Q2 2023 Varonis Systems Inc Earnings Call
Speaker 1: Greetings and welcome to the Verona Systems Inc. 2nd Quarter 2023 Earnings Conference Call.
Speaker 1: At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star-0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Peres, Investor Relations. Thank you. You may begin.
Speaker 1: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis's second 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 Varonis. After preliminary remarks, we will open the call to a question and answer session.
Speaker 1: 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 third quarter and full year ending December 31, 2023.
Speaker 1: 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.
Speaker 1: 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 any updates or revisions to any forward-looking statements made herein.
Speaker 2: 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 second quarter 2023 earnings press release and investor presentation, which can be found at www.varonis.com.
Speaker 2: 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. With that, I'd like to turn the call over to our chief executive officer, Yaki Fidelson. Yaki?
Speaker 3: Thanks Tim and good afternoon everyone. Thank you for joining us today. Our second quarter results reflect the strong adoption of Veronix SaaS and provide further validation that our strategy to transition our model to SaaS is working. Customers are adapting SaaS at a rapid pace which benefits our ARR performance and cost flow generation.
Speaker 3: I'm proud to announce that our SAS business now represents approximately 10% of total company ARR. Our second quarter SAS mix came in at 58%, well ahead our guidance of 35%. ARR grew 17% year-over-year to $497 million. And we have generated
Speaker 3: 40 million dollars of free cash flow year to date up from 3.9 million to the same period lasted.
Speaker 3: The strong execution and the pipeline we see ahead is allowing us to raise our four-year SaaS MIPS ARR and free cash flow guidance. I will review our Q2 results and our updated guidance in more detail. We continue to see the economy impact customer...
Speaker 3: by our second quarter performance against these headwinds. I feel increasingly confident about the trajectory of our SaaS platform and the overall trajectory of our company. Today, I would like to focus my time on why our offering is a must-have.
Speaker 3: and why Voronii SaaS continues to resonate with our customers and our internal teams.
Speaker 3: The recent Pentagon breach in which Jack Tichera, a 21-year-old guardman, allegedly leaked sensitive intelligence on social media sites.
Speaker 3: is a perfect example of why organizations need Varonis.
Speaker 3: The incident highlights why insider threats are the most difficult risk to defend against and can do the most damage.
Speaker 3: It appears that the Pentagon did everything right with its perimeter control to share a word in a sensitive, isolated information facility with regards against
Speaker 3: electronic surveillance, and suppressed data leakage.
Speaker 3: That means no USB keys were going in or out, nothing could be uploaded to the internet and no transmission could take place.
Speaker 3: Still, none of its perimeter controls could stop this threat. Teixeira was able to transcribe and take photos of classified documents because he had access to information that wasn't necessary to do his job.
Speaker 3: Perimeter controls by themselves do not address the problem that
Speaker 3: This incident seems to be a failure in taking a zero trust approach to the data. In many organizations, the focus is often on safeguarding perimeters rather than protecting the target itself, the data on the inside.
Speaker 3: You can patch your systems, secure your endpoints and lock USBs and even properly train your employees using phishing simulations but if your most important data is not locked down and monitored then you open yourself up to massive risks.
Speaker 3: In our risk assessment, we find that employees have far too much access to sensitive data all the time.
Speaker 3: Providing visibility during a Verona's risk assessment, which is a crucial step in our sales motion, is helpful for companies.
Speaker 3: but just begins to scratch the surface of what needs to happen to properly secure data. Varonis helps companies locate sensitive data, visualize who has access to it, and automatically lock it down. The ability to do all three of these is what makes us unique.
Speaker 3: And this allows companies to collaborate safely and get the most value from their data, while at the same time managing risks. VoniSaaS allows us to do all of this for our customers faster, with less effort, and with a drastically reduced overall total cost of ownership.
Speaker 3: And this is why we are seeing such strong adoption for our new SaaS platform.
Speaker 3: At the same time, the operational simplicity of Oronisas also allows our internal teams to be more efficient in supporting our customers and introducing new product innovation.
Speaker 3: As a reminder, the three key benefits that our customers get from our SaaS platforms are, first, customers are much better protected with much less effort with our automated remediation and proactive incident response.
Speaker 3: Second, SAS is easier to deploy and has significantly lower infrastructure costs. Third, SAS is easier to deploy and has significantly lower infrastructure costs.
Speaker 3: SAS is easier to maintain and upgrade.
Speaker 3: Three of the key benefits that we realized are, one, shorter cell cycles, two, larger initial ends, and three, margin benefits over time. We saw further evidence that these benefits these quarter are very encouraged by the continued feedback we are receiving from customers.
Speaker 3: As an example, a large public school district with approximately 4,000 employees became a VeronaSAT customer this quarter. Earlier this year, this district was the target of a ransomware attack, which led to a compromise of hundreds of thousands of files that contained sensitive information.
Speaker 3: which forced the organization to reevaluate its approach to protecting data, which was through manual efforts from its internal teams and consultants.
Speaker 3: Due to the high-profile nature of the breach, they needed a platform that would provide immediate time to value. Within two hours of installation, this organization gained visibility into where their sensitive data was located and who had access to it because of their Microsoft and Google deployments.
Speaker 3: While visibility was important, our ability to automatically remediate over exposures and quantify the risk reduction over time was critical because of the lack of resources. We purchased Veronix SaaS package for Windows, Microsoft 365, and DA Cloud for Google.
Speaker 3: The simplicity of deployment, fast time to value, and significantly lower infrastructure requirements of our SaaS offering were essential in meeting the organization's timeline to fix its access issues before teachers would return from summer breaks.
Speaker 3: We also saw an increase of existing customer conversion this quarter. One example is a fortune 500 L-scale company with 35,000 employees that first became a customer in 2021. They originally purchased seven on-prem subscription licenses to protect them of their on-prem window deployment.
Speaker 3: As a large healthcare company, they are subject to significant regulatory scrutiny and needed to ensure that they had security and privacy policies in place. With their Veronique self-hosted deployment, they were already reducing risk by remediating global access and shrinking the blast radius for Windows on-prem.
Speaker 3: The success that this organization had with Balones and the on-premise Windows environment
Speaker 3: drove the request for the same protections on Microsoft 365. Varonisas was a clear fit for this organization.
Speaker 3: automatic remediation in Microsoft 365 and proactive incident response team drastically reduced time to value
Speaker 3: and the scalability, performance improvement, and significant infrastructure saving will meaningfully reduce the resources needed to achieve these outcomes.
Speaker 3: On renewal, they converted their on-prem Windows licenses into SaaS equivalent package and purchased in a vision SaaS package for Microsoft 365.
Speaker 3: These custom wings illustrate the momentum we are currently seeing with Verona SAS.
Speaker 3: and underpin what is giving me increased confidence in our ability to capture our significant market opportunity and deliver value to our stakeholders as we execute on our $1 billion ARR target. With that, let me turn the call over to Guy.
Speaker 3: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We are pleased with a team's execution in the second quarter against the challenging macro backdrop.
Speaker 3: As compared to 90 days ago, we are increasingly confident as we look to the back half of the year with a performance we've seen so far in transitioning to selling SaaS.
Speaker 3: Although the macro remains a headwind, when we consider our momentum to date and our visibility in the pipeline ahead, we're confident in raising our guidance for full year SAS mix, ARR, and free cash flow.
Speaker 4: It is clear that the transition is gaining momentum and is evidence that we can deliver numerous benefits to our customers while also achieving strong ARR and cash flow benefits.
Speaker 4: As I have discussed at length since we introduced Bronus SaaS last fall, ARR, free cash flow, and ARR contribution margin are the leading indicators for our business during this transition.
Speaker 4: The shift from our on-prem subscription licenses, where approximately 80% of the deal's value is recognized upfront, to a SaaS model with fully ratable revenue recognition, will cause initial headwinds on the traditional income statement metrics as the SaaS mix and conversions of existing customers to SaaS increases.
Speaker 4: And this quarter, the impact was the largest we've seen to date.
Speaker 4: especially as a considerable number of our existing customers showed a desire to convert to SAS.
Speaker 4: However, these headwinds are a function of accounting treatment and are not indicative of the health of the business.
Speaker 4: In fact, the greater these accounting-related headwinds are, the better it is for our business as it means that transition is progressing at a faster pace.
Speaker 4: As a result of the rapid pace at which our customers are adopting SAS, we are adjusting our ARR guidance higher and we are adjusting our full year revenue guidance correspondingly lower.
Speaker 4: All three of our North Stars, ARR, Free Cash Flow, and ARR contribution margins are trending in a positive direction, which highlights the encouraging progress of our SaaS transition.
Speaker 4: The momentum seen in Q2 is being driven by Vronis X which is resonating with our customers and our Salesforce.
Speaker 4: Our second quarter SaaS mix represented 58% of new business and net new upsell ARR versus our guidance of 35%.
Speaker 4: After only two quarters into the transition, SAS now represents approximately 10% of the total company's ARR.
Speaker 4: The average deal size is realized in Q2 gives us incremental confidence in the 25 to 30% pricing uplift and margin structure that we previously provided.
Speaker 4: In the quarter, we once again saw reps introduce Vronis SaaS to customers where an on-prem subscription quote had already been provided, which interrupted the sales cycles for some of these deals.
Speaker 4: As we look out into the remainder of the year, we expect some of the pressure from this dynamic to ease because more of the pipeline expected to close in the second half has started as SAS rather than as on-prem deployment.
Speaker 4: This is already factored into our guidance. In the second quarter, a significant amount of SAS deals were sold to new customers. But we did see an increase in existing customers converting to our SAS offering.
Speaker 4: This was in line with the commentary that we provided last quarter on our increased pipeline, but was well ahead of the amount that we factored into guidance.
Speaker 4: In the second quarter, we had approximately $6 million in conversions of existing customers, impacting our Q2 revenue.
Speaker 4: These conversions are being driven by both customers and our sales posts.
Speaker 4: Customers want the automated protection of our own Assas and our sales reps can earn commission dollars on the incremental dollars sold because SaaS deals are larger.
Speaker 4: To be clear, this positive momentum in converting customers is happening organically as we have not been providing incentives to encourage these conversions.
Speaker 4: We view this as a clear positive as we plan for the second phase of our transition, which is when we will focus on converting our installed base over to SAS.
Speaker 4: As compared to 90 days ago, this is becoming a bigger driver of our top-line growth.
Speaker 4: As we look to our revenue guidance for the second half of the year, we're assuming approximately $8 million of conversions in Q3 and approximately $10 million of conversions in Q4.
Speaker 4: As a reminder, these conversions benefit our North Star's metrics, which are ARR, free cash flow, and ARR contribution margin. At the same time, this causes an initial headwind to reported revenue and operating margin.
Speaker 4: However, despite the headwinds to our traditional income statement metrics, we believe this is a huge positive and should be viewed as such.
Speaker 4: In the second quarter, ARR grew 17% year-over-year to $497 million.
Speaker 4: Year to date, we generated $40 million of free cash flow, which was up from $3.9 million over the same period last year, reflecting the inherent leverage in our model as well as our commitment to balancing top line growth with improving cash flow generation.
Speaker 4: In Q2, we continued to see macro environment that was similar to Q1. We're still seeing deal scrutiny and longer sales cycles across the board, which is impacting customer purchasing patterns and is holding back our near-term results.
Speaker 4: We expect these longer deal cycles to continue, along with budgetary scrutiny and our updated guidance already takes this and more into consideration.
Speaker 4: Turning now to our second quarter results in more detail.
Speaker 4: Before I get into the numbers, let me remind you of what we've said for a while now. ARR, Free Cash Flow, and ARR Contribution Margin are the leading indicators for this transition.
Speaker 4: Q2 total revenues were $115.4 million, up 4% year over year.
Speaker 4: During the quarter, as compared to the same quarter last year, we had approximately a 15% headwind to our year-over-year revenue growth rate as a result of having increased SaaS sales in our booking mix.
Speaker 4: which are recognized radically versus the upfront recognition of our on-prem subscription product.
Speaker 4: Subscription revenues were $91.1 million and maintenance and services revenues were $24.3 million. Bizarre renewal rates were again over 90%.
Speaker 4: Moving down the income statement, I'll be discussing non-GAAP results going forward.
Speaker 4: Gross profit for the second quarter was $100.5 million, representing a gross margin of 87.1% compared to 87.2% in the second quarter of 2022.
Speaker 4: Our gross margins were essentially in line with last year, despite significant revenue headwinds as we are getting greater efficiencies than we initially expected.
Speaker 4: Operating expenses in the second quarter totaled $99.6 million.
Speaker 4: As a result, second quarter operating income was $0.9 million or an operating margin of 0.8%.
Speaker 4: This compares to an operating income of 1.7 million dollars or an operating margin of 1.5% in the same period last year.
Speaker 4: During the quarter, as compared to the same quarter last year, we had approximately a 12% headwind to our operating margin as a result of having increased SaaS sales in our booking mix, which are recognized fully writeable versus the upfront recognition of our on-prem subscription products.
Speaker 4: Second quarter ARR contribution margin was 8.2% up from 3.7% last year.
Speaker 4: The significant leverage improvement, even during the early stages of the transition, reflects our ability to drive strong incremental margins while growing ARR and transitioning to SAC.
Speaker 4: During the quarter, we had financial income of approximately $7.6 million, driven primarily by interest, income on our cash, deposits, and short-term investments.
Speaker 4: Net income for the second quarter of 2023 was $1.1 million, or one cent per diluted chair, compared to a net loss of $0.1 million, or a loss of zero cents, per basic and diluted chairs, for the second quarter of 2022.
Speaker 4: This is based on 127.3 million diluted shares outstanding and 109.7 million basic and diluted shares outstanding for Q2 2023 and Q2 2022 respectively.
Speaker 4: As of June 30, 2023, we had $753.8 million in cash, cash equivalents, marketable securities, and short-term deposits.
Speaker 4: For the six months ended June 30th, 2023, we generated $42.6 million of cash from operations compared to $10.1 million generated in the same period last year and CapEx was $2.6 million compared to $6.1 million last year.
Speaker 4: During the second quarter, we repurchased 207,278 shares at an average purchase price of $24.51 and we have $36 million remaining on our share repurchase authorization.
Speaker 4: We ended the quarter with approximately 2,150 employees, roughly flat versus last quarter. As expected, we did see some turnover in the Salesforce, but it was at lower levels than our previous transition.
Speaker 4: Overall, we're pleased with the engagement of the vast majority of our Salesforce and their ability to transition to selling SaaS continues to show encouraging progress.
Speaker 4: Turning to our guidance in more detail.
Speaker 4: Our full year guidance now assumes a SAS mix of new business and upsell ARR of 50%, up from 35% previously and we expect Q3's SAS mix to be 45%.
Speaker 4: As a reminder, Federal's largest quarter is the third quarter, and because we are not yet FedRAMP certified, we expect to sell on-prem subscription to that market, which will be a headwind to the Q3 SaaS mix.
Speaker 4: A couple of additional modeling notes on this metric as we look at the back half of the year.
Speaker 4: We are continuing to take a prudent approach in building our SAS mix outlook as the dollar value of deals we expect to close in the fourth quarter is the largest of the year which is in line with historical trends.
Speaker 4: In Q3, we're assuming $8 million of existing customer conversions that will serve as a headwind to revenue and $10 million in Q4, which is higher than Q2 but consistent with the pipeline we have.
Speaker 4: We're again raising our ARR guidance to reflect strong adoption trends of Verona staff from our customers.
Speaker 4: Coupled with our improved efficiency, this also results in greater ARR contribution margin, which reflects our ability to focus on operating leverage during the transition.
Speaker 4: We are meaningfully raising our free cash flow guidance to reflect the strong cash generation trends we saw in the first half of the year. The higher SaaS mix drives corresponding adjustments to revenue and operating income guidance because of the radical accounting treatment of SaaS versus the upfront accounting treatment of on-prem subscription.
Speaker 4: Ultimately, we view the improved 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 4: Lastly, as a reminder, our guidance continues to factor in macro-headwind that we've discussed at length in the past.
Speaker 4: Now turning to our guidance.
Speaker 4: For the third quarter of 2023, we expect
Speaker 4: Total revenues of $123.5 million to $127 million, representing growth of 0 to 3%.
Speaker 4: Non-Gap operating income of $1 million to $2 million.
Speaker 4: and non-gap net income per diluted chair in the range of two cents to three cents.
Speaker 4: This assumes 127.1 million diluted shares outstanding.
Speaker 4: For the full year 2023, we now expect ARR of $529 million to $535 million representing growth of 14% to 15%.
Speaker 4: Free cash flow of $40 million to $45 million, which includes an incremental $2 million of headwind related to the TCJA capitalization of R&D provisions, for a total of $8 million to $10 million. Flow revenues of $497 million to $503 million.
Speaker 4: Representing growth of 5% to 6%, non-GAAP operating income of $19 million to $22 million and non-GAAP net income per diluted share in the range of 21 cents to 23 cent.
Speaker 4: This assumes 126.8 million diluted shares outstanding.
Speaker 4: In summary, the acceptance of SAS is progressing at a rapid pace with only 2 quarters into the transition. Approximately 10% of our total ARR is now coming from SAS.
Speaker 4: Our second quarter SAS mix of 58% versus our guidance of 35%, as well as a significant increase in existing customer conversions, generated meaningful improvement to our three North Stars during this transition, which are ARR, free cash flow, and ARR contribution margin.
Speaker 4: That gives us the confidence to raise our guidance as we enter the second half of the year. With that, we would be happy to take questions.
Speaker 5: Operator.
Speaker 1: Thank you. Ladies and gentlemen, at this time we'll be conducting a question-and-answer session.
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Speaker 1: Our first question comes from the line of Matt Hedberg from RBC Capital Markets. Please proceed with your question.
Speaker 2: Great guys, thanks for taking my question. Congrats on the faster transition here. I'm curious for Yacir Guy, of the six million dollars of fast conversion that you saw this quarter, do you have a sense for what the incremental spending was on those conversions versus had they been sort of on premise subscriptions and
Speaker 4: Thanks. Absolutely. So first of all, when we look at the price list, the price list of SAS is 25%, 30% higher. And when we compare the actual sales, apples to apples, the same number of licenses and the same number of users are the same number of users. So we're going to look at the price list of the SAS. And then we're going to look at the price list of the SAS. And then we're going to look at the price list of the SAS.
Speaker 4: we're actually seeing that. So the pricing is working very well for us. What is important to remember is that when you see existing customers move from on-prem to SaaS, with our SaaS offering, where we're selling the actual platform, they're actually consuming more licenses.
Speaker 4: and they don't have the ability to buy licenses individually. So we're seeing customers consuming more of the product and that's working very well. When you look at the headwind, the actual headwind
Speaker 4: So revenue was approximately 15%. And on the operating margin, we saw that headwind at 12%.
Speaker 1: Our next question comes from the line of Joel Fishbein with Truist. Please proceed with your question.
Speaker 6: Thanks for taking the question and also great execution on the SAS transition. I just wanted you to talk a little bit about the changes in go-to-market and any color you can give us on the adoption of the bundle, silver, gold, platinum. That would be really helpful. Thanks.
Speaker 3: Overall there is no fundamental change, you know, we are trying to do everything in risk assessment. It has been everybody has been involved in this.
Speaker 3: Fundamentally, the change is that with our SaaS offering, with 10% of the effort, we can get all of the magnitudes more value. So the reality is that we are the first and last frontier.
Speaker 3: damage happen in breaches and cyber attacks from the data level. And if you can't protect your data, really nothing will help you. So what we see is that our customers with almost doing nothing are able to find critical data, for immediate excessive access control, which is the holy grail of data protection.
Speaker 3: and reliably alert from any abnormal behavior and get to the root cause of every problem. So it's just the overall, when customers are experiencing something that is completely different and because of the fact that it has so much such tremendous automation, it's much easier for them to get value. They want more licenses, much easier for us to expand.
Speaker 3: And this is the most, you know, very real we have ahead. And there is just so much meat on the bone in terms of the overall.
Speaker 4: content in this data protection platform and it's easier for us to expand. I just want to touch on the question about bundles. In 2022, we offered bundles on our on-prem subscription offering. And that was an attempt to try and simplify the conversation with the customer. We also know that the more licenses a customer consumes, the more licenses they receive.
Speaker 4: the higher the customer satisfaction and that was very clear in 2022. So we doubled down on that and when we offered the SaaS platform, we no longer have bundles, we're selling it as one SKU. So you can have seven, eight licenses that appear as one SKU, we don't have the option.
Speaker 4: to buy that individually. That's actually working very well in conversations. They're simplifying the discussion with customers, providing more value because we're selling outcomes, we're selling the actual platform itself. And that's been working very well with the SaaS transition.
Speaker 1: Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.
Speaker 2: Great, thank you for taking the question. So I wanted to ask maybe a high level question. I guess I'm kind of surprised you aren't talking about AI yet because I would think as organizations start training their LMs with their corporate data, it would seem like the need for data protection increases and the need for visibility into where that data resides.
Speaker 2: also increases. So I guess are you seeing any customers come to Varonis as part of their AI initiatives and looking at your SaaS platform?
Speaker 3: You're 100% right. So it's a, what you said, it's very, very accurate. There are really two dimension. One is that when you look at these large language models, primarily what they are doing, the mining massive amount of data, and now that customers have their own, you know, these OpenAI instances and we start to see adaptions of these.
Speaker 3: can be one completely outside of the regular policies or using your current access control permissions which are broken and you don't know that they exist and who touched it. So this is super critical and we definitely in the last few weeks starting to see a lot of interest and I think that once people will understand how they can, how end users will use it in the organization.
Speaker 3: this can be a massive, massive driver for us. The other thing is, it's very easy for laymen with this new AI technologies to build the malware and APTs and for sophisticated actors to up their game and inflict tremendous damage on organizations.
Speaker 3: So what will happen is that it's becoming much easier to bypass perimeter security and do a lot a lot of damage on the data layer and this is the main objective of C source. So this is definitely a driver and there is a server driver, you know, where is the ability of our platform to integrate these kind of solutions to provide value.
Speaker 3: it's also something that we believe that potentially can be a game changer. So yes, AI is a massive driver primarily because of the nature of the line show of the data we are protecting and the exposure that it's bringing.
Speaker 1: Our next question comes from the line of shal-yal with Cowan. Please proceed with your question.
Speaker 7: Thank you. Good afternoon guys. Congrats on the ongoing successful transition. So this transition, Yaki Urga, is accelerating better than expected. How should we be thinking about your 2027 ARR metrics and guidance that you shared with us back in March?
Speaker 7: wouldn't that target will be achieved sooner? Maybe I'm front-running myself here.
Speaker 4: So there's two aspects to this. There's the ARR and there's kind of the transition itself. We've made a lot of progress in the past two quarters, which really likely requires us to revisit our guidance for the timeline at year end. You know, just to remind you, we...
Speaker 4: We assumed completing the transition for us would mean SAS reaching anywhere between 70% to 90% of our total ARR.
Speaker 4: The transition has moved fast. We're very happy to have 10% of our total ARR coming from SAS, and that's only in really just two quarters. It's moving fast because the reception from our customers and our sales force has been really positive. So we look forward to providing more color at year end on that timeline.
Speaker 4: And in terms of the ARR, we're seeing significant benefits with the move to SaaS. You can see that with the ARR this quarter. We're also seeing benefits on the free cash flow and also leverage in the model.
Speaker 1: Our next question comes from the line of Rob Owens with Viper Sandler. Please proceed with your question.
Speaker 8: Thanks for taking my question. I'm curious if you could comment on top of the funnel activity.
Speaker 8: given your SaaS approach is more frictionless and just what you're seeing in terms of customer interest and how that might compare with, say, where you were a year ago. Thanks.
Speaker 3: We definitely see the customers understand that they need to protect data. We also see that customers understand that they invested massively in security solutions that are not protecting the data and are very hard to manage. So you know, it's just that.
Speaker 3: On one hand it's a hard economy, but on the other hand we definitely see that the organization are thinking what will be the biggest bend for their back and what they need to do. And I would just gradually because they're realizing the benefits of the overall platform and what they can do and think that they can retire.
Speaker 3: and mainly the automated outcomes. Like when they see the outcome, you install it, it's classifying automatically, remediate automatically, you can roll back, you have any indicator of abnormal behavior, we can do it with a proactive I-R from the cloud, it's a game changer.
Speaker 3: So we definitely see a lot of interest across the board. You also have scrutiny in deals, and we're just in the beginning of the transition, but there are a lot of positive signs and definitely this transition is so far going significantly faster than we anticipated.
Speaker 1: Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question.
Speaker 1: Great, thanks for the question and congrats on another nice quarter of execution. Just wondering on the possibility of pent-up demand, you now have $50 million in SaaS ARR which is up pretty significantly over the last two quarters. Can you just talk about how you're thinking about the pipeline for the rest of the year? And as you think about 3Q in particular, the 45% mix...
Speaker 8: Any considerations there around SaaS other than just the federal fiscal year end? Thanks. No, the overall SaaS is going very well. One is the team really built a…
Speaker 3: very very good SAS product and you know and all the regular benefits of SAS total cost of ownership is your operations and upgrades
Speaker 3: But the beauty is that we really rebuild the company in the sense of these automated outcomes, which is night and day from the self-hosted solutions.
Speaker 3: So, and if you think about it, think what happened now, we move it or share everything that happens happens on the data layer. You can't unbridge data when data is in the wrong hands. It's a huge problem. The other thing we saw, you know, we are not trying to still to convert the base, but once they see it mainly because of this benefit.
Speaker 4: transition and and just to add to that when when we look when we look at kind of the the SAS mix we're raising it to 50% from 35% just remember we started the year with with a 15% expectation and if you kind of break down q3 the answer is really simple you kind of asked about it it's it's we're not yet FedRAN certified
Speaker 4: And then kind of the other factor to keep in mind is that Q4 is our largest quarter. And it's on a much larger denominator. But overall, we're really happy with the momentum that we're seeing with our SAS business. And we take our commitments to the street very seriously. So we wanted to put numbers out there that we feel good about.
Speaker 1: Our next question comes from the line of Jason Hatter with William Blair. Please proceed with your question.
Speaker 6: Yeah, thank you. Guy, I wanted to ask you about Gross margins.
Speaker 6: You mentioned greater efficiencies and expect that you can just elaborate on that.
Speaker 4: When you look at the fact that we are only very early in the transition, we are seeing a lot of benefits and we think we can see more benefits going forward. The benefits could be handling the customer when we do the risk assessment.
Speaker 4: but also it allows us to be more efficient with dealing with any questions that the customer has. So overall when you look at kind of the margins we're very happy to kind of have the margins we have as we just started and we feel very good about our ability to generate leverage in the model going forward.
Speaker 2: Yaki, maybe for you, I was wondering if you could just go one level deeper into just some of the details on the bundles. What differentiates silver from gold from platinum? And what is sort of the rough differences in pricing across those three bundles? Again, high level.
Speaker 4: Hi, Sackett. A similar question was asked before, so I'll just try and kind of emphasize. In 2022, we actually had an offering which was Gold Silver and Platinum, but that was for the on-prem subscription offering. And because we saw that that was working very well.
Speaker 4: When we announce the SaaS transition, we're not offering those bundles anymore. We're just selling the platform. So you see a situation where a customer in the on-prem subscription would buy seven licenses. This today appears as one skew under the SaaS offering. So it allows us to sell more of the platform.
Speaker 4: And we've talked a lot over the last couple of years about the fact that at Veronis more is more. The more licenses a customer has, the higher the customer satisfaction, the more automated results they receive. And because of that, we're seeing in that SaaS transition, how customers are embracing it. It simplifies the conversation for the rep and the customers.
Speaker 1: And that's something that is working very well for us. Our next question comes in line of Brian Essex with JP Morgan. Please proceed with your questions.
Speaker 2: Hi, good afternoon and thank you for taking the question. Um, um, um, Yaskyo, I was wondering if I could follow up to Rob's question actually if we think about
the sales cycle on the pipeline process. Could you be comment on where you're seeing better performance versus where you might be seeing friction? What I mean is if you kind of carve it in the bucket, you know, I'm thinking about this in terms of starting off with lead generation from channel and marketing, going to assessment, going to tech win, and then approval, then the closing and deployment.
Where are things maybe better than they were last quarter? And where might you have the friction save, for example, with what you highlighted in the sales force, where it deal might get delayed slightly because of the trend, shifting from a media.
term license to a staff deal. I think we need to distinguish between doing a transition, it's to be very committed to do a transition very effectively to the overall self-process. In the overall self-process.
You know, everything is easier with us. And primarily, it's much easier for the customers to get value, they said it's 10% of the effort, 10 times more value. Like this no star is working very well. And our mantra is, you know, you just need to pay a real protecting your data. This is starting to work very well.
So if you really want to break down the old self-motion and the self-process, it just works very well. The challenge, if you will, is to say, in a hard economy, everything is scrutinized and there is just a...
the friction of this nature. We need to make sure that people understand, you know what we do every time, to doing something that is such a profound change, you need to make sure that all the customer see it and there is a big difference between.
during the sales pitch, seeing the demo and tested. So we need to make sure that the marketplace understand what we do, but overall, up to up to up to the sales motion, everything is much, much easier with us, the customer reaches night in the end of the way to the realized value. And when the at value, I'm going value. And one thing we talked a lot about is kind of the first six months of the transition.
And when you look at where we are today, that we're past that part, which really was the riskiest part, the Verona SaaS is working the adoption of our customers and the excitement of our Salesforce. Our radiant levels we've never seen before, even more compared to the previous transition.
And I just want to add in terms of the macro, Q2 was very similar to Q1 in terms of the macro, but our guidance assumes continued worsening of economic conditions across the board. And just to point that out.
Our next question comes from the line of Rudy Kessinger with DA Davidson. Please be with your questions.
Hey, great. Thanks for taking my question and congrats again on the phenomenal execution here on the SAS transition. Guy, you know, certainly a number of callouts on this call on existing customer migrations gave some figures about migrations or converges to expect in the second half. A number of your customers, because the customers that I've spoken with have messages and interest in converting to your SAS project at some point in your term.
and vision incentivizing the sales force at some point, maybe sooner than you previously expected, to convert existing customers that were no longer to SaaS.
Great question. Phase two, which we defined is converting our installed based assassin, really hasn't started yet. And when you look at kind of the H2 assumptions, we took into consideration 8 million and 10 million of conversions in Q3 and Q4 respectively, which is really higher than the Q2 number.
but still a very small percentage of our existing customer base. So although we're seeing existing customers convert the SaaS, it really hasn't been our main priority yet. We expect that to be more of a focus next year, and then we'll take everything into consideration and decide what's the best thing, but as of now, it's happening in a natural way.
Our next question comes from the line of Joshua Tilted in with Wolf Research. Please proceed with your question.
Hey guys, thanks for taking my question and congrats on a solid quarter. Lots of good questions have been asked so far. I'm going to ask kind of an easy one. 10% of ARR coming from SAS, seems awesome. Could you maybe just help us understand directionally from last quarter?
Like how that's progressing, was that a double? A lot of percentage basis from last quarter. Just, you know, kind of help us understand maybe the rate of change you're seeing in the business from a quarter ago outside of just, that's the percentage of the new business mix. A-??.
So we really provided a lot of the data points when you look at kind of the actual conversions. The conversions in Q2 were significantly higher than the conversions that we had in Q1. If you remember, we actually called out in our prepared remarks last quarter the fact that we're seeing an increased pipeline.
But we didn't assume those would convert. We've actually, in Q2, we saw that happen. And the other thing that has increased is actually the percentage of the SAS mix, which went from 37% to 58%. And that's obviously from a much larger denominator. So overall, the progression of the...
quotes that are provided to customers and they're provided initially as on-prem subscription. Every time you introduce a new concept during a sales conversation with a customer, you're adding turbulence. And that's why we talked a lot about kind of the six months. Obviously there's some.
of that that would be in the second part of the year, but that the majority happened in the first six months and we did see SaaS progressing and improving both on the new customer side and the existing customer side significantly improving from Q1 to Q2.
We are still there early in the journey for SASS, but so far the overall adaption, given the reaction from current customers and the ability of the Salesforce to adapt to the transition.
Some experience with transition is well ahead of our initial expectations.
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 just on the ARR side, I know you guys didn't anticipate much in terms of conversions when you started the year, but they seem to be accelerating in a big way. Just, you know, if you kind of look at net new ARR,
in the quarter, you know, with six million of conversion, you know, obviously...
in the conversion assumption you have for the second half.
You know, I'm just curious to kind of get your insight into what the non-conversion SaaS business and how that performed in the quarter and the expectation for the second half of the year, because if you back out the six month conversions.
You know, net new ARR was kind of flatish sequentially. And if you kind of do the same exercise in the second half, you know, there's not a lot of net new ARR growth. Thanks. No problem. I think it's a great question. And I think you need to kind of split between what we feel about the business and the way we've guided.
We feel very good about about the business going into the second half. I think that when you look at kind of the way we treat our commitments to the street, we take them very seriously, so we wanted to put numbers out there that we feel good about.
You know when you look at the progression of the business which phase one is what we're focusing on right now We're trying to sell SAS to our new customers, which is which is working very well With a SAS mix that we're in but the on-prem subscription is is working just as good you know when when you look at kind of the
We feel very good going into the second part of the year.
Our next question comes from the line of Joseph Gallo with Jeffries. Please receive any questions.
Hi, this is Anik Bamanon for Jirgaolo. Thank you for taking my question. Maybe just taking it high level again, when you kicked off the SAS transition, you spoke of learning from your subscription transition and using that knowledge here, what have been some of the biggest surprises to the upside this time around?...
I think that there are many. One is that, you know, when you're doing this thing and you're committing the many times a lot of friction, you know, with the Salesforce code, but are out there people that want to convert and a lot of delays. We saw that, but less than we expected. I think the difference is that it's completely different business, the value that customers are getting and how fast they are getting the value. It's even more a little strange, but all right.
that we can bring them to value and how relatively little support we need to provide to the system relatively to the on-prem, how the benefits of the metadata, we having the cloud is just working for us and we can really transform it to clear customer value and the speed that engineering is working on.
still early but we had a expectation.
Our last question comes from the line of Matt Salsman with Morgan Stanley . Please receive with your question. Thanks for taking the question and very much appreciate the level of disclosure you guys given on the transition. Makes it a lot easier on our side. You've spoken a lot about the operating levers that you should drive through the transition. I'm just curious with everything progressing faster and expected when should we expect to see something that operating leverage comes through via the PNL. I mean I'd imagine that this should probably proceed the ARR and revenue convergence just especially with more existing customers converting and the inherent leverage.