Q1 2023 Varonis Systems Inc Earnings Call

Speaker 2: Greetings and welcome to the Verona Systems first quarter 2023 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.

Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Purse, Director of Investor Relations. Thank you, sir. Let's get started.

Speaker 3: Thank you, operator. Good afternoon. Thank you for joining us today to review Veronus's first quarter 2023 financial results. With me on the call today are Yaki Fidelson, chief executive officer, and Guy Malamud, chief financial officer and chief operating officer of Veronus.

Speaker 3: After preliminary remarks, we will open the call to a question and answer session.

Speaker 3: 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 future operating results for our second quarter and full year ending December 31, 2023.

Speaker 3: Due to a number of factors, actual results may differ materially from those set forth in such statements.

Speaker 3: 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.

Speaker 3: 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. Varonis expressly disclaims any application or undertaking to release publicly and publiclylotting websites on this election day.

Speaker 3: any updates or revisions to any forward-looking statements made herein.

Speaker 3: Additionally, non-GAAP financial measures will be discussed on this conference called A Reconciliation for the Most Directly Comparable GAAP Financial Measures is also available in our first quarter 2023 earnings press release and investor presentation, which can be found at www.varunas.com.

Speaker 3: in the investor relations section. Lastly, please note that a webcast of today's call is available on our website in the investor relations section.

Speaker 3: With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Fidelson. Yaki? Yaki?

Speaker 4: Thanks, Tim, and good afternoon, everyone. Thank you for joining us to discuss our first quarter 2023 performance. I'm happy to share the progress on our SAS transition, excited by the initial SAS adoption we saw and feel optimistic about our ongoing SAS journey.

Speaker 4: So let's start with our first quarter results. The reception of the Veroni SAS continues to exceed our expectations, and this quarter provided us with additional proof points that our strategy to transition to SAS is working.

Speaker 4: Our first quarter of SaaS mix came in at 37%, well ahead of our guidance for 15% in ARI through 18% year-over-year to $478.1 million. We reported revenues of $107.3 million in free cash flow.

Speaker 4: scrutiny on bills in Europe and North America but Veronisas has come out at just the right time in an environment where all spending is being highly scrutinized. Veronisas offers customers a faster time to value with drastically reduced...

Speaker 4: Overall, total cost of ownership because of the lower infrastructure and hand count related expenses required to operate it. We are pleased with the team's performance despite the difficult macro backdrop. And though we are only a quarter into the year, we are raising our suspects and…

Speaker 4: and the problem is solved.

Speaker 4: Data is the most important asset that a company has next to its people and because of its importance, data is a prime target for bad actors.

Speaker 4: Varonis helps companies locate sensitive data, visualize who has access to it, and automatically lock it up. This allows companies to collaborate safely and get the most value from their data, while at the same time managing risks. Recent events made it obvious how hard it can be to protect data from risks of insiders, it is less obvious that outside attackers become insiders.

Speaker 4: when they compromise the system of a person.

Speaker 4: In either case, without our solution, employees and contractors can always access more sensitive data than they should.

Speaker 4: Now, let's turn to some of the feedback that we have recently begun hearing from customers who are using the one stuff.

Speaker 4: As a reminder, last quarter and at our investor day in March, I spoke about three key benefits our customers get from our SaaS platform.

Speaker 4: First, customers are much better protected with much less effort with our automated remediation and proactive incident response. Second, SAS is easier to deploy and has significantly lower infrastructure costs.

Speaker 4: And third, SAS is easier to maintain and upgrade.

Speaker 4: At our investor day, I spoke about 3 benefits that we expect to realize.

Speaker 4: One, shorter sales cycle, two, larger land, and three, margin benefits over time. While it is still early, we as a company and our customers are already beginning to see evidence of these benefits.

Speaker 4: One example is a specialty chemical manufacturer with 1000 employees that suspected

Speaker 4: that they had issues with overexposed data. But prior to installing Veronis SAS, found it difficult to visualize who had access to data and configuration risks.

Speaker 4: let alone remediate them. Within the first day of installation, Comorbidity enabled them to see exposed sensitive information that was open to the entire company, and even sensitive files that were open to anyone on the internet.

Speaker 4: For the slim security team, hoping that visibility alone wouldn't have been enough. Manual remediation was a non-starter as it does not scale.

Speaker 4: and never end. Before installing Varonis, this team unsuccessfully tried to use multiple other point solutions that did not meet their needs, due in part to their lack of automation. Leveraging the power of automation with Varonis SAS has allowed them to classify PII alerts to target other features and using Varonis Vegas played an important role in its Luciaunc arrays.

Speaker 4: and most importantly, remediate overexposed links in Microsoft 365. In the end, they purchased Veronix SaaS packages to protect their on-prem Windows and Microsoft 365 deployments.

Speaker 4: Another example is one of the country's largest convenience store operators. This company was performing a gap analysis on its security architecture and realized that it failed to understand who can and does access data in Microsoft 365.

Speaker 4: and also had no way to locate sensitive data in their environment at scale.

Speaker 4: They could not see links shared with anyone on the internet older than 30 days and there was no way to remediate old links without breaking collaboration. Prior to bringing us in, they were trying to address these problems using Microsoft's building functionality.

Speaker 4: but this proved to be manually intense and ultimately unsuccessful. Once they installed Varonis, this organization gained real-time visibility into these overexposed links.

Speaker 4: Not only this, but our proactive incident response team identified and stopped a live ransomware attack on their network.

Speaker 4: A customer had a number of perimeter technologies that were bypassed, but because we looked at the data, we found files that were being encrypted on the networks and immediately locked the great actor out.

Speaker 4: stopping the incident. What started as a data classification project quickly expanded into much more. This customer purchased Laroni SaaS for Windows and Microsoft 365, which allowed them to realize the benefits of proactive incident response. It is infrastructure spend

Speaker 4: streamline the procurement process and simplify the ongoing maintenance of the electronics deployment. In addition,

Speaker 4: This new customer wins. We also had several existing customers convert to VeronaSAS this quarter. One of these conversions was a Fortune 500 insurance company that first became a customer in 2020.

Speaker 4: As we prepared for renewal discussion, a customer mentioned a multi-year plan to migrate its

Speaker 4: on-premises data center into the cloud and wanted to leverage the power of Veronix SaaS. Prior to the renewal they had 13 on-prem subscription licenses after the renewal, the purchase of Veronix SaaS package for Windows, Microsoft 365, Active Directory and Exchange Online as well as DA clouds for AWS and SaaS.

Speaker 4: As a result of this conversion in upsell, we recognize an increase in ARR of greater than 30% which gives us additional confidence in our pricing model.

Speaker 4: We are in discussions to protect the Salesforce.com and geo-environment as well as expanding into additional geographies they have in European Asia.

Speaker 4: In my conversation with customer, it is clear that the simplicity and automated protection of Roni SAS is resonating, which leaves me feeling optimistic about our outlook in spite of the economic slowdown that is impacting our customers.

Speaker 4: With that, let me turn the call over to Guy.

Speaker 4: Thanks, Yaki. Good afternoon, everyone. In addition to providing more color on our first quarter performance and our updated 2023 full year outlook, I plan to focus my time today on our SaaS transition and how the economy continues to affect our customers and, in turn, our business. We are pleased with how the team performed during Q1 and are encouraged about what this means for the rest of the year. Although it is early and we have a lot of work to do, the instructions and the of course won't divisions etc. Well, as always, here is a transm benign format that you look at and where you are to support your differentsalation partners in the PSC environment andesteering apprenticeship program for intranets and second-party crappy

Speaker 4: The reception of SANS from our customers and our salesports, together with our confidence in the pipeline and the ARR uplist we are seeing, allows us to raise both our SANS mix and our full year ARR guide.

Speaker 4: As I discussed in links at the investor day in March, ARR, free cash flow, and ARR contribution margin are the leading indicators for our business during this transition. The shift from on-prem subscription licenses, where approximately 80% of the deals value is recognized upfront, to a SaaS model with fully ratable revenue, to a fully accessible

Speaker 4: will cause initial headwinds on our reported revenue as the SAS mix increases.

Speaker 4: However, these headwinds are simply a function of accounting treatment and are not indicative of the trajectory of our transition or of our overall business.

Speaker 4: In fact, the greater these accounting-related headwinds are, the faster it means we are progressing throughout our transition, which we obviously view as positive.

Speaker 4: Given the momentum we saw in the first quarter and our pipeline and expectations going forward, we are raising our ARR and SAS mix outlooks, which also means we are adjusting lower our revenue outlook.

Speaker 5: start is being driven by Ronis SAF, which is resonating with our customers and our sales TCM.

Speaker 5: represents 37% of new business.

Speaker 5: and net new upsell ARR versus our guidance of 15%. And the examples that Iaki just discussed are evidence of this reception.

Speaker 5: Early feedback and the average deal sizes we have seen so far gives us further confidence in the pricing uplift that we previously provided. To that end, during the quarter, some of our reps did decide to go back to deals where an on-prem subscription quote

Speaker 5: was already put in front of the customer and introduced the SaaS product into the conversation.

Speaker 5: While some of these did convert, for other deals, it created some near-term disruption and elongated those sales cycles.

Speaker 5: We think this will work itself out in the second part of this year and is already factored into our guidance.

Speaker 5: We even saw some existing customers that during the Renault conversations were happy to convert their entire platform to SAS and by additional SAS licenses.

Speaker 5: Although the ARR impact of these renewal conversions wasn't material this quarter, it was ahead of our projections. As it relates to our updated guidance, we're not assuming significant conversions or a material change in the dollar value of these conversions versus Q1, but, as a modeling note, we're not assuming significant conversions or a material change in the dollar value of

Speaker 5: If these conversions continue to trend ahead of our projections, this will further benefit our North Star metrics, which are ARR free cash flow and ARR contribution margin. At the same time, this would cause a headwind to reported revenue and operating margin, which you should view as a positive in terms of the progression of the transition.

Speaker 5: As I look at our Q2 pipeline of Rinal conversion, it has increased significantly versus Q1, which you should keep in mind as you think through your models. Turning to our sales books.

Speaker 5: As expected, we did see some turnover, but we are pleased with the engagement of the vast majority of our Salesforce and their ability to transition to selling SaaS is tracking better than our initial expectation.

Speaker 5: Further, some of this success is being driven by our learning from our 2019 transition around setting up programs to reduce friction while providing the right incentives for both the rep and the company. As Yaki mentioned, we believe we have the right solution for the market.

Speaker 5: since Verona SaaS allows customers to achieve a faster time to value with significantly lower infrastructure costs.

Speaker 5: And while it's still early in the year, we feel good about the benefits both our customers and we will achieve as a result of the SAS transition.

Speaker 5: In the first quarter, ARR drew 18% year-over-year, the $478.1 million, and assuming the same SASS mix as we guided for, we would have been well ahead of our revenue guidance.

Speaker 5: We generated $35.7 million of free cash flow, which was up from $21 million in the same period last year, reflecting our commitment to top-line growth while improving cash flow generation.

Speaker 5: I'd like to elaborate on what I said earlier regarding the macro environment.

Speaker 5: During Q1, we saw the slowing economic climate continue to weigh on customers purchasing patterns.

Speaker 5: Across the board, we continue to see an elevated level of deal scrutiny and extended cell cycles involving multiple layers of approval with Europe in particular seeing the largest impact.

Speaker 5: We expect longer deal cycles to continue as a result of ongoing budgetary scrutiny, and our updated guidance already takes this and more into consideration.

Speaker 5: Turning now to our first quarter results in more detail. Before I get into the numbers, let me remind you of what we've said from the beginning. ARR, free cash flow, and ARR contribution margin are the leading indicators for this transition. Remember the shift of our business from term licenses to a SaaS model to a credit card model.

Speaker 5: Now onto the numbers.

Speaker 5: U-1 total revenues were $107.3 million up 12% year-over-year.

Speaker 5: During the quarter, as compared to the same quarter last year, we had approximately 7% headwind, the R-Year Over-Year Revenue Growth Rate, as a result of having increased SAF sales in our bookings mix, which are recognized gradually versus the upfront recognition of our on-prem subscription product.

Speaker 5: Subscription revenues were 83 million dollars and maintenance and services revenues with 24.4 million dollars as our renewal rates again were over 90%.

Speaker 5: In North America, revenues grew 18% to $81.2 million or 76% of total revenues. Inemia, revenues declined 5% to $22.9 million or 21% of total revenues. Current C was a 7% headwind in the region.

Speaker 5: Rest of the world revenues grew 9% to $3.2 million, or 3% of total revenue.

Speaker 5: Just to remind you, reported revenue growth rates throughout all regions were impacted by a higher SaaS mix.

Speaker 5: Moving down the income statement, I'll be discussing non-gap results going forward. Grouse profit for the first quarter was $92.9 million, representing a gross margin of 86.5% compared to 85.6% in the first quarter of 2022. Operating expenses in the first quarter

Speaker 5: total 97.1 million dollars.

Speaker 5: As a result, first quarter operating loss with $4.3 million or an operating margin of negative 4%. This compares to operating loss of $7.9 million or an operating margin of negative 8.2% in the same period last year.

Speaker 5: During the quarter, as compared to the same quarter last year, we had approximately a 6% headwind to our operating margin as a result of having increased staff sales in our bookings mix, which are recognized fully-radible versus the upfront recognition of our on-prem subscription products.

Speaker 5: First quarter ARR contribution margin was 5.6%, up from 4.1% last year, reflecting our ability to drive strong incremental margins while growing ARR and transitioning to SAP. During the quarter, we had financial income of approximately $7.2 million driven primarily by interest income on our cash, deposits, and short-term investments.

Speaker 5: Net loss for the first quarter of 2023 was $0.1 million, or 0 cents per basic and diluted share, compared to a net loss of $10.2 million, or loss of 9 cents per basic and diluted share, for the first quarter of 2022.

Speaker 5: This is based on 108.4 million and 108.2 million basic and diluted chairs outstanding for Q1 2023 and Q1 2022 respectively.

Speaker 5: As of March 31, 2023, we had $756.3 million in cash, cash equivalents, marketable securities, and short-term deposits.

Speaker 5: For the three months ended March 31, 2023, we generated $36.8 million of cash from operations, compared to $24.5 million generated in the same period last year. And CAPEX was $1.1 million compared to $3.5 million last year.

Speaker 5: During the first quarter, we repurchased 100,000 shares at an average purchase price of $25.19 and we have $41 million remaining on our share repurchase authorization.

Speaker 5: We ended the quarter with approximately 2,150 employees, roughly flat versus last quarter.

Speaker 5: Turning to our guidance in more detail, our second quarter and full year guidance now assumes a 35% SaaS mix of new business and upsell ARR up from 15% previously.

Speaker 5: A few additional modeling notes on this metric as we look to the back half of the year.

Speaker 5: First, Federal's largest quarter is the third quarter, and because we are not yet FedRAMP certified, we expect this to be headwind to our SAS mix in Q3.

Speaker 5: Second, despite the momentum we saw this quarter, Q1 is still the smallest quarter of the year. And as such, we are taking a prudent approach in building our outlook as the dollar value of deals we expect to close in the second half is much larger than in the first.

Speaker 5: despite the momentum we saw this quarter, Q1 is still the smallest quarter of the year. And as such, we are taking a prudent approach in building our outlook as the dollar value of deals we expect to close in the second half is much larger than in the first, which is in line with historical trends.

Speaker 5: And third, we're not assuming significant conversions of renewals from on-prem subscription to SAS or a material change in the dollar value of these conversions versus Q1.

Speaker 5: We are raising our ARR guidance, which reflects the faster adoption from our customers to Verona SAP. This also results in greater ARR contribution margin, which reflects our ability to focus on operating leverage during the transition.

Speaker 5: The higher SAS mix drives corresponding adjustments to revenue and operating income guidance because of the ratable accounting treatment of SAS versus the upfront accounting treatment of on-prem subscription.

Speaker 5: Ultimately, we view the updates to our guidance as a clear sign that the transition is progressing in a positive direction and continue to view ARR, free cash flow, and ARR contribution margin as our north stars during this transition.

Speaker 5: Lastly, as a reminder, our guidance continues to factor in headwinds from macro perspective, which includes ongoing budgetary scrutiny, longer sales cycles, and an increase in unemployment, as well as worsening of other economic conditions.

Speaker 5: From a SAS transition standpoint, we are still factoring in a ramp-up period in the first half of the year, which assumes increased Salesforce turnover, lower sales productivity, and longer sales cycles as an on-prem subscription deals in flight may convert to SAS.

Speaker 5: Now turning to our guidance. For the second quarter of 2023, we expect Total revenues of $118 million to $120 million representing growth of 6-8%. non-GAAP operating income of $0.5 million to $1.5 million and

Speaker 5: $20 million to $528 million, representing growth of 12% to 14%.

Speaker 5: Bray cash flow of $20 million to $25 million, which includes a 6-8 million dollars headwind related to the TCJA capitalization of R&D provision.

Speaker 5: Total revenues of $510 million to $520 million representing growth of 8% to 10%.

Speaker 5: Non-GAP operating income of $29 million to $34 million, and non-GAP net income per diluted chair in the range of $0.30 to $0.34. This assumes $126.8 million diluted chairs outstanding.

Speaker 5: Non-GAP operating income of $29 million to $34 million, and non-GAP net income per diluted chair in the range of $0.30 to $0.34. This assumes $126.8 million diluted chairs outstanding. In summary.

Speaker 5: Despite continued challenges in the macro environment, the year is off to a solid start with the adoption of Verona SAS showing positive momentum reflected by our first quarter SAS mix of 37%.

Speaker 5: These results in our pipeline give us the confidence to raise our four-year ARR outlook while driving strong incremental contribution margins.

Speaker 5: With that, we would be happy to take questions. Operator?

Speaker 2: At this time, we will be conducting a question and answer session.

Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Speaker 2: You may press star 2 if you would like to remove your question from the queue.

Speaker 2: We ask that you limit yourself to one question so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, all we pull for questions. Our first question comes from Matt Hedberg with RBC Capital Markets. Please proceed with your question. Great guys, thanks for taking my question. It can grasp on the execution. The environment certainly does not seem to be easy out there.

Speaker 2: Um, Yaqui, um, you know, obviously a lot of the focus on the call was on, on SaaS adoption. And I really enjoyed the, uh, the, the example you give it to the large insurance customer. I think you said they saw a 30% uplift to ARR when they converted to SaaS. I'm curious, is that sort of a standard uplift that you're seeing across the base when it converts or maybe said differently?

Speaker 4: but you know, we discussed before 25 to 30%, it's very easy, relatively easy to justify in terms of the total cost of ownership. It's a wash, but when we convert to that, we also believe that a lot of the customers will buy.

Speaker 4: Significantly more bundles, you know what is very exciting for us is that the automated the automated outcome and coverage is really working and so far the

Speaker 4: conversion to SAS is really a

Speaker 4: Stopping that from from from every aspect and primarily the overall value proposition so in terms of the total cost of ownership when it's up to apples we think that You know, it's this should be the overall increase but we also believe that customers will consume significantly more lessons.

Speaker 2: Our next question comes from Hasma, Fadarala with Morgan Family. Please proceed with your question.

Speaker 6: Hey guys, thank you for taking my question. Hamza here. So.

Speaker 6: Just want to clarify, Yaki, point you made earlier. Is it fair to say that the environment got worse in Q1 versus Q4 or was it relatively consistent? Yeah, it's overall, I will say that it was relatively the same. You know, it's a hard macro environment, but I will tell you what we do see and that it was from a MS industry, Scoration has a cost-effective basis for Quadrotacia.

Speaker 4: to protect data. And if you're protecting data, if the data is protected with us and you fed with everything else, you did your job right. But if your, if the data is not protected and you have 99% perimeter security and you have one insider, so we depend on incident, one compromised user or a machine and the blast radius, so much of the data is exposed.

Speaker 4: Then you have what we call lasting damage. So what we see is that its customers are very attentive and with the SaaS we're just producing a lot of friction and you know what we have discussed in the analyst days, 10% of the effort, orders of magnitude of the value.

Speaker 4: is really working and we, DA Cloud and everything that we are doing, we see more coverage and really with the incident response, it's pretty amazing, they need to do fairly, you know, very little in order to get a lot of value. So hard macro, but I think that, you know, at the end of the day, data security is a secular trend and if we keep doing what we are doing,

Speaker 6: In terms of coverage and automation, I think that we can, on a relative basis, can do very, very well. Our next question comes from Cikit Kalia with the Barclays. Please proceed with your question. Great. Good afternoon, guys. It's Sackett from Barclays. Thanks for taking my question here.

Speaker 7: between the SaaS products and the on-prem, and to the extent that they're still a gap, right, and you'll tell us whether there's a gap. How do you sort of think about that that sort of narrowing over time? Does that make sense?

Speaker 4: Yes, so thanks for the question. So for new customers it's a completely, it's just a no-brainer because we have so much more advanced capability in remediation mainly in 365 and the proactive incident response and just all the benefits that are coming with that.

Speaker 4: So this is, you know, this is a, it's a non-issue. With customers that have some of the features that we still don't have in the SaaS platform, we are moving very fast to now the GAP, and we believe in a several quarters.

Speaker 4: We are going to now everything and also will be able to do a frictionless migration. Now we have 80 percent.

Speaker 4: of what we have on the on the on on to M platform, but we are moving very, very fast. As I said before, so far, it's just in every aspect of the SaaS transition, we have just, you know, very good, very good indicators. Our next question comes from Joel Fishvine, but true securities. Please proceed with your question. Thank you for taking my questions and good.

Speaker 5: execution against your plan. I get it's guy for you. Can you just go through what the percent of business that's going to renew? I think you said something about a decent renewal in Q2, but I'd like to understand the cadence of that throughout the year. Then your assumptions around conversion rates, that would be helpful. Thank you. So for so long, if you're talking about the renewal rate or renewal rate is...

Speaker 5: we've seen increased renewal conversions in the pipeline. Now more reps are talking about SaaS when they talk to our existing customers when the renewals are coming up.

Speaker 5: Now, to be clear, we're not providing any additional incentives for us to do this. They're really doing it on their own, but it's happening because customers see the benefits of SaaS, it's a much better product, and reps are getting more commission on the uplift. And because of this larger pipeline.

Speaker 5: We have baked in just over a million dollars into our Q2 guidance, which again isn't a significant number, but we do want to highlight this for the modeling sake because if that renewal conversions do end up being more significant, it will be an even larger headwind to revenue and operating margin.

Speaker 2: but that is a positive development for us, especially on ARR. Our next question comes from Fatima Belani with Sidi. Please proceed with your question. Hi, good afternoon. Thank you for taking my questions. Guy, you talked in your script.

Speaker 2: about elevated sales turnover, which was pretty much in alignment with your expectations and what you articulated to us when you were talking us through some of the risks around the transition. I'm curious how you're thinking about sales capacity for the remainder of the year and how we should see you making rehire or backfill or

Speaker 5: So as you mentioned, and as I as I talked in the prepared remarks, we did see some turnover, but it was very much as expected and we're very much pleased with the engagement of the vast majority of our sales force and their ability to transition to selling fast and that's tracking better than our initial guidance.

Speaker 5: We're getting great feedback from our reps and our customers on the product and the benefits. We're hiring in strategic positions and locations. We want to continue to invest. We'll do it in a prudent way as we have done in the past. But overall, we're very pleased with the reception of SAS and the way the sales force has received that.

Speaker 8: growth assuming that the environment would deteriorate further from what you saw in 3, 4Q. I guess I'm wondering did you add any additional macro considerations to the model or absent the out performance you had in SAS mix? Would you likely have been reiterating the full year revenue guidance? Thanks.

Speaker 5: That's a great question. Our reduction of revenue, revenue coming down by $9 million is entirely related to the increase of the SaaS mix from 15% to 35% there's obviously revenue headwind coming from the accounting treatment.

Speaker 5: And that's why we reduced that revenue number and increased our ARR number which moved up by $6 million for the year. We definitely baked in macro economic uncertainty. We did that at the beginning of the year. We didn't change anything related to that and the entire reduction of revenue is related to the SaaS uplift. Very quick. Thank you.

Hi, great. Thanks. Good afternoon and thanks for taking a question.

Maybe, I guess for either one of you, if you could give us a little bit of color. I think you mentioned during the prepared remarks that you had some customers that decided to convert to SAS and then some stuff with on-prem. Could you give us a little more color around what the gating factors?

were there of customers that were in the pipeline and what kind of got them over the hurdle to convert and then Conversely maybe which ones have decided to say on-prem and why? We are not pushing conversions, it's just beyond those two that some of the features that we have with 365 and the product is IR and they just

You know, almost forced us to do the conversion, which has made a much more sense for them, much more sense for them to do it. Other time, we don't see, you know, the vast, vast majority of customers we want to look at us.

It's a no bueno for them. It's just a question of timing in future.

And Brian , just to add, there's basically two types. There's new customers that received quotes that had on-prem subscription pricing on them. We did see many of those deals convert to SaaS within the quarter, and we expect that to continue. But as Yaku mentioned, the conversion of existing customers with their renewals from on-prem subscription to SaaS hasn't started yet.

Good afternoon and thanks for taking my question. Um...

I'm curious how the shift of SaaS is impacting the top of the pipeline or top of the funnel. Anything that you can give us from a quantification standpoint. Thanks.

Overall, what I can say more than anything else that it's resonating much better with the customer. So if you will go to every organization in the world and say, we wonder, only the right people can access the right data. You know what is critical and reliably can alert and stop. And you have normal behavior. Everybody say yes.

The question is how can you do it in a frictionless manner and to make sure that you can do it completely automatically? And this is something that we are doing with SAS. So it's the overall reception in terms of the way that they receive value, in the way that they can deploy it and just get value from the platform.

It's basically eliminating two of the biggest hurdles and objections that we got from customers when we sold on-prem subscription, which is one we don't want to deal with a hardware, and that gets eliminated when we have the SaaS offering, and the second objection is we don't have enough people. And those two benefits are pretty significant, which...

basically generates a total cost of ownership that is lower for the customer with much more of the automation that Yaki talked about. Our next question comes from Josh Tilton with Wolf Research. Please proceed with your question. Hey guys, thanks for...

for taking my question. I just have a quick one on the numbers. I just want to make sure I have a handle on everything here. But I think the previous commentaries you ended 2022 with $3.5 million in ARR from DA Cloud. You also had a 10% SaaS mix. And I'm just trying to understand, is that 10% SaaS mix which is new and upsell business, is that part?

of the 3.5 million that you finished the year with in VA Cloud or is that on top of the 3.5 million in ARR from VA Cloud? Thank you. The 35% SAS mix is related to Q1 2023 and I think there's been some confusion in the way that metric is defined.

spend a second by just clarifying it. The SAS mix is the percentage of new gross ACV, so it's out of a much larger denominator than if you do that based on a calculation from net new ARR, but in relations to your question it relates to Q1 new ACV sales, not related to last year.

Our next question comes from Chad Bennett with Craig Hallam Capital Group. Please proceed with your question. Great. Thanks for taking my question. So yeah, kudos on the accelerated shift to the SAS business, and you're seeing kind of deals in flight shift, which I think is good. But…

Just a guy, you know, considering the ARR, you know, pretty dramatic ARR shift on a percentage basis from 15 to, you know, mid-30s in your expectations for this year from an ARR perspective.

to SaaS and it sounds like the price improvement related to the SaaS deals or ACV related to those has held, right, based on your commentary and you're not really baking in more macro negativity. I just sort of thought the magnitude of…

going from 15 to 35 percent of bookings coming from SAS would have more than a six million dollar benefit in the guide. Am I not, you know, are there puts and takes I'm not thinking about there, or is there more to it? Well, I can walk you through how we're thinking about this. First of all, this is the first quarter into the year.

And as I mentioned before, it's the smallest one of the year and there's a lot of macro uncertainty still out there which we continue to bake into our guidance. And we take the commitment to the street very seriously. So we definitely feel extremely encouraged about the SAS transition with the feedback that we've been getting and the pricing we've realized as you've asked.

so far gives us the confidence in that 25 to 30 percent uplift. So I think this is early in the year but we feel very confident in where we stand today after one quarter of the year. Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question.

Okay, thank you. You mentioned an existing Fortune 500 insurance company that renewed and you upsold DA Cloud to that customer, which I think contributed in part to that 30% increase in ARAs. How much of that 30% increase was attributable to DA Cloud and then...

What kind of attach rate of DA Cloud are you seeing when a customer buys a SaaS platform? So one of the things that we talked about in the investor day is that we're going to talk about the Verona SaaS as one mix because we want to avoid the confusion and the puts and takes. So the 37% SaaS mix in Q1 and the guidance that we gave

we're very excited to raising the number from 15% SaaS next to 35% after one quarter. But in terms of the cloud and the attach rates, when you look at the customers and everything we have in the platforms in terms of the cloud, each and every one of our customers.

several cloud platforms that we support and we just believe that you know just on paper we can sell to all of them and we think that everything that's related to the protection of these SaaS platforms is the market is becoming a

more ready and everything that we had on the on-prem and 365 we bring to these platforms and we just believe that the overall platform and the value proposition has massive potential.

Our next question comes from Sharnik Kothari with Robert W. Baird. Please proceed with your question.

Thanks for taking my question. You mentioned from a fast transition standpoint, you are still factoring the ramp up period in the first half of the year, which assumes increased turnover productivity and longer cycles. Given that you mentioned the faster transition and especially increased renewal conversions without

talked about the first six months, the first two quarters where we expect to see the majority of the friction and that friction is coming from two places. One is the expectation for higher sales turnover which I can tell you we were pleased with kind of the adoption of our Salesforce. They very much understand the benefits.

for both the customers and the company. And it's obviously when you see the numbers, the 37% SaaS mix was well ahead of our guidance. But the second thing we talked about was the fact that deals that were in flight, that were introduced.

to customers with on-prem subscription pricing as part of the negotiation and the conversation, we expect our Salesforce to go back to those customers and try and move them to SaaS, which will add some friction in the conversation. And we expect to kind of go through that.

For the vast majority of those deals in the first part of the year and on the larger deals, we should clean through that pipeline in the second part of the year, but the majority of that friction happened in the first six months. We called that out and talked a lot about that in the last call on the investor day that we had. That still holds. That is still part of the expectation, but I think we can clear through those conversations with customers for the most part in future.

Our next question is with Shebly Saraf with FBN Securities. Please proceed with your question. Yeah, thank you very much. So you noted that you're seeing additional scrutiny on deals in Europe and North America, but your European business or MIA business declined by 5%, actually grew by 2% constant currency.

That was versus like 24% constant currency growth the year before. So 22 point de-sell year to year. North America had de-selled only 13 points. So it looks like EMEA is slowing down more than North America on a constant currency basis. Can you elaborate on why that's the case and what actions you're taking to improve results in EMEA?

business impact that still impacted us in we still recognized in Q1 of last year and that was another 2% headwind but on top of that you're also seeing the headwind related to the SaaS transition so selling SaaS with a way of the accounting treatment related to that will generate headwind and the adoption of SaaS in Europe was very good not similar to

our transition from perpetual to on-prem subscription where we had conversations with our European teams at the time for all of you that were part of that transition. I'm sure you remember that. But in this transition, our European teams have adopted the SAS transition very well and that also has an impact on the comparison. So I don't think it's

it's the right way to look at revenue numbers year over year. And that will probably be a bit of a confusion going forward. And that's why we talked about the ARR. I will say..

We're definitely seeing longer sales cycles and deal scrutiny. And that's for the most part we're seeing that in Europe . We're also seeing it in North America. But the numbers themselves should not be looked on a year-over-year basis because of the items I mentioned. We have reached the end of our question and answer session. I would now like to turn the floor back over to Tim.

for closing comments. Thanks, everyone, for joining us. We appreciate your interest in Veronis.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

seven seven three 7, one for for the two K four and.

F cur for C.

The that.

six of J of.

Get.

And how P.

For.

The.

At last we pay molecules not touches in Correspondence and

I I think.

So that.

You

The.

The.

So to I.

So.

The D MAR F Qu Qu.

The well.

The.

This quote from

I.

I.

To.

The.

I.

The.

The.

The.

So.

Pol.

We which Su con se the.

M pect.

So that.