combined with the rone is that it gives a significant value to our customers that yoki talked about before.
And honestly if you will.
We look at the what we are supporting.
Very easy to understand what is the adoption of the SaaS applications.
And the cloud data repository and you see that it's something that almost every organization.
So what is happening today, that's the onus is really protecting data and you want to protect critical data will you have it.
All the access all the data flows you know that's usually a little doing in applications.
A P eyes and to do it automatically so we believe that the whole platform is something that almost every organization.
Thank you and again as a reminder, we ask that you. Please limit yourself to one question. During today's question and answer session and our next question comes from the line of Shaul Eyal with Cowen and company. Please proceed with your question.
Thank you hi, good afternoon, guys congrats on the fast and the rapid progress.
Are you seeing similar SAP buying behavior between U S and a meal or SaaS for some reason.
More pronounced in the U S.
So we.
In Q4, we we did it only.
In terms of the vote when he says we've done it on lean the only in the U S. We open it now for it.
EMEA and the pipeline is he's using using coaching and so you know we will give you more way.
Deepens and is this progressing but in general we just see that it's just the Norway in terms of the objections you know I don't have time I don't think hardware, we don't have people.
It's really eliminated all the major objection. So if you are a critical data and you want to protect it the way to do it is to use our platform.
And our next question comes from the line of Joseph Gallo with Jefferies. Please proceed with your question.
Hey, guys I appreciate the question and just wanted to follow up on da cloud since I think that's such an important growth factor for you guys Guide you had mentioned that it takes time you specifically mentioned the office product what what is it that takes time is it a product feature issue is it an awareness issue is it a sales comparability issue just kind of curious if you could provide a little more detail on.
Matt.
So yeah.
Hi, Jackie.
In terms of the D. D. In cloud you just wanted to make sure that they do.
<unk> is very mature and we hope we have all the feature set and you can see all the releases we have done in the fourth quarter. They are commending you know in each one of the use cases for detection and response data protection, we had below to configuration management, there and also and also classification once.
You have everything. It's also you know it takes sometimes but the sales force knows how to sell it and we have done it with Guy mentioned is that in the fourth quarter. When you have only SaaS. When you are always win when you release, something like that and you're introducing sauce.
Some kind of friction. This is why we told you that every time, we are doing something major like that take us just two.
Two quarters to get the vaccine.
If you will but cloudy there we believe that it's a tremendous growth engine for us.
We'd say it.
A lot of data repositories very complex commission stock a lot of configuration, well still a lot of the API and API connectivity. These are tremendous platforms that introduce a lot of the introduced a lot of risks in our very unique intellectual property works very well, though and.
We believe that the cloud is a massive opportunity for the company moving forward and we have done all the right things in terms of development enablement to make sure that we can realize it.
Great games on this platform in the future.
And our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.
Thanks for taking my question I'm, just curious on the roadmap for the SaaS solution and are you currently at feature parity with with on Prem and in what's to come down the Pike in the near term. Thanks.
Thanks for the question. So we have not been complete feature parity, but there are stopping the SaaS some stuff that out much.
Much more advanced than on Prem Something's in the on Prem we need to be on parity. We are moving very very fast with a very fast with the cloud.
270, 80% of the Bologna say on Prem customers and it's a feature hallway every new every new customer will get to parity. We also have many new advancements in this platform. So we really prioritize the other thing you know the beauty of the cloud we can see the UC.
You can see how you know how this stuff that we're doing it affecting our customers and we can prioritize it.
We can play only pays effectiveness.
And our next question comes from the line of Chad Bennett with Craig Hallum. Please proceed with your question.
Great. Thanks for taking my questions. So maybe maybe for Guy just it seems like you're you're obviously seeing pretty significant early traction and in the SaaS.
Platform and in and so you upped kind of your sales mix or a or our mix from five to 15, and assuming that that price lift sticks of 25 to 30.
I think you effectively reiterated a IRR for this year relative to what you talked about before wouldn't that be.
You know up and the uplift or a tailwind to overall air or if in fact, you know you're seeing a higher mix of of SaaS a R. R. That's higher priced.
Hi, Chad Yeah, like you're saying, we we definitely saw a lot of great traction with the SaaS introduction, which gave us the confidence to increase the SaaS mix from 5% to 15%.
With that said, we're very early in this transition.
When you look at the overall number it didn't move much we did increase it slightly but we but it didn't move much.
This is because we're at the beginning of the year.
We wanted to start we talked about kind of a six month ramp up time that we factored in.
But we feel very good about the SaaS offering and over the last 100 days, we gained a lot of great feedback from both our customers and our sales force.
And our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.
Alright. Thank you I just had a question on the SaaS mix also so I think you've generated 50 or excuse me 10% of <unk>.
The new business from SaaS in Q4, and then you said, 15% in Q1 and 15% for the year. So I'm wondering why wouldn't the mix continue to increase throughout the year as more sales reps get ramped up and etcetera. So just just for.
Why it's staying flat at 15% after Q1.
You know 100 days ago, It was a 5% mix and we get it again like I said before we gained a lot of cash.
Conference, but again, we're very early in this process.
And we do expect some friction that will happen in the first six months of the transition which is already baked in the guidance.
We will obviously update everyone as we progressed through this transition and we will give more color as we see kind of the pipeline build but because we're so early in this transition we moved it up from 5% to 15% and we want to start with this.
And then well update and give will be as transparent as possible throughout the transition and give metrics that can allow everyone to see the progress.
And in the progress progression within the transition.
Yeah.
And our next question comes from the line of shrink Caffari with.
Robert W. Baird. Please proceed with your question.
Hey, good evening, a great to hear about the SaaS progress.
And then thanks for taking my question, so one for Yoki and I'm Grateful for Guy, So Yoki mountain, where the slowing macro continued to impact our customers' continued worsening of.
Conditions across the board, both EMEA and in spillover into North America, just comparing that with your commentary last quarter. You cited of course EMEA revenues, but there was also some weakness in the U S federal and comment on the on the U S. If I grow our trends are trending above our <unk>.
Spectation now are in line I'm, just quick commentary and then very quickly on the operating margin. So you mentioned about a 1.5% headwinds just wanted to know the breakdown between hosting and support cost sources. The sales incentive structure related headwinds are thank you.
We are building a really healthy pipeline in the federal market.
Sector in general.
Critical data that they need to protect and many bid up to the one the one the data you want to protect these massive data stores you need a solution like ours and we believe that we can do.
Very well in the federal market.
You know when you have an economic slowdown.
Usually impacting a spend but again you have clinical data someone wants you to just essential business. So we believe that we the source of doing we can weather any economic slowdown very effectively.
In terms of the margin one of the things that we've talked a lot about.
And you've probably heard me talk about <unk> being the leading indicator for the last six quarters.
We wanted to make sure that everyone understands that when were shifting our business from term license.
We recognize approximately 80% of the deals value.
<unk> upfront to a SaaS model.
It's kind of a fully ratable revenue it will make our income statement metrics I'm less indicative of the health of the business than it's been in the past. So the headwind that we're talking about is obviously impacted the most by the the way revenue is recognized between the two the two models and that's why we said.
Throughout the transition.
A R R and free cash flow will be our north star is because they are not impacted by the speed of the transition.
So all.
Obviously, as we announced our Investor day happening on March 14th we will give more color we will give more.
Color not just on the headwinds, but will give color on on Kpis, and we'll try and be as transparent as possible.
To allow analysts and investors to work with us during this transition.
Thank you and as a reminder, please limit yourself to one question. Thank you. Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question.
Hey, guys can you hear me.
Yep.
Hum.
Just one quick one for me.
I think we all walked away from the last earnings call.
Got.
Got it.
Your guidance is derisked.
But you guys I don't want maybe 5% and there was no real change its growth outlook.
Great.
Yes.
What should we should we walk away feeling.
Derisked.
Okay.
Right.
Yeah.
It's hard to draw the line is very hard to hear but I think I understood. The question of whether.
We feel more confident about our guidance and have we still are factored in.
Hum macroeconomic uncertainties and if that's the question. The answer is basically yes to both we feel more confident about where we are today versus where we were a 100 days ago.
The reception of the SaaS offering has been extremely positive I thought we talked about that both from our customers and our sales force.
With that said when we look at the guidance for 2023.
We did bake in.
Additional worsening of the economic conditions across the board.
We assume a softness in EMEA and North America are.
We assumed a budgetary scrutiny longer sales cycles base.
Basically worsening of the economic condition. So we.
We feel better about the business, but as we guide today.
For 2023, we wanted to account for both.
Macroeconomic deterioration and some of the friction that might occur with the introduction of the SaaS offering and that would.
Amp up time of basically six months.
Yeah.
And our next question comes from the line of Erik <unk> with JMP Securities. Please proceed with your question.
Yeah. Thanks for taking the question.
Can you just talk a little bit about the linearity that you saw.
Saw through the quarter it sounds like things may be eroded. So did did the end of the quarter slow and then you also talked about some turnover in the sales organization can you comment on.
What kind of turnover are you expecting in the sales organization.
So the quarter actually behave very similar in terms of seasonality, we didn't see any any abnormal behavior. When we look at kind of the seasonality.
We're similar to other software.
Enterprise businesses, we do have.
A large component of the business come in the last couple of weeks of every quarter.
So we didn't see any major trends there.
In terms of the turnover I can tell you that the reception of.
The SaaS offering as we've mentioned several times on this call has been extremely positive, but some of the lessons that we've taken from a kind of a move from perpetual to the on Prem.
Some increased turnover, which we baked into our guidance.
And factor that in them. So that's kind of the way we thought about it.
But as of now everything's kind of going in line with our expectations.
And our final question comes from the line of Chablis, Sarah I'll see it with SPN Securities. Please proceed with your question.
So thank you very much so I wanted to delve into the 13 point deceleration in North America growth from 30% to 17%.
How much of that was the SaaS headwind can you talk about like the different trends you saw between the large customers and smaller customers.
And finally did you see in January and February early February .
Mark.
A notable pickup in north American business versus the end of last year.
When we gave guidance last quarter, we said that we expected to see some spillover from the macroeconomic conditions in EMEA to North America with some increased scrutiny and longer sales cycles in the region and that was in line with our expectations. So the results that we saw in Q.
For.
Kind of in line with how we saw it when we guided the last quarter. There was about 300 basis points of headwind from the SaaS mix shift that impacted our North America reported revenue in Q4.
And in terms of January and February February is only just started but I can tell you we gave guidance.
We feel.
Good with the guidance that we've provided.
And we'll update as we kind of progressed.
And we will give some color on.
On the SaaS transition them during our Investor day on March 14th.
At this time there are no further questions now I'd like to turn the floor back over to Tim Prez for any closing comments.
Thanks for joining us today, and we look forward to seeing you all at our Investor Day on March 14th in New York.
This concludes today's teleconference. You may now disconnect by at this time. Thank you for your participation and have a great day.
Yeah.
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Yeah.
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