Q3 2023 Varonis Systems Inc Earnings Call

[music].

Greetings and welcome to Verona Systems, Inc. Third quarter 2023 earnings Conference call.

At this time all participants are in 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 zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce Tim purse Investor Relations. Thank you you may begin.

Thank you operator good afternoon. Thank you for joining us today to review a variety of this third quarter of 2023 financial results with me on the call. Today are you occupy it'll send the chief Executive Officer and Guy.

Amit Chief Financial Officer, and Chief operating Officer Umbrian Us 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 future operating results for our fourth 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.

We encourage all investors to read our SEC filings.

These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.

<unk> expressly disclaims any obligation or undertaking Charlie publicly any updates or revisions to any forward looking statements made herein.

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 third quarter 2023 earnings press release.

After a presentation, which can be found at www dot <unk> dot.

Dot com 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 copy titled Yockey.

Thanks, Steve and good afternoon, everyone. Thank you for joining us today.

Let me start by saying Oh, So it's always our employees customers partners and all of those.

With the recent events in Utah.

We continue to do whatever it takes to support our employees to date I would like to review, our Q3 results and discuss how AI can fill isn't meaningful tailwind to our business and be used to come but first I would like to remind you why is the 160 <unk>.

The programs we saw them.

Data is the prime target for bit okta because of its importance towards business data is also out of control explosion of the cloud and remote work and improved collaboration but also made securing data more difficult the only company.

Locate sensitive data visualizing, who has access to eat they automatically locking down.

This allows companies collaborate safety and get value from their data.

In Greece.

We only make these even greater.

Our first quarter results reflect the continued healthy adoption.

We saw further evidence that our transition to a SaaS business model is working and says Oh Wow now represent approximately 16% of total company.

Third quarter SaaS mix came in at 59% comfortably heretofore guidance, 45%.

Hey, all grew 16% year over year.

$517 5 million.

<unk> generated $46 million free cash flow year to date up from 800000 for the same period last year Guy who will review our Q3 results.

This guidance in more detail.

From a macro standpoint, we continued to see high level of scrutiny and longer satisfy can this quarter, but remain encouraged by the progress.

Fast position against these headwinds now I would like to spend some time on.

How it presents a meaningful opportunity for voice.

My conversations with customers in postpaid <unk>.

Comes up more and more and my key takeaways for the.

<unk> has been the growth of AI is the potential.

Tension to generate significantly more data significantly more leased can significantly increase the need for data security.

Stepping back Genuity, VII present, both opportunity and risk for companies.

There is an opportunity to boost productivity and efficiency, but in order to save many lives.

Benefits.

Our security risk that businesses must mitigate.

Does this present opportunities for companies like voice.

The first place is related to <unk>.

Paul.

Inflicted loose.

Which happen when businesses start using AI to suggest content to employees.

Data is locked down.

To prevent the iPhone analyzing the company entire data estate, Amazon really critical business assets that customer at least they will file or bank accounting formation to the wrong people.

Microsoft My comments mitigating this risk by securing sensitive data we saw the gone copilot.

Which is the company.

Kristen and.

And specifically the komen hitting the right information access controls and policies in place.

Precisely what belongs to us.

Without warning.

<unk> access control is very challenging managing access control all it gets harder all the time with the data supported.

Surely continue.

A follow up to this problem.

Without the right controls in place.

No.

See what and.

Surface and invoicing for April.

This becomes the new address organizations in mid October one.

To search for content they want to see.

Finally, as a commodity.

AI will also increase.

Company.

From external tuck ins. If you examples of this include helping bad actors create and conduit phishing E mail. So they can use them in many languages.

Getting fake datasets in order to treat companies into paying down some Spain, creating models.

Fortunately.

We will continue to lower the barriers to entry for hockey.

When he steps organizations mitigate these suites.

By ensuring that only the right.

People have access to information that we need to do their job.

<unk> can help organization ensure that increased only see content suggestions that are relevant to the job function.

So bad actor bypass Telemeter controller, the only can look out the compromised user machine preventing damage from happened.

Although it is early.

We are still quantifying timing and sizing, we see AI, becoming a growth tailwind to our business.

<unk> momentum and there is a detailed plan to execute them.

Our peloton demand opportunity correct, we see hiring from security risk related to the <unk>.

We are also leveraging this technology.

To improve our customer experience.

Vaughn who's been using machine learning and AI for many years in our analysis engine and threat models. For example, and today, we are announcing two exciting generated AI capabilities fast data security platform.

Hey, guys system Security Operation Center, what we consult and natural language search.

Although we do not plan to Sidney I have a separate SKU.

Assistance stock will provide security annually.

MTI assistance specialized and performing investigation mediating friends.

And for actively housing environment.

<unk> can analyze that data and provide context and next steps to help.

It's more efficiently result security incident is.

Natural language search AI and people wanting to use that values.

From the head.

So can use natural language to get fast and oxalate until two questions such as do.

Do we have any files containing possible exposed to everyone on the internet.

What youre accessing all fail.

It was fine.

Good day.

Really introduced January <unk>.

Part of the <unk> benefits that we have discussed with you.

Plus team and will further reduce the time to value for our customers and improve the experience was born.

I'd like to spend a moment to remind you of the three key benefits of SaaS platform provides our customers.

First customers are much better protected is much less and therefore, the automated remediation and blocked incident response second SaaS is quicker to deploy kind of significantly lower infrastructure costs and fed.

It's easier to maintain and upgrade.

The key benefits that we realized.

One short of satisfied your two larger with Michelin and three margin benefits over time.

This quarter, we continue to see additional proof points of these benefits is that state government organization became SaaS customer this quarter, we first gain.

Department of the state as a customer in 2022.

The past year, we had a very successful deployment is that department that allowed us to build credibility and organically wouldn't be border state government mandate.

So this organization sauce was in March 10th.

Because the security team.

Now they will benefit from quicker time to value.

I'll still be growing and most importantly, they will.

Be better protected.

Incident response team and automated remediation windows on Prem in Microsoft 360.

We've also continued to see healthy interest from existing self hosted customers who converted to SaaS. This quarter. One example was a multinational financial institution, let's first became a customer in 2020, given the large volume sensitive customer data.

It is to make sure that information was knocked down.

Originally purchased for on Prem subscription licenses to protect them on when the windows environment.

This organization's success protecting all time window and dwell the desire to consume all of the platform, but going both wider and deeper <unk> SaaS.

Now haven't been showing the blast radius in this.

The cloud just as the big players.

Our occupancy percentage points.

Supplementing the assay detection capabilities.

<unk> eliminates the need for these customers to manage their own houses, which would improve the scalability.

We converted the one thing we lose licenses into SaaS equivalent package in the purchased an additional stats package for Microsoft 365, why they're going to have coverage.

The sustained momentum that we saw.

Foremost fast transition this quarter, coupled with a faster pace of innovation.

Closer to achieving our $1 billion.

Target and delivering meaningful paint going to providing ease that let me turn the call over to Guy Guy.

Thanks, Jackie and good afternoon, everyone. Thank you for joining us today.

It goes without saying that the health and safety of our employees.

Paramount importance to us and we will continue to do whatever it takes to support that.

Before I discuss results I want to briefly comment on the impact of the war in Israel.

Our operation.

From a top line perspective, Israel has historically represented less than 1% of our business.

We have approximately a third of our employees located in Israel, which includes our principal research and development facility.

Well as a portion of our support and general and administrative team.

At this time.

Low single digit percentage of our global team members has been called up to active duty.

We have executed business contingency plans to minimize the impact on our business and at this time, we don't expect a material impact on our global operations.

With that I'd like to turn to the Q3 results.

We are pleased with the continued strong adoption of their own this that again continued macro headwinds.

Our SaaS transition continues to gain momentum and this quarter provided additional proof of the numerous benefits to our customers as well as the tailwind to our <unk> and cash flow performance.

As a reminder.

Our free cash flow and 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.

<unk> model with fully ratable revenue recognition will cause initial headwind on the traditional income statement metrics.

The SaaS mix and conversions of existing customers.

Thanks.

And this quarter's impact was meaningful as the number of existing customers converting to again increase.

However, these headwinds are a function of accounting treatment are not indicative of the health of our business.

In fact, the greater of these accounting related headwinds are the better it is for our business as it means the transition is progressing at a faster pace.

Our third quarter SaaS snake represented 59% of new business and net new upsell a R versus our guidance of 45% and after only three quarters into the transition SaaS now represent approximately 15% of the company's total <unk>.

The average deal size it realized in Q3 continued to provide us with confidence in the 25% to 30% pricing uplift in margin structure that we previously provided.

In the third quarter, a significant amount of SaaS deal were sold to new customers, but we are.

Again saw an increase in existing customers converting to our SaaS offering.

In the third quarter, we had approximately $10 million in conversion.

Zinc customer impacting our Q3 revenue.

To be clear. This is the renewal of milk that was previously booked as an on prem subscription that is now sac, which causes a headwind to our reported revenue and operating margin, but does not impact <unk>.

Our all free cash flow.

The $10 million from this quarter does not include the uplift that we realized from these conversion, which is accretive to <unk> free.

Free cash flow.

As we look to our revenue guidance for the fourth quarter, we're now assuming that approximately $12 million of existing customers renewals will convert this stuff in Q4.

Which is up from $10 million previously.

In the third quarter, <unk> grew 16% year over year to $517 5 million yes.

Unknown Executive: Greetings, and welcome to Varonis Systems Inc.

Unknown Executive: 3rd quarter, 2023 Earnings Conference call. At this time, all participants are on a listen-only mode.

Year to date, we generated $46 million of free cash flow, which was up from zero point $8 million over the same period last year.

Unknown Executive: A 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.

<unk> the inherent leverage in our model as well as our commitment to balancing topline growth with improving cash flow generation.

Tim Perz: It is now my pleasure to introduce Tim Perz, Investor Relations. Thank you. You may begin. Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' 3rd quarter, 2023 financial results.

In Q3, we continued to see a macro environment that was similar to the first half of the year.

We're still seeing deal scrutiny and longer sales cycles across the board, which is impacting customer purchasing pattern and as constraining our near term results.

Tim Perz: With me on the call today are Yaki Pytles and the Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. 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 future operating results for our 4th quarter and full year ending December 31, 2023.

We expect these longer deal cycles to continue along with the associated budgetary scrutiny and our updated guidance takes this into consideration.

Turning now to our third quarter results in more detail before.

Before I get into the numbers, let me remind you of what we've said for a while now.

Our free cash flow and a contribution margin are the leading indicators for this transition.

Tim Perz: Due to a number of factors, actual results may differ materially from those that work in such statements. These factors are set forth in the earnings press release that we issued today under the section caption forward-looking statements, and these and other important risk factors are described more fully in our reports filed at the Ficaria's Exchange Commission. We encourage all investors to read our FTP filings. These statements reflect our views only out of today and should not be relied upon as representing our views as of any subsequent date.

We take our commitments seriously and our revenue guidance is based on a combination of our expected SaaS snake and existing customer conversion.

We said previously the faster we progress throughout the transition, but more headwind, we will experience our traditional income statement metrics.

We view these headwinds in a positive light.

They show our customers are adopting our solution more rapid.

Q3, total revenues were $122 3 million down.

Tim Perz: Varonis expressly describes any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAF financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAF financial measures is also available in our 3rd quarter, 2023 earnings press release, and investor presentation, which can be found at www.varonis.com 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.

Down 1% year over year.

During the quarter as compared to the same quarter last year, we had approximately a 12% headwind to our year over year revenue growth rate as a result of having increased <unk> sales and our bookings.

Which are recognized ratably versus the upfront recognition of our on Prem subscription product.

Ascription revenues were $97 7 million in maintenance and services revenues were $24 6 million as our renewal rates were again over 90%.

Moving down the income statement I'll be discussing non-GAAP results going forward.

Yakov Faitelson: With that, I'd like to turn the call over to our Chief Executive Officer, Jackie Pidelsen, Jackie. Thanks, James, and good afternoon everyone. Thank you for joining us today.

<unk> profit for the third quarter was $106 7 million.

Representing a gross margin of 87, 3% compared to 88, 3% in the third quarter of 2022.

Yakov Faitelson: Let me start by saying our thoughts are with our employees, customers, partners, and all of those impacted by the recent events in the event. We continue to do whatever it takes to support our employees.

Spike significant revenue headwinds, which were largely offset by greater efficiency on our SaaS platform than we initially expected.

Yakov Faitelson: Today, I would like to review our Chief Executive Officer and discuss how AI can serve as a meaningful tailwind to our business in the years to come. But first, I would like to remind you why Varonis exists and the problems we saw. Data is the prime target for web actors because of its importance to its business. Data is also out of control. The question of the cloud and remote work has improved collaboration but is also made securing data more difficult.

Operating expenses in the third quarter totaled 101 $9 million.

As a result third quarter operating income was $4 9 million or an operating margin of 4%. This.

This compares to operating income of $9 8 million.

Operating margin of seven 9% in the same period last year.

During the quarter as compared to the same quarter last year, we had approximately an 11% headwind to our operating margin as a result of having increased SaaS sales in our bookings, which are recognized fully ratable versus the upfront recognition of our on Prem subscription product.

Yakov Faitelson: The only sales companies located sensitive data visualized who is access to it and automatically lock it down. This allows companies to collaborate safely and get value from their data while managing risk and AI will only make this an even greater priority. Our third quarter results reflect the continued healthy adoption of the wrong tasks. We saw further evidence that our transition to a task business model is working in SAS ARR now represent approximately 15% of total company ARR.

Third quarter <unk> contribution margin was 11, 1% up from three 6% last year.

The significant leverage improvement even during the early stages of the transition reflects our ability to drive strong incremental margin, while growing <unk> and transitioning to that.

During the quarter, we had financial income of approximately $8 million driven primarily by interest income on our cash deposits and investments in marketable securities.

Yakov Faitelson: The third quarter of SAS mix came in at 59%, comfortably headed for guidance of 45%. ARR was 15% the overall to $517.5 million and we have generated $46 million for the test show here today up from 800,000 to the same period last year.

Net income for the third quarter of 2023 was $10 4 million or eight cents per diluted share compared to a net income of $6 $7 million or net income of five cents per diluted share for the third quarter of 2022.

This is based on $126 7 million diluted shares outstanding and $126 9 million diluted shares outstanding for Q3 2023 in Q3 2022, respectively.

Yakov Faitelson: The guide will review our Tuesday results and updated guidance in more detail. From a milestone point we continue to see higher level of this scrutiny and longer self-psychitis quarter but remain encouraged by the progress of for SAS transition against these headlines.

As of September 32023, we had $731 $5 million in cash cash equivalents short term deposits and marketable securities.

Yakov Faitelson: Now I would like to spend some time on how AI present a meaningful opportunity for voice. In my conversation with customer reports the AI comes up more and more and my key takeaway for voice is that the growth of the AI is the potential to generate significantly more data significantly more risk and significantly increase the need for data security.

For the nine months ended September 32023, we generated $49 million of cash.

Cash from operations compared to $8 4 million generated in the same period last year.

Capex was $2 9 million compared to seven 6 million last year.

During the third quarter, we repurchased one 2 million shares at an average purchase price of $30 10, which completed our intended.

Yakov Faitelson: Stepping back, generative AI present both opportunity and risk for companies. It has an opportunity to boost productivity and efficiency but in order to simply realize these benefits, there are security risks that businesses must mitigate first. These risk present opportunities for companies like voice. The first risk is related to what I call self-inflicted risk which happens when businesses start using AI to suggest content to employees. And as data is locked down, there is little to prevent AI from analyzing the company entire data state and the really critical business assets like customer lists, payroll files, or bank account information to the wrong people.

Yeah.

Over the course of the program, we repurchased approximately $4 4 million shares at an average purchase price of $22 64 for a total consideration of approximately $100 million.

Turning to our guidance in more detail.

We're raising our full year SaaS mix of new business and upsell AOR guidance to 55% up from 50% previously and we expect Q4 is that it makes to be 60%.

We continue to take a prudent approach in building our SaaS 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.

Yakov Faitelson: Microsoft recommend mitigating this risk by securing sensitive data before the point called pilot, which is the company's AI assistant. And specifically recommend having the right information access controls and policies in place, which is precisely what the one is doing. Without the one is right-sizing access control is very challenging. Managing access control only gets harder over time with the data support and AI will surely contribute further to this problem. Without the right control in place AI doesn't know.

In Q4, we're assuming that $12 million of renewal.

Will convert to <unk>.

That which will serve as a headwind to revenue.

Conversions to SaaS before considering any uplift to deal sizes do not impact <unk>.

Our guidance continues to factor in the same level of macro headwinds that we have.

Discussed at length in the past.

Now turning to our guidance.

For the fourth quarter of 2023, we expect.

Total revenues of $115 million to $154 million, representing growth of 5% to 8%.

Yakov Faitelson: Who should see what and surface everything for everyone? This becomes a huge risk for organizations and bed-actors won't even need to search for content they want to steal. AI will help them to finally automatically. AI will also increase the risk that companies face for external articles. If your examples of this include helping bed-actors create and calculate fishing emails, so they can use them in many languages, creating fake data sets in order to treat companies into paying ransom and creating miles.

non-GAAP operating income of $25 million to 27 million and non-GAAP net income per diluted share in the range of 22 to.

<unk> 24 cents.

This assumes $126 1 million diluted shares outstanding.

For the full year 2023, we now expect.

<unk> of $535 million $539 million, representing growth of 15% to 16%.

Cash flow of 40 million to $45 million, which includes 8 million to $10 million of.

Yakov Faitelson: Unfortunately, the use of AI will continue to lower the barriers to entry for hacking. The only steps organizations mitigate this risk when showing that only there are people of access to information that they need to do their job. Varonis can help organizations ensure that they can only see content suggestions that are relevant to their job function. If a bed-actors bypassed perimeter control, Varonis can lock out the company's user's own machine, preventing damage from happening.

The headwind related to the E C J a capitalization of R&D provision.

Total revenues of 495 million to $499 million representing.

Representing growth of 5%.

non-GAAP operating income of $26 5 million to $28 $5 million non.

non-GAAP net income per diluted share in the range of 31 to 33.

This assumes $126 6 million diluted shares outstanding.

Yakov Faitelson: Although it is early, when we are still quantifying timing and siding, we see AI becoming a gross tail into our business as it gains momentum and has a detailed plan to execute. A platform-dimensional opportunity that we see rising from security risk related to AI, we are also resulting in this technology in new ways to improve our customer experience. Varonis has been using machine learning and AI for many years in our analysis engine and search models, for example.

In summary, we continued to see solid demand for both new and existing customers, who wish to consume grown it through our SaaS platform. As a result, our transition continues to move quickly and approximately 15% of our total IRR is now coming from Sac.

This is benefiting our <unk> performance and cash flow generation, which positions us for a strong fourth quarter.

With that we would be happy to take questions.

Yakov Faitelson: And today we are announcing two exciting generative AI capabilities in our SAS data security platforms. AI Assistant Security Operations Center for what we call SOC and Natural Language Search. Although, we do not plan to sell AI in a separate skew, our AI Assistant SOC will provide security analysts with an intelligent AI Assistant specialized in performing investigation. The mediating threats and proactively harvaining environments. Our SAS platform can analyze a list and provide context and next steps to help analysts more efficiently resolve security incidents.

Operator.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

If you'd like to ask your question you May press Star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith <unk>.

In the interest of time, please limit yourself to one question only.

Our first question comes from the line of <unk> <unk> with Barclays. Please proceed with your question.

Okay, Great Hey, guys. Thanks for taking my question here and just wanted to send our thoughts to the <unk> team and their families in Israel.

Yakov Faitelson: With Natural Language Search, AI makes everyver one user a power user. Anyone from the head of the SOC can use Natural Language to get fast and accurate answers to questions such as, do we have any files containing passwords that are exposed to everyone on the internet? Or what user has been accessing our payload files? Today's new introduced generative AI features build upon the Varonis SAS benefits that we have discussed with you over the past year and will further reduce the time to value for our customers and improve the experience with Vonis.

Thank you. Thank you.

Absolutely.

If I stick to one question, maybe I'll make it for you here.

Yockey.

Just seems like great traction on SaaS for those customers that are moving to your SaaS tools. What are you seeing on the on usage of the of the different modules are you seeing any change in usage now that the tools are arguably easier to deploy and use.

We see dramatic change, we see what we call the robotic value proposition.

And the.

North Star was always what we call it 10% of <unk>.

Yakov Faitelson: I would like to spend a moment to remind you of the tricky benefits of SAS platform provider customers. First, customers are much better protected, is much less effort, is a automated remediation and proactive. Incident Response, Second, Sass is quick to deploy from a significantly lower infrastructure course, and third, Sass is easier to maintain and upgrade. Three of the key benefits that we realize are, one, shorter self-circle, two, larger initial length, and three, margin benefits over time. This quarter we continue to see additional post points of these benefits.

Order of magnitude more value than just smokes. According to plan, we can measure everything from installation to update to integration our ability to do it.

Okay.

We also build the ability of our people.

Professional services to support the customer is much more.

We can provide a lot of the value of the platform with the customer almost nothing.

Very very little in helping the in terms of configuration. So just completely different value proposition literally unleashing globally. So it's important.

Yakov Faitelson: A lot of state government organization became the only Sass customer this quarter. We first gained a department of this state as a customer in 2022. Or the past year, we had a very successful deployment with the department that allowed us to build credibility, and ultimately wouldn't the broader state government mandate. For this organization, Sass was a master because the security team is very thin. Now, they will benefit from quicker time to value, faster deployment, and most importantly, they will be better protected without proactive incident response team, and automated remediation for Windows 1 premium and Microsoft 365.

Got it very helpful I'll get back in queue. Thank you.

Our next question comes from the line of Hamzah photo Walla with Morgan Stanley. Please proceed with your question.

Hey, good evening. Thank you for taking my question.

Jackie I wanted to dig in a little bit more about your commentary around.

<unk> I think a lot of the CIO and she says that we're talking to more recently are talking about.

Security and governance is is a big hurdle to deploying these things models and I'm curious to what extent are you starting to have conversations with customers on how they can.

Ladies generative AI models.

That can prevent things like data leakage or equation from occurring.

I think this is going to be.

Yakov Faitelson: We also continue to see healthy interest from existing self-hosted customers who converted to Sass is quarter. One example was a multinational financial institution that first became a customer in 2020. Even the large volume of sensitive customer data, committed to make sure that information was locked down. They originally purchased four on-prem subscription items to protect the on-prem Windows environment. This organization's success, protecting on-prem Windows door-to-door design to consume more of the platform by going both wider and deeper.

A complete game changer, but reality is that we still haven't seen it completely but.

Just the niche.

Please stop by co pilots for business. Thank you essentially what he does.

Mining all the data that people can access and this is not me, saying, Microsoft saying that 90% of the axis compose.

All access.

You don't need them. So you have this.

Towards that level.

Language models going in mining massive amounts of data.

The 18.

Two men despite high value information products, but not completely out of policy. So now think about EP I take your credentials in 90% of the data you can access is not relevant for you and you have these AI tools, that's all extremely.

Yakov Faitelson: The one is that we now have been showing the blasphories in the cloud just as they did on-prem. For active incident response, we supplement those very touching capabilities, and the one Sass eliminates the need for this customer to manage their own hardware, which will improve the scalability. They converted their on-prem Windows license into a Sass equivalent package, and they purchased an additional Sass package for Microsoft 365 while doing their coverage.

<unk>.

Hi, Lee.

It's valuable valuable data I just think that's very soon what you will see is that organizations understand that they need to make sure that these auctions consolidator auditing and justification in place.

To make sure they can realize productivity gains and avoid disaster. So this is something that we are starting to see that the customers talking about it.

Yakov Faitelson: The sustained momentum that we saw from a Sass transition this quarter, coupled with a faster pace of innovation, gets us closer to achieving a $1 billion dollar dollar target in delivering meaningful stakeholder value.

All the customers, we're talking about it and I really believe that baloney.

<unk> to make sure that you can that you would.

Be able to use the suit.

Guy Melamed: Is that, let me turn the call over to Guy. Thanks, Jackie.

This quarter.

Thank you.

Guy Melamed: Good afternoon, everyone. Thank you for joining us today. It goes without saying that the health and safety of our employees is of permanent importance to us, and we will continue to do whatever it takes to support them. Before I discuss results, I want to briefly comment on the impact of the war in Israel on our operation. From a top line perspective, Israel has historically represented less than 1% of our business. We have approximately a third of our employees located in Israel, which includes our principal research and development facility, as well as a portion of our support and general and administrative Team.

Our next question comes from the line of Matt Hedberg with RBC capital. Please proceed with your question.

Well, thanks, guys congrats on the results in.

Send our thoughts and prayers to all the <unk> employees around the globe.

Guy Melamed: At this time, a low single-digit percentage of our global team members has been called up to active duty. We have executed business contingency plans to minimize the impact on our business, and at this time, we don't expect the material impact on our global operation.

And in Israel.

Yoki, maybe as a follow up to <unk> question I think in the prepared remarks, you said you don't expect to sell a separate gen. AI SKU at this point I am curious it.

Could that change in the future and then maybe secondarily.

As you're having these initial conversations with customers.

How do you think it could impact deal sizes longer term.

So.

Okay.

Definitely can change I think what we are doing is already one.

One thing that you can use the product just not sure what language means that you don't do Phoenix, which is tremendous.

Second thing.

If you look at the met the data we are collecting we are the only company in the world.

Guy Melamed: With that, I'd like to turn to Q3 results. We are pleased with a continued strong adoption of Rona Saag, against continued macroheadling. Our SaaS transition continues to gain momentum, and this quarter provided additional proof of the numerous benefits to our customers, as well as the tailwind to our ARR and cashflow performance. As a reminder, ARR free cashflow 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 deal's value is recognized upfront, who a SaaS model with fully-radible revenue recognition will cause initial headwind on the traditional income statement metrics, as the SaaS mix and conversions of existing customers to SaaS increases.

The smelter data, what we call <unk>.

Later, we entered.

In response and he can take you.

Guy Melamed: And this quarter's impact was meaningful as the number of existing customers converting to SaaS again increased. However, these headwinds are a function of accounting treatment on our not-indicatives of the health of our business. In fact, the greater these accounting-related handwinds are, the better it is for our business as it means the transition is progressing at a faster pace. Our third quarter SaaS mix represented 59% of new business and net new upsell ARR versus our guidance of 45% and after only three quarters into the transition, SaaS now represents approximately 15% of the company's total ARR.

The person.

Yes.

Tend to be world class detection.

So let me touch in person.

Do we sign them.

Maybe it will.

To monetize it but.

The best way to monetize to sell the platform and this is really.

On splitting the atom.

Your question.

Michelle.

There is great, but are you really seeing but the way that we can grow.

It was.

Within our customer base I think that Cigna.

Significant then and what we're seeing now just the tip of the.

Iceberg, we're starting to have stability in the overall condition, so completely different usage EBIT level, Steve niche data that we have to have been the foundation. So really the digital world to make sure that it can be repaired then.

<unk>.

<unk> way and then we'll decide if we are going to monetize this model, but at this point, we want to make sure that we have so much to sell to a customer.

Be very easy for them to use it and to gain value.

Thanks Jackie.

Our next question comes from the line of Brian Essex with J P. Morgan. Please proceed with your question.

Hi, good afternoon, and thank you for taking the question and our thoughts are with you and your families and Israel as well.

Hey, just wanted to dig in a little bit towards maybe for you for Yoki and what Youre seeing in the pipeline, particularly with regard to previous commentary reflecting.

Guy Melamed: The average deal sizes, realized in Q3, continued to provide us with confidence in the 25% to 30% pricing uplift and margin structure that we previously provide. In the third quarter, a significant amount of SaaS deals were sold to new customers, but we again saw an increase in existing customers converting to our SaaS offering. In the third quarter, we had approximately $10 million in existing versions of existing customers impacting our Q3 revenue.

Elongated sales cycles and.

The impact of deals in flight as you.

As those customers assess moving to SaaS instead of instead.

Instead of the term.

Maybe if you can help us understand the impact in the quarter and then how much visibility into the pipeline and what was growth like and how much confidence that gives you into your ability to execute in that in the last quarter of the year here.

Guy Melamed: To be clear, this is the renewal amount that was previously booked as an on-prem subscription that is now SaaS, which causes a headwind to our reported revenue and operating margin, but does not impact ARR of the cash flow. The $10 million from this quarter does not include the uplift that we realized from these conversions, which is a creative to ARR and free cash flow. As we look to our revenue guidance to the fourth quarter, we're now assuming that approximately $12 million of existing customers renewals will convert to SaaS in Q4, which is up from $10 million previous.

Yeah.

We see very healthy pipeline across the board and the other thing that we're starting to see is that organizations understand the data protection inevitable.

Actually the first one deal and Youll, obviously, though if you don't put takes data wherever it will never be protected.

Everything else that you are doing with sale. It's the only thing that we have safety and I also think that many organization.

Bidding talking Ted zone, because it was hard to do.

With the robotic value proposition.

We are building we understand that.

Can do is to look at really enterprise projects, we can gain the immediate time to value them ongoing value.

Guy Melamed: In the third quarter, ARR grew 16% year over year to $517.5 million. Here to date, we generated $46 million of free cash flow, which was up from $0.8 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. In Q3, we continued to see a macro environment that was similar to the first half of the year.

Completely automated way, so I would think that would.

I'm spending a lot of a lot of time with customers. These days and a different I can see that.

People understand that they need a sophisticated data security platforms and the only way that they can do to use automation and.

Very well positioned to take these budgets.

Got it.

Our next question comes from the line of Joel Fishbein with <unk>. Please proceed with your question.

Guy Melamed: We're still seeing Deal scrutiny and longer sales cycles across the board, which is impacting customer purchasing patterns and is constraining our near-term results. We expect these longer-deal cycles to continue along with the associated budgetary scrutiny and our updated guidance takes this into consideration.

Thanks for taking my question and Im also starting first with all of you.

I wanted to just follow up on this new FCC reporting rules and if you are seeing it.

Your customers starting to ask questions about them and also is that as a potential driver to your pipeline and new business.

Guy Melamed: Turning now to our third-quarter results in more detail. 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 margins are the leading indicators for this transition. We take our commitments to the street seriously and our revenue guidance is based on a combination of our expected SaaS mix and existing customer conversion. As we said previously, the faster we progress throughout the transition, the more headwind we will experience to our traditional income statement metrics.

It's definitely a potential.

But we see all around the <unk>.

People understand that they need to protect the data.

In the last few years organization spend a fortune on security and a lot of them yet.

Not such great return on investment you have a lot a lot of security on the perimeter.

And at the end of the day it will be the most bleach as well they are happening from an inside of the PC user or someone solid credential and acting like you use though really inflicting the damage of the data store stocks can come from anywhere on any device, but only going one direction.

Guy Melamed: We view these headwinds in a positive light, as they show our customers are adopting our fast solution more rapidly. Q3 total revenues were $122.3 million, down 1% year over year. During the quarter, as compared to the same quarter last year, we had approximately a 12% headwind to our year-over-year revenue growth rate as a result of having increased SaaS sales in our booking mix, which are recognized rapidly versus the upfront recognition of our on-prem subscription product. The subscription revenues were $97.7 million, and maintenance and services revenues were $24.6 million, as our annual rates were again over 90%.

Data that essentially.

Most valuable assets that most organizations.

And the most vulnerable ones. So the FTC regulations, just another one just inevitably you want to add cyber security.

Peter.

This is really where we are.

And what do you see indefinitely.

Ablation.

Thank you.

Yeah.

Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question.

Great. Thanks for taking my question and congrats on another very strong quarter of SaaS adoption.

Guy Melamed: Moving down the income statement, I'll be discussing non-gap results going forward. [inaudible] I'll be honest with you. I'll be honest with you. 3rd quarter, ARR Contribution margin was 11.1% up from 3.6% last year. The significant leverage improvement even during the early stages of the transition reflects our ability to drive strong incremental margin while growing ARR and transitioning to SaaS. During the quarter, we had financial income of approximately $8 million driven primarily by interest income on our cash deposits and investments in marketable security.

I don't think investors should be too surprised to see furnace outperforming on a transition timeline, but just given the success, you're seeing with SaaS and meaningful outperformance on mix expectations and conversions any update to how you're thinking about the timing of phase two of the transition and why not lean further into a more active plan to convert existing customers.

Okay.

I think that question can be broken into two one is the overall timeline and the second part of this phase II when.

When we think about kind of the overall timeline I think with a 5% increase.

As last quarter.

When you think about that math and kind of the way I'd extrapolate going forward. It definitely makes sense to reconsider our timeline and thats something that we talked about last quarter that we would revisit our guidance for that.

At year end, and we plan to do that I think overall when you think about the transition. It's moving very fast were very happy to have 15% of our <unk> coming from SaaS.

Three quarters.

It's happening fast because our customers and our sales force are adopting it.

Very very positively so we definitely look forward to providing more color on that part.

And our next earning call in terms of phase III.

When you think about kind of the conversion of the installed base and that's how we defined phase two it hasnt begun yet.

But we are increasing the number that.

And that we expect in terms of conversion in Q4 to $12 million and Thats gone up from $10 million that we guided last quarter and when you think about the Q3 number.

We actually came in at $10 million, which is a really high number as you think about it and it's very positive.

Guy Melamed: Net income for the 3rd quarter of 2023 was $10.4 million or 8 cents per diluted share compared to a net income of $6.7 million or net income of 5 cents per diluted share for the 3rd quarter of 2022. This is based on $126.7 million diluted shares outstanding and $126.9 million diluted shares outstanding for Q3 2023 and Q3 2022 respectively. As of September 30, 2023, we had $731.5 million in cash, cash equivalent, short term deposit, marketable security. For the nine months ended September 30, 2023, we generated $49 million of cash from operation compared to $8.4 million generated in the same period last year. CapEx was $2.9 million compared to $7.6 million last year.

But still a very small percentage of our existing customer base.

As much as we're seeing very strong adoption that's happening in a natural way, we haven't prioritized it yet, but we plan to do that next year. So I think overall.

We look at the progression of the transition it's been really positive and we hope to.

To continue to move in that pace going forward.

Thanks, guys.

Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.

Okay. Thank you.

For taking the question.

I think last quarter your guidance was for SaaS to account for about 45% of that new and upsell business because of the.

The expected contribution from your U S federal deals so.

So I guess given how much higher SaaS was relative to your guidance. This quarter is it fair to assume that the fed demand was not as strong as you expected.

Guy Melamed: During the 3rd quarter, we repurchased 1.2 million shares at an average purchase price of $30.10, which completed our intended share repurchased it. Over the course of the program, we repurchased approximately 4.4 million shares at an average purchase price of $22.64 per total consideration of approximately $100 million. Turning to our guidance in more detail, we're raising our full year SaaS mix of new business and upsell ARR guidance, the 55% up from 50% previously, and we expect Q4's SaaS mix to be 60%.

And if so like you know what happened to those deals. Thanks.

So the growth driver this quarter was with overall of the enterprise business and when you look at the 59%. It was driven by the enterprise business. It is a strong reflection of how customers in the enterprise business are adopting SaaS.

When you look at the federal industry as a whole we definitely see the opportunity there, but it's still small mid single digit percentages out of <unk>.

Sure.

But when we look at the opportunity we see.

Feel very confident about our ability to grow there.

Guy Melamed: We continue to take a prudent approach in building our SaaS 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. In Q4, we're assuming that $12 million of renewals will convert to SaaS, which will serve as a headwind to revenue. Conversions to SaaS before considering any uplift to deal sizes do not impact ARR. Our guidance continues to factor in the same level of macro headwind that we've discussed at length in the past.

Our next question comes from the line of Fatima Bologna with Citi. Please proceed with your question.

Yes.

Taking my question.

Thank you and the entire <unk>.

Employee day.

Yes. Good question for you a bigger picture one actually we've been hearing a lot about data protection and data security posture management into all these new monitors that are coming up as well and more traditional backup and recovery vendors on the infrastructure side talk a lot about the importance of data protection and data recovery I wanted to.

But your perspective on how you are interfacing with buyers.

Guy Melamed: Now turning to our guidance. For the fourth quarter of 2023, we expect total revenues of $115 million to $154 million, representing growth of 5% to 8%. Non-gap operating income of $25 million to $27 million, and non-gap net income per diluted chair in the range of 22 cents to $24 million. This assumes 126.1 million diluted shares outstanding. For the four years 2023, we now expect ARR of $535 million to $539 million, representing growth of 15% to 16%.

Buying psychology changes around data protection and I wanted to get your sense of how those conversations are changing if at all.

<unk> quote unquote changes in the competitive landscape are benefiting you in any way in providing a spotlight to what you've been saying all along with respect to the importance of data protection.

I think that we just don't see the.

The pickup in business continuing to data protection, we have a much more on data security.

But but people understand that they need to protect.

Evaluable data regarding posture management and all of this stuff I think that the organization understands very well.

Now this is the first time, but we are benefiting from other people doing marketing and in order to solve the problem you really need to see use cases and need the metadata and something that is very hard to do and everything really eventually in order to solve the problem you need to be under one umbrella for data security platform do you think it's most breaches people are doing.

Guy Melamed: Non-gap operating income of $26.5 million to $28.5 million, non-gap net income per diluted share in the range of 31 cents to 33 cents. This assumes 126.6 million diluted shares outstanding. In summary, we continue to see solid demand for both new and existing customers who wish to consume Varonis through our SaaS platform. As a result, our transition continues to move quickly and approximately 15% of our total ARR is now coming from SaaS. This is benefiting our ARR performance and Casco generation, which positions us for a strong fourth quarter.

Lateral movement.

Duane.

Data sold and you need to you need to enrich the data. So we definitely see that the marketplace understands the need one big platform you need to be able to classify in one place and then because it's early to do it at scale. So we have the portfolio power people identity.

Using data and to be able to do remediation and really reliable automated way. So we definitely see that we seem to be happening in the ecosystem.

Benefiting us.

Really excited too.

Okay great.

Aylwin.

Allocating that other lenders.

Unknown Executive: With that, we will be happy to take question. Operator? Thank you.

Our next question comes from the line of Chad Bennett with Craig Hallum. Please proceed with your question.

Great. Thanks for taking my question. So just on I know, it's early but just in terms of.

Unknown Executive: Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tunnel indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants choosing to choose, it may be necessary to pick up your handset before pressing the star key. In the interest of time, please let me yourself to one question only. Thank you.

Kenneth.

The type of customer converting.

From on Prem subscription to to SaaS.

I think you've talked before about that 25% to 30% uplift, but and I think you gave a couple of examples on the call already but is there any any commonality in terms of where the on Prem subscription customer is in their license journey.

Saket Kalia: Our first question comes from the line of Sakit Kalia with Barclays. Please proceed with your question. Okay. Great. Hey guys.

When they are converting and.

Is there are you seeing significant cross sell up sell on that conversion from a license standpoint or is the hope obviously like like a lot of conversion stories that once you get them to SaaS like for like product that that whole cross sell up sell just becomes.

Yakov Faitelson: Thanks for taking my question here and just want to send our thoughts to the Varonis team and their families in Israel. Thank you. Absolutely.

Yakov Faitelson: If I stick to one question, maybe I'll make it for you here, Yaki. You know, it just seems like great traction on SaaS. For those customers that are moving to your SaaS tools, what are you seeing on usage of the different modules? Are you seeing any change in usage now that the tools are arguably easier to deploy and use? Yeah, we see just dramatic change. We see what we call robotic value proposition.

Easier and kind of.

Accelerated.

And I think that's a very good question.

And when you will.

I'll start by saying that the SaaS offering is so much better for our customers, but it's a no brainer for them and we're seeing that with the amount of conversions that are happening in a natural way.

When conversions happen, we can get an uplift in the number of licenses that they that they buy because we're selling the platform. They don't have the opportunity to buy individual licenses, we can get an uplift in the fact that the number of users goes up and we can get an uplift in their ability to consume more of the products. It really.

Yakov Faitelson: And the no star was always what we call 10% of the effort or the order of magnitude more value and this works according to plan. We can measure everything from installation to update to innovation or ability to do this. And the other thing, we also build the ability of our people, our professional services to support the customer is much more easy. We can provide a lot of the value of the platform with the customer almost nothing, you know, just very, very little in helping the in terms of configuration.

Saket Kalia: Got it. Very helpful.

It depends on the situation of the customer where they are in terms of the renewal whether they want to.

To speed it up or wait for the actual renewal dates that come to play so it's very individual but at the end of the day once we get them to the SaaS offering their ability to see value and the simplicity of the usage of the product gives us a tremendous opportunity to continue to sell them more and more.

More license.

Saket Kalia: I'll get back in queue.

Unknown Executive: Thank you.

No.

I would say there is no one straight answer on how it happens, but at the end of the day. It just works in our favor to get them to SaaS.

Hamza Fodderwala: Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question. Hey, good evening. Thank you for taking my question. Yaki, I wanted to dig in a little bit more about your commentary around, you know, generative AI. I think a lot of the CIOs and CSOs that we're talking to more recently are talking about are days security and governance is is a big hurdle to deploying these these large language models.

With good confidence in our pricing methodology as we see it so far.

Yes.

Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Great. Thank you for taking my question I was curious if you could comment on just what the channel response has been regarding the move to SaaS.

Hamza Fodderwala: And I'm curious to what extent are you starting to have conversations with customers on how they can play these generative AI models in a way that can prevent things like data leakage or poisoning from occurring. I think that it's going to be a complete game changer. The reality is that we still haven't seen it completely, but, you know, just the initial release of supply, co-pilot for business, think essentially what it does.

Are you getting the breadth of channel participation that you would hope in new transactions.

Yes.

The shot every option.

Is usually just a direct correlation to the customer reaction.

So definitely the understanding.

Much easier much easier to sell and they.

Hamza Fodderwala: It's mining all the data that people can access. And this is not me saying Microsoft saying that 90% of the access controls are excessive. You don't need them. So you have this. Tools that leverage large language models that going in mining massive amounts of data, creating in tremendous rate, high value information products, but now completely out of policy. So now think about it, I take your credential. But this is something that we started to see that the customer was talking about it, you know, that all the customers were talking about it.

Requires significantly less professional services and this is something that they will need to adapt to.

We just see.

On a single platform with tremendous automation, but we're definitely getting a lot of sell through the channel to take these steps.

<unk>.

Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Yeah, Hi, guys.

I wanted to ask you on firstly first a clarification you said, a 12% headwind to revenue growth in Q3, I believe that's 12 percentage points correct.

Correct, Okay, and then just on the kind of following up on the channel question can you remind us how your go to market how much is direct how much is indirect.

And then where are you seeing the most success right now.

In terms of finding new customers.

So we sell 100% through channel.

But our outside sales force really does all of the heavy lifting of doing the risk assessment talking to the customers explaining where the risks are.

Yakov Faitelson: And I really believe that the one is the foundation to make sure that you can that you will be able to use this AI base for. Thank you.

So the channel helps us in getting the meeting and they help us and closing the deal, but all the hard work in between is done by our outside.

Outside sales force when we look at the opportunity with our SaaS offering it opens up new market. It opens up new territories and open up it opens up new industries to basically our new customer opportunities that we didn't have before.

Matthew Hedberg: Our next question comes from the line of Matt Hedberg with RBC capital. Please just here with your question. Well, thanks guys.

Yakov Faitelson: Congrats on the results and we send our thoughts and prayers to all the gross employees around the globe and Israel. Yaki, maybe as a follow-up to Homs' question, I think in the prepared remarks, you said you don't expect to sell a separate gen AI skew at this point. I'm curious, could that change in the future? And then maybe secondarily, you know, as you're having these initial conversations with customers, you know, how do you think it could impact deal sizes longer term?

And all of the reception that we have.

To date received on the SaaS offerings has been positive.

And we expect that to continue as we kind of really went through the toughest part of the transition.

Kind of clearing through the pipeline and now.

Introducing every new customer with a quote that as SaaS only and not really on Prem subscription as we had in the past. So I think overall, we're very well positioned to take advantage of that opportunity going forward.

Yakov Faitelson: So it's definitely, definitely it can change. You think what we are doing is our AI. One thing is that you can use the order is just natural language, which means that you don't need to learn syntax, which is tremendous. The second thing, you know, really, if you look at the method data that you are collecting, we are the only company in the world that has this method data, what we called data, we entered the presentation and response and you can take a regular IT person.

Our next question comes from the line of Joseph Gallo with Jefferies. Please proceed with your question.

Hey, guys. Thanks for the question and I appreciate the AI commentary you guys have a large M 365 footprint can you just give us some updated size and growth profile of that business and then maybe just to be clear given the rollout of co pilot this week.

Yakov Faitelson: And years now have the assistance to be world class predilection, predilection person. But with time, maybe we will monetize it, but it's for us the best way to monetize it is to sell the platform. And this is really answering the other part of your question.

Your existing solution capture that opportunity now or is it more just that you guys are perfectly positioned to capture that opportunity long term. Thanks.

Regarding the regarding the border in terms of the two preparing an organization fully ice so over to you.

Just the basic value proposition understand within a cubicle made sure that only the right people can access data.

Yakov Faitelson: Initial deals is great, but I really think that the way that we can grow a arouse in our customer base, I think that it's significant and what we are seeing now is just the people of the iceberg. You know, starting to have stability in the overall transition to completely different usage able to leverage the mixed data that we have to have AI being the foundation for really the digital world. To make sure that can be prepared and a benefit AI in a secure way, and then we'll decide if we are going to monetize this model, but at this point we want to make sure that we have so much to sell to our customer, but it will be very easy for them to use it and to gain value.

Stoping abnormal behavior, the basics without it you can't use it in a secure way.

This is 100%.

And just to touch on the first part of the question. When we look at the office 360, <unk> office 365 contribution.

We become.

A significant.

Aylwin for us going forward. If you go back to our Investor day in March we actually showed in one of the signs there that our penetration within the overall.

365.

<unk> was.

At the time in March it was 1%.

Hasnt grown too much since then so when you think about the opportunity going forward.

Shaul Eyal: Thank you, Shaul Eyal.

Brian Essex: Our next question comes from the line of Brian Essex with JP Morgan. Please you know elongated sales cycles and you know the impact of deals in flight as you or as those customers assess moving the SaaS instead of instead of term.

So much for us to capitalize on.

And we see the reception of our customers very positive when we sell that license.

Our next question comes from the line of Rudy Kessinger with D. A Davidson. Please proceed with your question.

Hey, great. Thanks for taking my question.

Guy what was SaaS as a percentage of the mix. If you exclude federal in Q3, and then just how much higher is federal as a percentage of new and upsell in Q3 relative to Q4, the other quarters.

Yakov Faitelson: Maybe if you can help us understand the impact in the quarter and then how much visibility into the pipeline and what was growth like and how much confidence that gives you into your ability to execute in the last quarter of the year here. You see very healthy pipeline across the board and the other thing that we started to see is that organizations understand that data protection is inevitable. It's actually your first frontier and your last result.

So like I said before the actual driver this quarter was the enterprise business.

And Thats really what drove the 69% to remind you.

We're not fed ramp certified yet.

So we didn't have.

Sales that were sold under the federal business, but we do expect to have fed ramp.

For next year's cycle, which can become a significant opportunity for us.

Yakov Faitelson: If you don't protect data wherever you will, it will never be protected and it's everything else that you are doing will fail. It's the only thing that we save you. And I also think that many organizations didn't attack its heads on because it was how to do. And with the robotic value of the vision that we are building, they understand that they can do it and if you look at really enterprise projects, they can gain immediate time to value and ongoing value in a completely automated way.

And when you think that the overall opportunity from a new business and upsell in that market.

We fit.

Like a glove to that type of use case the amount of malicious actors that have not been only in the last couple of months has been tremendous and our product fits very very nicely and we feel that we.

We can capitalize on that opportunity and grow our ALR.

Coming from that industry going forward.

Yakov Faitelson: So I just think that what I am spending a lot of time with customers these days and I definitely see that people understand that they need a sophisticated data security platforms and the only way that they can do is automation and we are very well positioned to take this part.

Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for sneaking me in and I'll, just say my thoughts and prayers are with your employees install the people of Israel.

I'm actually I'm going to sneak in two and a half.

Two questions really quickly. My first question is just how should we think about the implied Q4, net new Ah seasonality and all the macro impact baked into <unk> worse than they were a quarter ago and on the AI front, which is my second question well I wont Microsoft to offer these capabilities and if so do you expect this to bring you into more.

Unknown Executive: Thank you.

Joel Fishbein: Our next question comes from the line of Joel Fishbine, which was please proceed with the question. Thanks for taking my question and I'm also thoughts and prayers with all of you. I wanted to just follow up on these new SEC reporting rules and if you are seeing it, your customers starting to ask questions about them and also is that as a potential driver to your pipeline and new business. It's definitely a potential driver, but this what we see all around is that people understand that they need to protect their I think that in the last few years organizations spend the fortune on security and a lot of them get you know, not such great return on investment.

Competition with them going forward.

So they'll know.

Microsoft.

We are the only truly company devoted to date.

Yeah.

Taking swift stream submit the data there.

Omission.

Content in their activity.

So Todd site access so we just need to build a completely different type of <unk>.

Solutions.

In order to do that so I just think that the.

<unk> for a long time.

Jo Walton.

Joel Fishbein: You have a lot of security around the perimeter and at the end of the day, if you will dissect the most breaches or they are happening for an insider that is a user or someone stole a credential and acting like a user and really inflicting the damage on the data. It's the data that essentially, you know, the most valuable asset that most organizations have and the most vulnerable one.

Maintain tremendous competitive advantages.

And when we when we kind of think about the guidance our philosophy hasn't changed.

So we're definitely thinking about the guidance in the same way that we've we've talked about it throughout the year.

In terms of where we are.

In Q3, we definitely saw things stabilize.

Compared to previous quarters and.

And that's a good sign for us.

But our assumptions in terms of guidance stayed the same.

Yakov Faitelson: So and the SEC regulation is just another one, just inevitable. You want to have side of security in me to protect data. So this is really where we are and what you see and definitely a regulation. Thank you.

And we think that we are set up well for.

Having our large Q4 in terms of seasonality, we don't see any change compared to the on Prem subscription so SaaS.

Should be the largest quarter Q4 should continue to be the largest quarter of the year as it as it has been in.

Roger Boyd: Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question. Great.

In previous years, obviously from a revenue recognition perspective, it does change because it's ratable, but you've heard me talk millions of millions of times about the fact that they are free cash flow and they are our contribution margins are the right metrics for this transition and.

Yakov Faitelson: Thanks for taking the question and congrats on another very strong quarter of SAS adoption. I don't think investors should be too surprised to see Verona's outperforming on a transition timeline, but just given the success you're seeing with SAS and meaningful outperforming on mixed expectations and conversions, any update to how you're thinking about the timing of phase two of the transition. And why not lean further into a more active plan that convert existing customers?

Especially in Q4, they should be viewed.

As the leading indicators of the business.

Our next question comes from the line of shelving Rafi with SPN Securities. Please proceed with your question. Yes. Thank you. So your head count really were flattish in terms of growth in Q1, and Q2 and it looks like it grew around 50.

Yakov Faitelson: Thanks. I think that question can be broken into two. One is the overall timeline and the second part is phase two. When we think about kind of the overall timeline, I think with a 5% SAS increase versus last quarter. You know, when you think about that mass and kind of the way it extrapolates going forward, it definitely makes sense to reconsider our timeline. And that's something that we talked about last quarter that we would revisit our guidance for that year end.

Which is a decent pace for the first time in like a year or so.

My question is.

This is fine.

The environment is better for you you talked about deal scrutiny et cetera, but at least.

Is it better.

And therefore, you're hiring more relate to this talk about your headcount growth expectations going forward.

Yakov Faitelson: And we plan to do that. Overall, when you think about the transition, it's moving very fast. We're very happy to have 15% of our ARR coming from SAS in just three quarters. It's happening fast because our customers and our Salesforce are adopting it very, very positively. So we definitely look forward to providing more color on that part in our next turning call in terms of phase two. When you think about kind of the conversion of the installed base, and that's how we define phase two, it hasn't begun yet.

No.

We know how to do this transition.

It was very important to us when we did it just to be focus on there.

There are moving parts to make sure that if you will definitely see more stability in the transition.

Despite the economic headwinds, we definitely see that there is just the.

Inevitable demand for data security this is something that the organizations need and win.

The pipeline and what we can do in terms of say.

Yakov Faitelson: But we are increasing the number that we expect in terms of conversion in Q4 to 12 million. And that's going up from 10 million that we guided last quarter. And when you think about the Q3 number, we actually came in at 10 million, which is a really high number as you think about it. And it's very positive, but still a very small percentage of our existing customer base. So as much as we're seeing very strong adoption that's happening in a natural way, we haven't prioritized it yet, but we plan to do that next year. So I think overall, as we look at the progression of the transition, it's been really positive and we hope to continue to move in that pace going forward. Thanks, guys.

<unk>.

It.

Features and products.

The massive total available market and we need to cover.

Salesforce and make sure that our customers succeed in and keep building the organization. So.

The business is performing and we are investing against a massive opportunity.

If you go back to our last quarter's earnings call you can hear in the commentary that we talked about the fact that we're hiring.

So obviously the fact that we grew the head count was part of our.

Planning, we want to continue to increase the head count, but we obviously want to do it in the right way and we want to make sure that we general generate.

Increased productivity and I think we can do that going forward. So it's a balancing act of increasing head count at the right pace in the right positions in the right.

Andrew Nowinski: Our next question comes from the line of Andrew Nowinsky with Wells Fargo.

Andrew Nowinski: Please prepare a question. Okay, thank you for taking the question. I think last quarter, your guidance was for SAS to account for about 45% of that new and upsell business because of the expected contribution from the US federal deals. But it's given how much higher SAS was relative to your guidance this quarter. Is it fair to assume that the Fed demand was not as strong as you expected? And if so, what happened to those deals?

Locations, but also.

Improving our leverage as we have done when you look at kind of the fact that the <unk> contribution margin.

It is now 11, 1% an increase of 750 basis points year over year, which is pretty significant.

Our next question comes from the line of sure Nick Curtis Qatari with Robert W. Baird. Please proceed with your question.

Yakov Faitelson: Thanks. So the growth driver of this quarter was overall the enterprise business. And when you look at the 59%, it was driven by the enterprise business. It's a strong reflection of how customers in enterprise business are adopting SAS. When you look at the federal industry as a whole, we definitely see the opportunity there, but it's still small, mid-single digit percentages out of AR. But when we look at the opportunity, we feel very confident about our ability to grow there.

Hey, Thanks for taking my question again, our thoughts and prayers to our entire team out there I just a follow up to the previous Microsoft question, Oh, Yoki micro or the tailwind and the growth runway and implementing the access controls and governance policies.

There was a previous question on the commentary about advantage horses, Microsoft as well just just trying to understand of course as the significance of data security rises as you just pointed out.

Especially in the realm of generative AI, which we're anticipating kind of more traction, particularly for data access governance is it is it the right way to think that we're on is just kind of focusing on on a comprehensive data protection platform, including data security access control governance, where it says what Mike.

Fatima Boolani: Our next question comes from the line of Fatima Boolani with City. Please proceed with your questions. Good afternoon. Good afternoon, my question and our pleasure with you and the entire employee base in the complex zone. You asked me questions for you, a bigger picture. Actually, we've been hearing a lot about data protection, data security, posture management and all these new monitors that are coming up. As well as more traditional backup and recovery vendors on the infrastructure side, talk a lot about the importance of data protection and data recovery.

Yourself as offering just got a more narrow kind of b L P and and and this urgency around data security and and.

Of course with respect to the data protection tailwind like.

Is this the competitive advantage that you guys have and is that the right way to think about the competitive dynamic.

Fatima Boolani: I wanted to get your perspective on how you are interfacing with buyers as buying psychology changes around data protection. I wanted to get your sense of how the conversations are changing for you as it all, and it be a sort of quote unquote changes in the competitive landscape are benefiting you in a way, in providing a spotlight because it's been saying all along with respect to the importance of data protection. I think that we just don't see the backup and business continuity in data protection. We are much more on data security. But people understand that they need to protect valuable data.

From your perspective, I have a quick follow up there as well.

Yes, yes.

It's essentially completely different.

Just giving an automated outcomes regarding.

The access control classification.

And third detection, we have really two pictures that overlap.

Very good synergy.

<unk> can label for the MLP as you mentioned and other stuff and.

But.

It's different we actually.

We work very well with them and we have very good partners sheet regarding January <unk>, which is the foundation. The building blocks. If you want to use generate degree.

Yakov Faitelson: Without the posture management and all of this stuff, I think the organization understands very well that this is the first time, but we are benefiting from other people doing marketing and in order to solve the problem, you will need the three use cases and you need the metadata and something that is very how to do and everything really eventually in order to solve the problem need to be under one umbrella of a data security platform. You think it most breaches people are doing this lateral movement between a data store and you need to enrich the data.

And not to introduce innovative lease can end up in disaster, you need to use our solution to make sure that.

You already.

So this is except the oil link AI features.

We can.

Deliver.

Using technologies and acknowledged language models, we have the foundation to make sure that businesses can use it in order to extract value.

Yakov Faitelson: So we definitely see that the marketplace understand that they need one big platform. You need to be able to classify in one place and then in all repository to do its scale to have the profile of how people are using data and to be able to do remediation in a very reliable automated way. So we definitely see that everything that is happening in the ecosystem are benefiting us and we are very excited to tailwind from the marketing that other members do.

Our next question comes from the line of Hugh Cunningham with Gd Cowen. Please proceed with your question.

Hey, guys. Thank you for taking my call and I'll Echo that.

Here on our team.

Thoughts and prayers are with you and your families your friends and your coworkers.

They're for Otis.

Thank you.

Do have two quick ones first one is the 25% to 30% uplift that we're talking about that's just on pricing of.

Subscription versus SaaS that doesn't include any assumptions that you mentioned before more licenses users go up anything like that.

Chad Bennett: Our next question comes from the line of Chad Bennett with Craig Hallam. Please thanks for taking my question. So just on I know it's early, but just in terms of kind of the the the type of customer converting from on-prem subscription to to SaaS, I think you've talked before about that 25 to 30% uplift, but and I think you gave a couple examples on the call already. But is there any any commonality in terms of where the on-prem subscription customer is in their license journey when they're converting and you know is there are you seeing significant cross sell-up sell on that conversion from a license standpoint or is the hope obviously like like a lot of conversion stories that once you get them to SaaS you know like for like product that that whole cross sell-up sell just becomes easier and kind of accelerated.

Apples to apples.

Only so yes, okay and then these.

Conversions of existing customers are these taking place at the end of their existing.

Contracts, what I'm trying to figure out here is if.

When you quote a number of 10 or $12 million.

That number includes sort of accelerated recognition.

The initial period in that in that subscription is that right.

No.

That relates only to the deals within the quarter.

Okay.

Our next question comes from the line of Brian Colley with Stephens. Please proceed with your question.

Hi, guys. Thanks for taking my question here.

Can you talk about how the SaaS platform has impacted the pipeline for new logos.

Yakov Faitelson: I think that's a very good question, and when you, I'll start by saying that the SaaS offering is so much better for our customers, that it's a no brainer for them and we're seeing that with the amount of conversions that are happening in a natural way. When conversions happen, we can get an uplift in the number of licenses that they buy because we're selling the platform. They don't have the opportunity to buy individual licenses.

As well as sales cycles for those new customers I'm, just curious if youre seeing an acceleration of new logo adds or.

Sales cycles.

So I continue when we look at the new customer adds.

Definitely seeing positive signs.

This quarter and I think that is.

As we look at our ability to sell SaaS to new customers as I said in one of my previous answers before it opens up opportunities that we didn't have before with the on Prem subscription. So I think overall the.

Yakov Faitelson: We can get an uplift in the fact that the number of users goes up and we can get an uplift in their ability to consume more of the product. It really depends on the situation of the customer, where they are in terms of the renewal, whether they want to speed it up or wait for the actual renewal date to come to place. So it's very individual, but at the end of the day, once we get them to the SaaS offering, their ability to see value and the simplicity of the customer.

Signs that we're seeing are healthy and.

And positive.

And definitely it gives us.

The ability to to show value.

I said before we're kind of past the challenging part of the transition where we had to clean quote unquote clean through the pipeline, where some of the quotes were introduced to customers in the past as on Prem subscription.

Yakov Faitelson: The simplicity of the usage of the product gives us a tremendous opportunity to continue to sell them more and more licenses. So I would say there's no one straight answer on how it happens, but at the end of the day it just works in our favor to get them to SaaS with good confidence in our pricing methodology as we see it so far.

Now, we're just starting with the SaaS.

Part of the quote.

It's been very well received by customers because the value of the art SaaS product as.

Is much greater than the <unk>.

That's the end of our Q&A session I'd like to hand, it back to management for closing remarks.

Thanks for your interest in <unk> look forward to meeting you all are.

Rob Owens: Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question. Great. Thank you for taking my question. I was curious if you could comment on just what the channel response has been regarding the move to SaaS. Are you getting the breadth of channel participation that you would hope in new transactions? Thanks.

Conferences this quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Yakov Faitelson: Yeah, you know, it's the channel reaction is usually, you know, just paying direct correlation to the customer reaction. So definitely they understand it much easier, it's much easier to sell and you know, it requires significantly less professional services and it is something that they will need to adapt to. You know, we just see the whole thing of this platform is too many automation, but we're definitely getting a lot of help with the channel to take this platform tomorrow.

Jason Ader: Our next question comes from the line of Jason Adder with William Blair, please proceed with your question. Yeah, hi guys. I wanted to ask you on firstly, first clarification, you said a 12% headwind to revenue growth in Q3, I believe. That's 12 percentage points, correct? Correct. Okay.

Yakov Faitelson: And then just on the kind of following up on the channel question, can you remind us how you go to market, how much is direct, how much is indirect? And then where are you seeing the most success right now in terms of finding new customers? So we sell 100% through channel, but our outside Salesforce really does all the heavy lifting of doing the risk assessment, talking to the customers, explaining where the risks are. So the channel helps us in getting the meeting and they help us in closing the deal, but all the hard work in between is done by our outside Salesforce.

Yakov Faitelson: When we look at the opportunity with our SaaS offering, it opens up new markets, it opens up new territories, it opens up new industries to basically a new customer opportunities that we didn't have before. And all of the reception that we have to date received on the SaaS offering has been positive. And we expect that to continue as we kind of really went through the toughest part of the transition, kind of clearing through the pipeline and now introducing every new customer with a quote that is SaaS only, and not really on prem subscription that we had in the past. So I think overall we're very well positioned to take advantage of that opportunity going forward.

Joseph Gallo: Our next question comes from line of Joseph Gallo with Jeffries.

Joseph Gallo: Please proceed with your question. Hey guys, thanks for the question, and appreciate the AI commentary. You guys have a large M365 footprint. Can you just give us an updated size and growth profile of that business? And then maybe just to be clear, given the rollout of co-pilot this week, does your existing solution capture that opportunity now, or is it more just that you guys are perfectly positioned to capture that opportunity long term?

Yakov Faitelson: Thanks. Regarding the, regarding the border in terms of the preparing and in organization for AI story here, so just the basic of all its value proposition. And just 10 more data is critical, make sure that only the right people can access the right data, alert and stop any abnormal behavior. It's the basics without it, you can't use it in a secure way, and this is 100% us.

Yakov Faitelson: Just to touch on the first part of the question, when we look at the Office 365 contribution, it's definitely become a significant hell win for us going forward. So if you go back to our investor day in March, we actually showed in one of the slides there that our penetration within the overall 365 opportunity was at the time in March, it was 1%. Hasn't grown too much since then, so when you think about the opportunity going forward, there's so much for us to capitalize on. And we see the reception of our customers, very positive when we sell that life.

Rudy Kessinger: Our next question comes from the line of Rudy Kessinger with DA Davidson, please proceed with your questions. Hey, great. Thanks for taking my question. Guy, what was SAS as a percentage of the mix, if you include federal in Q3, and then just how much higher is federal as a percentage of new and upsell AR in Q3 relative to Q4 in the other quarters? So like I said before, the actual driver this quarter was the enterprise business, and that's really what drove the 59% to remind you we're not FedRAM certified yet.

Rudy Kessinger: So we didn't have SAS sailed that was sold under the federal business, but we do expect to have FedRAM for next year's cycle, which can become a significant opportunity for us. And when you think at the overall opportunity from a new business and an upsell in that market, we fit like a glove to that type of use case. The amount of malicious actors that have happened only the last couple of months has been tremendous and our products fit there very, very nicely. And we feel that we we can capitalize on that opportunity and grow our AR are coming from that industry going both.

Joshua Tilton: Our next question comes from the line of Joshua Tilton with Wolf Research. Please proceed with your question.

Hugh Cunningham: Hey guys, thanks for speaking me in, and I'll just say my thoughts and prayers are with your employees and install the people of Israel. I'm actually going to sneak into, I'm going to have questions really quickly. My first question is just how should we think about the implied Q4 in that new ARRC Vanality, and are the macro impact baked into 4Q worse than they were a quarter ago? And on the AI front, which is my second question, why would Microsoft offer these capabilities?

Hugh Cunningham: And if so, do you expect us to bring you into more competition with them going forward? So in terms of Microsoft, you know, we are the only truly company in the world today that taking three streams of metadata, the permissions, the content and the activity to build these robots for price-sized access. So we just need to build completely different types of solutions in order to do that. So I just think that we can, for a long time, leverage our modes and maintain the tremendous competitive advantage in this.

Hugh Cunningham: And when we kind of think about the guidance, our philosophy hasn't changed. So we're definitely thinking about the guidance in the same way that we've talked about it throughout the year. I think in terms of where we are in Q3, we definitely saw things stabilized compared to previous quarters. And that's a good sign for us. But our assumptions in terms of guidance have stayed the same. And we think that we are set up well for having our large Q4 in terms of seasonality.

Hugh Cunningham: We don't see any change compared to the on-prem subscription. So SAS should be the largest quarter. Q4 should continue to be the largest quarter of the year as it has been in previous years. Obviously, from a revenue recognition perspective, it does change because it's radical, but you've heard me talk millions of times about the fact that AR, free cash flow and AR contribution margins are the right metrics for this transition. And especially in Q4, they should be viewed as the leading indicators of the business. Our next question comes from the line of Shelby Sirafi with FBN Securities. Please continue with your question.

Yakov Faitelson: Yes, thank you. So your head count really was flatish in terms of growth in Q1 and Q2. And it looks like it grew around 50, which is a decent pace for the first time in like a year. So my question is, is this a sign that the environment is better for you? You talk about deal scrutiny, et cetera, but at least is it better and therefore you're hiring more and related to this.

Yakov Faitelson: Talk about your head count growth expectations going forward. You know, we know how to do this transition, and it was very important for us when we did it just to be focused on just the right, the right moving parts to make sure that it will definitely see just most ability in the transition. And despite of the economic head, we definitely see that there is just a... You know, inevitable demand for data security.

Yakov Faitelson: This is something that the organization needs and we have a lot of fight on in what we can do in terms of the world of features and products, massive total available markets. We need to cover it with self-poss and make sure that our customers succeed and keep building the organization. So, you know, the business is performing and we are investing against a massive amount of content. And if you go back to our last quarter's earnings call, you can hear in the commentary that we talked about the fact that we're hiring.

Yakov Faitelson: So obviously, the fact that we drew the headcount was part of our planning. We want to continue to increase the headcount, but we obviously want to do it in the right way. And we want to make sure that we generate increased productivity. And I think we can do that going forward. So it's a balancing act of increasing headcount at the right pace in the right positions in the right location, but also improving our leverage as we have done when you look at kind of the fact that the ARR contribution margin is now 11.1%.

Yakov Faitelson: And increase the 750 basis points 0 over year, which is pretty significant. Our next question comes from the line of Shernick. Kutari with Robert W. Baird. Please proceed with your question. Hey, yeah, thanks for taking my question.

Yakov Faitelson: Again, thoughts and prayers to our entire team out there. Just a follow up to the previous Microsoft question. You know, you mentioned the tailwinds and the growth runway and implementing the access controls and governing policies. And there was a previous question on the commentary of advantage versus Microsoft as well. Just trying to understand, of course, as a significance of data security rises as we just pointed out, and especially in the realm of generative AI, which where you're anticipating kind of more traction, particularly for for data access governance.

Yakov Faitelson: This is the right way to think that we're honest. It's kind of focusing on on a comprehensive data protection platform, including data security access control governance versus what Microsoft is offering just kind of more narrow kind of DLP and and this urgency around data security and. And of course, with respect to the data protection tailwinds, like is this the the competitive advantage that you guys have and is that the right way to think about the competitive dynamic from from your perspective of a quick follow up there as well.

Yakov Faitelson: Yeah, it's it's essentially completely different, you know, what we just giving automated outcomes regarding, you know, the access control classification and Fred detection. We have very little pictures that overlap and a lot of very good synergy to walk with the way that they can label for DLP. As you mentioned and other stuff and they're, you know, but it's different. We actually, you know, walk very well with them and we have a very good partnership regarding generative AI, which is the foundation, the building blocks, if you want to use generative AI, the right way and not to introduce a lot of risk and can end up in disaster.

Yakov Faitelson: You need to use our solution to make sure that, you know, you already, so this is except for all the AI features that we can deliver using technologies and cloud language models, we are the foundation to make sure that businesses can use it in order to extract value from the day. Our next question comes from the line of Hugh Cunningham with GD Cowent. Please proceed with your question.

Yakov Faitelson: Hey guys, thank you for taking my call. And, you know, I'll echo that, you know, everyone here on our team, our thoughts and prayers are with you and your families, your friends, and your co-workers there for Otis. Thank you. I do have two quick ones. The first one is, the 25-30% uplift that we're talking about, that's just on pricing of subscription versus SaaS, that doesn't include any assumptions that you mentioned before, more licenses, users go up, anything like that.

Yakov Faitelson: Apples, the apples, only, so yes. Okay, and then these conversions of existing customers, are these taking place at the end of their existing contracts? What I'm trying to figure out here is if, when you quote a number, 10 or 12 million, that number includes sort of accelerated recognition for the initial period in that. In that subscription, is that right? No, that relates only to the deals within the quarter. Okay. Our next question comes from the line of Brian Colley with Stevens. Please proceed with your question.

Yakov Faitelson: Hi guys, thanks for taking my question here. Can you talk about how the SaaS platform has impacted the pipeline for new logos? You know, as well as fail cycles for those new customers? I'm just curious if you're seeing an acceleration in new logo ads or, you know, sales cycles. So I can tell you, when we look at the new customer ads, we've definitely seen positive signs this quarter. And I think that as we look at our ability to sell SaaS, the new customers, as I said in one of my previous answers before, it opens up opportunities that we didn't have before with the on-prem subscription.

Yakov Faitelson: So I think overall, the signs that we're seeing are healthy and positive and definitely gives us the ability to show value. I said before, we're kind of past the challenging part of the transition where we had to clean, quote unquote, clean through the pipeline where some of the quotes were introduced to customers in the past as on-prem subscription. Now we're just starting with the SaaS as part of the quote and it's been very well received by customers because the value of the R SaaS product is much greater than the on-prem subscription.

Unknown Executive: That's the end of our Q&A session. I'd like to hand it back to management for closing remarks. Thanks for your interest in growing us. Look forward to meeting you all at our conference as this quarter.

Unknown Executive: So you think, gentlemen, this does conclude today's teleconference. Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.